The Relationship Between Scrap and Oil Prices

Scrap and oil prices
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A guide to oil prices do—and don’t—affect the price of scrap metal.

In the scrap business, you may hear people talk about the fact that oil and scrap prices act as opposing forces. When the price of one goes up, the other goes down. Given the fact that oil prices have been high recently, it stands to reason that scrap prices would drop.

Right?

Not necessarily.

In this article, we’re going to explain the economics behind the relationship between scrapl and oil prices. We’ll take a look at how the relationship used to work, how it’s changed, and why.

A quick economics lesson

To understand the full picture, we need to brush up on some basic economics terminology and concepts. (Feel free to skip this section if you’re already a pro.) There are two concepts we want to cover in particular: Commodities, and supply and demand.

What is a commodity?

A commodity is a product or service whose value is not determined by who is selling it. A few examples include oil, gold, electricity, or crops, such as wheat and rice. No matter who produced or is selling the product, the value is about the same—because the product is about the same. A price increase or decrease for gold affects all gold, not just one type or supplier of gold.

Alternatively, something like an athletic shoe is not a commodity. That’s because things like material choice, design, and brand play a role in the value of the product. Consumers are willing to pay more for a pair of Nike Air Jordans than a basic sneaker from Walmart. The two products have very different perceived values and are thus not a commodity.

What is supply and demand?

Supply and demand is a core principle of economics. In simple terms, there’s a natural balance point where the number of buyers willing to purchase an item at a given price will equal the quantity available at that price. A very basic example is a grocery store with 1000 avocados priced at $1 (supply) and 1000 customers willing to spend $1 on an avocado (demand). The two forces are equally balanced.

A wide range of variables can change the balance of supply and demand, meaning this balance can be disrupted at any time. An especially successful growing season can result in an abundance of avocados. A drought or a supply chain issue may lead to a shortage. A trendy video about avocado toast can lead to more people buying avocados. (This actually happened in 2021, thanks to a TikTok video about a recipe that calls for feta cheese.) These changes affect the price—and what people are willing to pay.

Simply put, when the demand is greater than the supply, prices tend to go up. When the supply outweighs the demand, prices tend to go down.

Now let’s talk about scrap.

A history of the relationship between scrap and oil prices.

Up until about twenty years ago, the relationship between scrap and oil prices was fairly predictable.

A change in oil prices was a pretty reliable bellwether for an opposing change in scrap prices. That’s because of the ripple effect of oil prices. Oil is a commodity, which means any change in oil prices is effective across the board. When oil prices go up, everything becomes more expensive, including:

  • Operating manufacturing and production equipment.
  • Transporting materials and finished products from place to place.

Someone’s gotta pay for those extra costs, and usually, it’s the end customer. In other words, higher oil prices lead to higher price tags on everything from cars to consumer products.

This leads to a chain reaction:

  • Many people will simply hold off on purchasing those items until they become more affordable again. This is a reduction in demand.
  • Because sales are down, manufacturers may slow production or put certain projects on hold for a while.
  • Fewer materials, including scrap metal, are purchased for production—another reduction in demand.

The result is the outcome of basic supply-and-demand principles. A drop in demand for scrap metal necessitates a drop in price. This is, in simple terms, how a spike in oil prices leads to a drop in scrap metal prices.

Why the relationship between scrap and oil prices changed.

It seems simple enough. But, as we said up top, it’s not quite that simple—at least, not anymore. That’s because another variable has entered the equation: New energy sources.

Oil has been a major source of energy since the Industrial Revolution, and it remains a vital commodity in our modern world. But the introduction of nuclear energy, hydropower, renewables, shale, and other energy sources have changed the balance.

Industries have alternative energy sources to choose from, rather than relying solely on oil. If a company uses renewable energy to power their manufacturing operation, the price of oil has less of an impact on the final product price. If a transportation company uses solely electric vehicles, they don’t have to bump their prices if oil becomes more expensive.

As a result, a spike in oil prices has less of a universal impact on consumer prices. Demand is less dramatically affected, and manufacturers don’t cut back on scrap metal purchasing quite so much.

Of course, this is a fairly simple overview. Global economic forces are complex and ever changing. But the relationship between scrap and oil prices is less predictable and straightforward than it used to be. As the energy landscape continues to evolve, more changes are surely on the horizon.

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