How Does the Global Oil Market Work?

The global oil market is a worldwide system in which crude oil is produced, traded, refined, and consumed across countries. Although different benchmarks exist, crude oil prices around the world generally move in tandem because oil is traded in a highly interconnected global market.

Oil prices are primarily influenced by global supply and demand. Because oil is widely transported and traded internationally, regional events can have worldwide effects on pricing.

How Oil Prices Are Determined

Two major crude oil benchmarks are West Texas Intermediate (WTI), the primary U.S. benchmark, and Brent crude, the main global benchmark sourced from the North Sea. While they are priced separately, they typically move in the same direction due to global trading dynamics.

Global Supply

Oil supply comes from a mix of national producers and private-sector companies. The Organization of the Petroleum Exporting Countries (OPEC) consists of 12 member countries and accounts for roughly one-third of global oil supply. Saudi Arabia and other OPEC members collectively represent about 35% of total global production.

However, OPEC does not single-handedly control oil prices. Other major producers include:

• United States (approximately 20% of global supply)
• Russia (approximately 12%)
• Canada (approximately 6%)
• Other non-OPEC countries

Supply decisions by governments, investment trends among private oil companies, and capital allocation strategies all influence production levels. In recent years, some energy companies have emphasized capital discipline, focusing more on dividends and share repurchases rather than expanding production.

Short-term price volatility may also result from geopolitical developments, particularly in oil-producing regions.

Global Demand

Oil demand varies by region and economic conditions.

• The United States consumes nearly 20% of the world’s oil, though demand has been relatively flat since the global financial crisis.
• Europe has experienced gradually declining demand, influenced in part by environmental policies.
• China has been the largest contributor to global demand growth over the past two decades, although increased electric vehicle adoption has recently contributed to demand stabilization.

Because supply and demand are global, developments in one region can affect prices worldwide.

Why Gasoline Prices Differ From Oil Prices

While crude oil prices tend to move together globally, retail gasoline prices vary widely by location.

In the United States, crude oil accounts for approximately half of the retail price of gasoline. As a general rule, a $1 per barrel decline in oil may reduce the retail gasoline price by about $0.02 per gallon, assuming other factors remain constant.

The remaining portion of the retail price includes:

• Refining costs
• Distribution and transportation
• Federal and state taxes

These components vary significantly by state and region.

For example:

• Coastal states often have higher gasoline prices than central states
• California’s gasoline tax is more than three times higher than Texas’s
• Refining and distribution costs may be higher in densely populated areas

Seasonality also affects fuel prices. Gasoline prices have historically increased in anticipation of the summer driving season, typically peaking around mid-June.

Why Understanding the Oil Market Matters

Understanding how the oil market functions can help individuals:

• Recognize why oil prices move globally
• Understand the relationship between crude oil and gasoline prices
• Interpret headlines related to OPEC, geopolitical events, or energy demand
• Appreciate how global economic trends influence energy markets

Because oil is a globally traded commodity, pricing reflects a broad set of economic, political, and industry-specific factors.

Key Risks and Considerations

• Oil prices can be volatile due to geopolitical developments
• Supply disruptions may cause sudden price movements
• Demand shifts from economic slowdowns or technological change can affect pricing
• Government policies, taxes, and regulations influence retail fuel costs
• Historical patterns do not guarantee future outcome

Build Your Understanding

Several related concepts are often discussed alongside the global oil market:

• Supply and Demand — The fundamental economic forces that influence prices based on availability and consumption.
• Commodities — Physical goods such as oil, metals, and agricultural products that are traded in global markets.
• Geopolitical Risk — The potential for political events or instability to impact markets, particularly in resource-producing regions.
• Market Volatility — The degree of price fluctuation over time, often influenced by economic data, policy changes, or global events.

Each of these concepts may help explain why oil prices move and how global events can influence energy markets.

Related Investment 101 Articles

• What are Bull and Bear Markets?
• What is Market Volatility and Why is it Considered the Cost of Long-Term Gains

Frequently Asked Questions

Why do oil prices around the world move together?

Oil is traded in a global market. Because it is widely transported and internationally priced, supply and demand changes in one region typically affect prices worldwide.

Does OPEC control global oil prices?

OPEC accounts for roughly one-third of global oil supply and influences production levels. However, non-OPEC producers and global demand trends also play significant roles in determining prices.

Why are gasoline prices different from state to state?

Gasoline prices vary due to differences in state taxes, refining costs, and distribution expenses. Crude oil represents only part of the retail price.

How much of the gasoline price comes from crude oil?

In the United States, crude oil typically accounts for about half of the retail price of gasoline, with the remainder coming from refining, distribution, and taxes.

Are oil prices affected by seasonal trends?

Yes. Gasoline prices have historically increased ahead of the summer driving season, often peaking around mid-June, regardless of broader oil price trends.

By

Larry Adam

Lawrence (Larry) Adam, CFA, CIMA®, CFP® is the chief investment officer for the Private Client Group at Raymond James. Prior to that he was both CIO of the Americas and chief investment strategist at Deutsche Bank Private Wealth, for whom he worked for over 20 years. He is frequently quoted in well-known financial publications like Bloomberg, Barron’s, and the WSJ. Part of his work involves translating complex financial concepts into clear, practical guidance to help guide advisors and clients through changing market conditions.