Fuel Hedging and Risk Management. Gajjala Vishnu N.

      Trends in Economic Activity

      The pace of economic activity is a good barometer of commodity consumption. An acceleration in GDP growth rate leads to higher usage of crude oil and other commodities, leading to higher prices during the uptrend in the economic cycle. Conversely, a contraction in economic output can lead to a sharp fall in commodity prices, as evidenced in the fall of 2008–09, when oil prices dropped from their highs of over 140$/bbl to lows of below 40$/bbl.

      Technological Advances

      Technological advances affect expectations of long-term supply and demand. For example, rising oil prices make it viable to develop more producing assets, thus increasing future reserves and production. However, rising oil prices also spur investment in alternative energy sources and shape future demand as well. For example, the development of hydroelectric, solar, wind, and other forms of energy generation, the growth in the usage of biofuels and compressed natural gas (CNG) for transportation, as well as heightened public awareness and demand for electric-powered vehicles and hybrids are all consequences of higher oil prices. The environmental impact of using oil can also be credited with the development of tougher standards on emissions, reducing energy intensity of new technologies, and increasing investments in alternative energy.

      Short-Term Supply and Demand: Supply Chain and Infrastructure

      Short-term supply and demand are affected by disruptions in the supply chain of the commodity. For example, the hurricanes Katrina and Rita led to a drop of over 1 million bbl/day in crude oil output from the Gulf of Mexico and refined product capacity was significantly reduced (by a third of national capacity at one point). Maintenance of oil rigs and other equipment can also lead to short-term price dislocations.

      Upstream

      Upstream production capacity and spare capacity affect prices as well. The amount of spare capacity maintained by OPEC, especially Saudi Arabia, has an effect on containing price rises. OPEC is an international organization, which aims to coordinate the petroleum policies of member countries and ensure the stabilization of oil markets. Its members, as of mid-2015, are the states of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC accounts for over 81 % of the world's crude oil reserves as of 2012, and produces about a third of global production, thereby wielding significant influence over oil prices.

      Refining

      Prices of crude oil are also affected by their usability in refineries and refining capacity. As refineries are large installations, which are constructed over a long period of time, refining capacity is finite and inelastic and refineries are typically configured to handle a specific type of crude oil. Thus, price trends for crude oil will be affected by the refining capacity available to process that particular blend of oil. For example, if it is more profitable to refine heavy crude oil in a complex refinery (vs. light crude oil), complex refineries will run at full capacity, reducing the premium for light crude oil. The development of complex refineries in Asia has served to increase the value of heavy, sour crude oils such as Dubai and Saudi Arabian crudes.