Price of oil

Spot price of a barrel of benchmark crude oil
the price of crude oil

The price of oil, or the oil price, generally refers to the spot price of a barrel of benchmark crude oil—a reference price for buyers and sellers of crude oil such as West Texas Intermediate (WTI), Brent Crude, Dubai Crude, OPEC Reference Basket, Tapis crude, Bonny Light, Urals oil, Isthmus, and Western Canadian Select (WCS). Oil prices are determined by global supply and demand, rather than any country's domestic production level. The global price of crude oil was relatively consistent in the nineteenth century and early twentieth century. resulting in the 1973 oil crisis, the Iranian Revolution in the 1979 oil crisis, the financial crisis of 2007–2008, and the more recent 2013 oil supply glut that led to the "largest oil price declines in modern history" in 2014 to 2016. The 70% decline in global oil prices was "one of the three biggest declines since World War II, and the longest lasting since the supply driven collapse of 1986." By 2015, the United States had become the third largest producer of oil and resumed exporting oil upon repeal of its 40 year export ban. The 2020 Russia–Saudi Arabia oil price war resulted in a 65% decline in global oil prices at the beginning of the COVID 19 pandemic. In 2021, the record high energy prices were driven by a global surge in demand as the world recovered from the COVID 19 recession. By December 2021, an unexpected rebound in the demand for oil from United States, China and India, coupled with U. S. shale industry investors' "demands to hold the line on spending", has contributed to "tight" oil inventories globally. On 18 January 2022, as the price of Brent crude oil reached its highest since 2014—$88, concerns were raised about the rising cost of gasoline—which hit a record high in the United Kingdom.

According to Our World in Data, in the nineteenth and early twentieth century the global crude oil prices were "relatively consistent." In the 1970s, there was a "significant increase" in the price of oil globally, the Arab Spring 2010s uprisings in Egypt and Libya, the ongoing Syrian civil war (2011–present), and the 2013 oil supply glut that led to the "largest oil price declines in modern history" in 2014 to 2016. The 70% decline in global oil prices was "one of the three biggest declines since World War II, and the longest lasting since the supply driven collapse of 1986." By 2015 the United States was the 3rd largest producer of oil moving from importer to exporter.

Oil prices are determined by global forces of supply and demand, according to the classical economic model of price determination in microeconomics. The demand for oil is highly dependent on global macroeconomic conditions. The study listed exogenous variables that can affect the price of oil: "regional supply and demand equations, the technology of refining, and government policy variables". Based on these exogenous variables, their proposed economic model would be able to determine the "levels of consumption, production, and price for each commodity in each region, the pattern of world trade flows, and the refinery capital structure and output in each region". A widely cited 2008 The Review of Economics and Statistics, article by Lutz Killian, examined the extent to which "exogenous oil supply shocks"—such as the Iranian revolution (1978–1979), Iran–Iraq War (1980–1988), Persian Gulf War (1990–1991), Iraq War (2003), Civil unrest in Venezuela (2002–2003), and perhaps the Yom Kippur War/Arab oil embargo (1973–1974)"—explain changes in the price of oil." Killian stated that, by 2008, there was "widespread recognition" that "oil prices since 1973 must be considered endogenous with respect to global macroeconomic conditions,"

A 2019 Bank of Canada (BOC) report, described the usefulness of a structural vector autoregressive (SVAR) model for conditional forecasts of global GDP growth and oil consumption in relation to four types of oil shocks. The structural vector autoregressive model was proposed by the American econometrician and macroeconomist Christopher A. Sims in 1982 as an alternative statistical framework model for macroeconomists. According to the BOC report—using the SVAR model—"oil supply shocks were the dominant force during the 2014–15 oil price decline". A 2016 article in the Oxford Institute for Energy Studies describes how analysts offered differing views on why Goldman Sachs said that this structural shift was "reshaping global energy markets and bringing with it a new era of volatility" by "impacting markets, economies, industries and companies worldwide" and will keep the price of oil lower for a prolonged period. Others say that this cycle is like previous cycles and that prices will rise again.

Major benchmark references, or pricing markers, include Brent, WTI, the OPEC Reference Basket (ORB)—introduced on 16 June 2005 and is made up of Saharan Blend (from Algeria), Girassol (from Angola), Oriente (from Ecuador), Rabi Light (from Gabon), Iran Heavy (from Iran), Basra Light (from Iraq), Kuwait Export (from Kuwait), Es Sider (from Libya), Bonny Light (from Nigeria), Qatar Marine (from Qatar), Arab Light (from Saudi Arabia), Murban (from UAE), and Merey (from Venezuela), Dubai Crude, and Tapis Crude (Singapore). In North America the benchmark price refers to the spot price of West Texas Intermediate (WTI), also known as Texas Light Sweet, a type of crude oil used as a benchmark in oil pricing and the underlying commodity of New York Mercantile Exchange's oil futures contracts. WTI is a light crude oil, lighter than Brent Crude oil. It contains about 0.24% sulfur, rating it a sweet crude, sweeter than Brent. Its properties and production site make it ideal for being refined in the United States, mostly in the Midwest and Gulf Coast regions. WTI has an API gravity of around 39.6 (specific gravity approx. 0.827) per barrel (159 liters) of either WTI/light crude as traded on the New York Mercantile Exchange (NYMEX) for delivery at Cushing, Oklahoma. Cushing, Oklahoma, a major oil supply hub connecting oil suppliers to the Gulf Coast, has become the most significant trading hub for crude oil in North America. In Europe and some other parts of the world, the price of the oil benchmark is Brent Crude as traded on the Intercontinental Exchange (ICE, into which the International Petroleum Exchange has been incorporated) for delivery at Sullom Voe. Brent oil is produced in coastal waters (North Sea) of UK and Norway. The total consumption of crude oil in UK and Norway is more than the oil production in these countries. So Brent crude market is very opaque with very low oil trade physically. Brent price is used widely to fix the prices of crude oil, LPG, LNG, natural gas, etc. trade globally including Middle East crude oils. There is a differential in the price of a barrel of oil based on its grade—determined by factors such as its specific gravity or API gravity and its sulfur content—and its location—for example, its proximity to tidewater and refineries. Heavier, sour crude oils lacking in tidewater access—such as Western Canadian Select—are less expensive than lighter, sweeter oil—such as WTI. The Energy Information Administration (EIA) uses the imported refiner acquisition cost, the weighted average cost of all oil imported into the US, as its "world oil price".

The oil storage trade, also referred to as contango, a market strategy in which large, often vertically integrated oil companies purchase oil for immediate delivery and storage—when the price of oil is low— and hold it in storage until the price of oil increases. Investors bet on the future of oil prices through a financial instrument, oil futures in which they agree on a contract basis, to buy or sell oil at a set date in the future. Crude oil is stored in salt mines, tanks and oil tankers. But it was in 2007 through 2009 the oil storage trade expanded, with many participants—including Wall Street giants, such as Morgan Stanley, Goldman Sachs, and Citicorp—turning sizeable profits simply by sitting on tanks of oil. By May 2007 Cushing's inventory fell by nearly 35% as the oil storage trade heated up. From June 2014 to January 2015, as the price of oil dropped 60% and the supply of oil remained high, the world's largest traders in crude oil purchased at least 25 million barrels to store in supertankers to make a profit in the future when prices rise. Trafigura, Vitol, Gunvor, Koch, Shell and other major energy companies began to book oil storage supertankers for up to 12 months. By 13 January 2015 At least 11 Very Large Crude Carriers (VLCC) and Ultra Large Crude Carriers (ULCC)" have been reported as booked with storage options, rising from around five vessels at the end of last week. Each VLCC can hold 2 million barrels." In 2015 as global capacity for oil storage was out paced by global oil production, and an oil glut occurred. Crude oil storage space became a tradable commodity with CME Group— which owns NYMEX— offering oil storage futures contracts in March 2015. By 5 March 2015, as oil production outpaces oil demand by 1.5 million bpd, storage capacity globally is dwindling. In 2020, rail and road tankers and decommissioned oil pipe lines are also being used to store crude oil for contango trade. For the WTI crude to be delivered in May 2020, the price had fallen to $40 per bbl (i. e. buyers would be paid by the sellers for taking delivery of crude oil) due to lack of storage/expensive storage. LNG carriers and LNG tanks can also be used for long duration crude oil storage purpose since LNG can not be stored long term due to evaporation. Frac tanks are also used to store crude oil deviating from their normal use.

In their May 2019 comparison of the "cost of supply curve update" in which the Norway based Rystad Energy—an "independent energy research and consultancy"—ranked the "worlds total recoverable liquid resources by their breakeven price", they listed the "Middle East onshore market" as the "cheapest source of new oil volumes globally" with the "North American tight oil"—which includes onshore shale oil in the United States—in second place. The breakeven price for North American shale oil was US$68 a barrel in 2015, making it one of the most expensive to produce. By 2019, the "average Brent breakeven price for tight oil was about US$46 per barrel. The breakeven price of oil from Saudi Arabia and other Middle Eastern countries was US$42, in comparison. In 2016, the Wall Street Journal reported that the United Kingdom, Brazil, Nigeria, Venezuela, and Canada had the costliest production. Saudi Arabia, Iran, and Iraq had the cheapest. Global annual crude oil production (including shale oil, oil sands, lease condensate and gas plant condensate but excluding liquid fuels from other sources such as natural gas liquids, biomass and derivatives of coal and natural gas) increased from in 2008 to per day in 2018 with a marginal annual growth rate of 1%.

The rising oil prices could negatively impact the world economy. One example of the negative impact on the world economy, is the effect on the supply and demand. High Oil prices indirectly increase the cost of producing many products thus causing increased prices to the consumer. Since supplies of petroleum and natural gas are essential to modern agriculture techniques, a fall in global oil supplies could cause spiking food prices in the coming decades. One reason for the increase in food prices in 2007–08 may be the increase in oil prices during the same period. Bloomberg warned that the world economy, which was already experiencing an inflationary "shock", would worsen with oil priced at $100 in February 2022. The International Monetary Fund (IMF) described how a combination of the "soaring" price of commodities, imbalances in supply and demand, followed by pressures related to the Russian invasion of Ukraine, resulted in monetary policies being tightened by central banks, as some inflation in some countries broke 40 year old record highs. Low oil prices could alleviate some of the negative effects associated with the resource curse, such as authoritarian rule and gender inequality. Lower oil prices could however also lead to domestic turmoil and diversionary war. The reduction in food prices that follows lower oil prices could have positive impacts on violence globally. Research shows that declining oil prices make oil rich states less bellicose. Low oil prices could also make oil rich states engage more in international cooperation, as they become more dependent on foreign investments. The influence of the United States reportedly increases as oil prices decline, at least judging by the fact that "both oil importers and exporters vote more often with the United States in the United Nations General Assembly" during oil slumps. However, in recent countries like Japan, the decrease in oil prices may cause deflation and it shows that consumers are not willing to spend even though the prices of goods are decreasing yearly, which indirectly increases the real debt burden. It is estimated that 17–18% of S&P would decline with declining oil prices. It has also been argued that the collapse in oil prices in 2015 should be very beneficial for developed western economies, who are generally oil importers and aren't over exposed to declining demand from China. In the Asia Pacific region, exports and economic growth were at significant risk across economies reliant on commodity exports as an engine of growth. The most vulnerable economies were those with a high dependence on fuel and mineral exports to China, such as: Korea DPR, Mongolia and Turkmenistan—where primary commodity exports account for 59–99% of total exports and more than 50% of total exports are destined to China. The decline in China's demand for commodities also adversely affected the growth of exports and GDP of large commodity exporting economies such as Australia (minerals) and the Russian Federation (fuel). On the other hand, lower commodity prices led to an improvement in the trade balance—through lower the cost of raw materials and fuels—across commodity importing economies, particularly Cambodia, Kyrgyzstan, Nepal and other remote island nations (Kiribati, Maldives, Micronesia (F. S), Samoa, Tonga, and Tuvalu) which are highly dependent on fuel and agricultural imports. The oil importing economies like EU, Japan, China or India would benefit, however the oil producing countries would lose. A Bloomberg article presents results of an analysis by Oxford Economics on the GDP growth of countries as a result of a drop from $84 to $40. It shows the GDP increase between 0.5% to 1.0% for India, USA and China, and a decline of greater than 3.5% from Saudi Arabia and Russia. A stable price of $60 would add 0.5 percentage point to global gross domestic product. Katina Stefanova has argued that falling oil prices do not imply a recession and a decline in stock prices. Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, had earlier written that that positive impact on consumers and businesses outside of the energy sector, which is a larger portion of the US economy will outweigh the negatives. While President Trump said in 2018, that the lower price of oil was like a "big Tax Cut for America and the World", Some of the big multinational oil companies actively participate in crude oil trading applying their market perception to make profit.

According to a U. S. Commodity Futures Trading Commission (CFTC) 29 May 2008 report the "Multiple Energy Market Initiatives" was launched in partnership with the United Kingdom Financial Services Authority and ICE Futures Europe in order to expand surveillance and information sharing of various futures contracts. Part 1 is "Expanded International Surveillance Information for Crude Oil Trading." The report found that the primary reason for the price increases was that the world economy had expanded at its fastest pace in decades, resulting in substantial increases in the demand for oil, while the oil production grew sluggishly, compounded by production shortfalls in oil exporting countries. Bankers also use hedge funds to more "safely increase leverage to smaller oil and gas companies." "funding [for upstream oil industry] is shrinking and hedges are unwinding." To finance exploration and production of the unconventional oil industry in the United States, "hundreds of billions of dollars of capital came from non bank participants [non bank buyers of bank energy credits] in leveraged loans that were thought at the time to be low risk. However, with the oil glut that continued into 2016, about a third of oil companies are facing bankruptcy.