Policy Report

Fundamentals of the Global Oil Market

Calls for “energy independence” notwithstanding, oil is a fungible global commodity, which means that events affecting supply or demand anywhere will affect oil consumers everywhere.

Oil is a fungible global commodity that essentially has a single world benchmark price. Therefore, a supply disruption anywhere in the world affects oil consumers everywhere in the world. A country’s exposure to world price shocks is a function of the amount of oil it consumes and is not significantly affected by the ratio of “domestic” to “imported” product.

Demand for oil is “demand inelastic” because there are no significant ready substitutes for oil, meaning that consumers have little flexibility to switch to other fuels for their daily oil consuming activities (such as transportation). When this reliance on oil is combined with tight supply conditions and growing oil demand, even relatively small shortages in supply can lead to sudden and large rises in the price of oil and have wide ranging ramifications for the economy. As Alan Greenspan noted before the Joint Economic Committee in April in 2002, “all economic downturns in the United States since 1973 ... have been preceded by sharp increase increases in the price of oil.”

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“Of special note is the support of a nonpartisan group of business executives and retired senior military leaders concerned about global energy security, known as Securing America’s Future Energy, SAFE.” Senator Daniel Inouye (D-HI)

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