Commodity Prices - Determining Factors

We can always hear articles like this: With the growth of population on earth, the resources such as crude oil and coal will be used up which will make the commodity price be more and more expensive in the future. You may think: if I increase some investment on those commodities, I can get a good return in the future. However, is that true?

If you take a look at the price of crude oil in the last 25 years, you will find that the price is always fluctuating instead of constantly rising. The price reached its peak of $140 in 2008 and quickly went back to $40 per barrel after the global economic crisis. Then it fluctuated between $40 and $100 in recent years. That will throw us a question, if there is less and less oil on earth, why is the oil price not as high as we expected? The reason is, the rising price will cause more oil to be extracted from the earth shell, and then the increased supply of oil will drag the oil price down, which results in the fluctuation in the chart. Let's consider this secorio. When the oil price is less than $40 per barrel, only a few oil producing countries can make profit from extracting crude oil. Most of those countries are located at The Middle East. When the price is rising to $60 per barrel, that price can cover more costs and more countries such as Russia will be profitable from the oil production. This price can also cover the cost of lots of offshore drilling platforms beneath the seabed. All of those will quickly increase the supply of crude oil which will slow down the increase of the price. If the price keeps increasing to 80$ per barrel, that will reach the break-even price of more technologies such as oil extraction from shale and oil sands. Moreover, the emergence of other technology such as usage of solar and wind for electricity will enable people to be less dependent on fossil fuels. They also help improve all aspects of oil extraction and lowers the cost at the same time. All of these will help to lower the price of crude oil in the near future. When the price is lowered below the break-even price for some groups, since they cannot make profits under that price, they will stop the production, which will decrease the supply. Once the price is reaching a low point, there is less supply and the price will start to increase again. So, the price of crude oil is determined by the supply and consumption instead of fears of running-out.

This rule also applied to other types of commodities such as metal, crops and soft commodities such as cotton, coffee and rice. Today, more and more technologies such as high resolution satellite imagery, big data and intelligent drones are used to help increase the production of those products. So, in the foreseen future, we will see a constant price range for those commodities. They will not be depleted. The price will be determined by the supply instead of other factors.

Attribution:
Image From Pixabay: https://pixabay.com/zh/photos/oil-rig...