Oil 101

Petroleum, in one form or another, has been used since ancient times, and is now important across society, including in economy, politics and technology. The rise in importance was mostly due to the invention of the internal combustion engine and the rise in commercial aviation.
More than 4000 years ago, according to Herodotus and Diodorus Siculus, asphalt was used in the construction of the walls and towers of Babylon; there were oil pits near Ardericca (near Babylon), and a pitch spring on Zacynthus. Great quantities of it were found on the banks of the river Issus, one of the tributaries of the Euphrates.. Ancient Persian tablets indicate the medicinal and lighting uses of petroleum in the upper levels of their society.

In the 1850s, the process to distill kerosene from petroleum was invented by Abraham Gesner, providing a cheaper alternative to whale oil. The demand for the petroleum as a fuel for lighting in North America and around the world quickly grew. The world’s first commercial oil well was drilled in Poland in 1853. Oil exploration developed in many parts of the world with the Russian Empire, particularly the Branobel company in Azerbaijan, taking the lead in production by the end of the 19th century. Oil exploration in North America during the early 20th century later led to the U.S. becoming the leading producer by the mid 1900s. As petroleum production in the U.S. peaked during the 1960s, however, Saudi Arabia and Russia surpassed the U.S.

Today, about 90% of vehicular fuel needs are met by oil. Petroleum also makes up 40% of total energy consumption in the US, but is responsible for only 2% of electricity generation. Petroleum’s worth as a portable, dense energy source powering the vast majority of vehicles and as the base of many industrial chemicals makes it one of the world’s most important commodities..

The top three oil producing countries are Saudi Arabia, Russia, and the United States. About 80% of the world’s readily accessible reserves are located in the Middle East, with 62.5% coming from the Arab 5: Saudi Arabia, UAE, Iraq, Qatar and Kuwait. A large portion of the world’s total oil exists as unconventional sources, such as bitumen in Canada and Venezuela and oil shale. While significant volumes of oil are extracted from oil sands, particularly in Canada, logistical and technical hurdles remain, and Canada’s oil sands are not expected to provide more than a few million barrels per day in the foreseeable future.

The petroleum industry is involved in the global processes of exploration, extraction, refining, transporting (often with oil tankers and pipelines), and marketing petroleum products. The largest volume products of the industry are fuel oil and gasoline (petrol). Petroleum is also the raw material for many chemical products, including pharmaceuticals, solvents, fertilizers, pesticides, and plastics. The industry is usually divided into three major components: upstream, midstream and downstream. Midstream operations are usually included in the downstream category.

Petroleum is vital to many industries, and is of importance to the maintenance of industrialized civilization itself, and thus is critical concern to many nations. Oil accounts for a large percentage of the world’s energy consumption, ranging from a low of 32% for Europe and Asia, up to a high of 53% for the Middle East. Other geographic regions’ consumption patterns are as follows: South and Central America (44%), Africa (41%), and North America (40%). The world at large consumes 30 billion barrels (4.8 km³) of oil per year, and the top oil consumers largely consist of developed nations. In fact, 24% of the oil consumed in 2004 went to the United States alone [23], though by 2007 this had dropped to 21% of world oil consumed. In the US, in the states of Arizona, California, Hawaii, Nevada, Oregon and Washington, the Western States Petroleum Association (WSPA) represents companies responsible for producing, distributing, refining, transporting and marketing petroleum. This non-profit trade association was founded in 1907, and is the oldest petroleum trade association in the United States.

Consumption in the twentieth century has been abundantly pushed by automobile growth; the 1985-2003 oil glut even fuelled the sales of low economy vehicles (SUVs) in OECD countries. In 2008, the economic crisis seems to have some impact on the sales of such vehicles; still, the 2008 oil consumption shows a small increase. The BRIC countries might also kick in, as China briefly was the first automobile market in December 2009[45]. The immediate outlook still hints upwards. In the long term, uncertainties linger; the OPEC believes that the OECD countries will push low consumption policies at some point in the future; when that happens, it will definitely curb the oil sales, and both OPEC and EIA kept lowering their 2020 consumption estimates during the past 5 years. Oil products are more and more in competition with alternative sources, mainly coal and natural gas, both cheaper sources.

Production will also face an increasingly complex situation; while OPEC countries still have large reserves at low production prices, newly found reservoirs often lead to higher prices; offshore giants such as Tupi, Guara and Tiber demand high investments and ever-increasing technological abilities. Subsalt reservoirs such as Tupi were unknown in the twentieth century, mainly because the industry was unable to probe them. Enhanced Oil Recovery (EOR) techniques (example: DaQing, China [47] ) will continue to play a major role in increasing the world’s recoverable oil.

In a world that consumes over 80 million barrels per day of petroleum products that added a significant risk premium to crude oil price and is largely responsible for prices in excess of $40-$50 per barrel.

Other major factors contributing to the current level of prices include a weak dollar and the continued rapid growth in Asian economies and their petroleum consumption.  The 2005 hurricanes and U.S. refinery problems associated with the conversion from MTBE as an additive to ethanol have contributed to higher prices.

One of the most important factors supporting a high price is the level of petroleum inventories in the U.S. and other consuming countries. Until spare capacity became an issue inventory levels provided an excellent tool for short-term price forecasts. Although not well publicized OPEC has for several years depended on a policy that amounts to world inventory management. Its primary reason for cutting back on production in November, 2006 and again in February, 2007 was concern about growing OECD inventories. Their focus is on total petroleum inventories including crude oil and petroleum products, which are a better indicator of prices that oil inventories alone.

Commodities

WTI Crude Oil

Brent Crude Oil

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