Oil became one of the most important sources of energy in the 20th century. Oil is used in various ways such as fuel for engines, motor lubricant and as an ingredient for the manufacturing of many chemical products. According to a report by the UK’s Department of Energy and Climate Change (DECC), 75% of oil in Great Britain is used for transport reasons and 25% for heating and production of other products.
Oil hasn’t only changed people’s every day life, but it has also affected the financial markets.
Oil has become one of the most preferred commodities for traders. The oil market is considered to be volatile with price fluctuations occurring daily. Oil prices are sensitive to news coming from oil producing countries such as the United States (US), Saudi Arabia, Russia etc.
What is crude oil?
A part of financial media reports is usually dedicated to the price of crude oil. Crude oil is an unrefined petroleum product and a type of fossil fuel. Crude oil is refined to produce products such as diesel, gasoline, motor oils and lubricants etc. The top five oil producing countries are Saudi Arabia with 11,75 million barrels per day, the US with 10,59 million barrels per day, Russia with 10,30 million barrels per day, China with 4,19 million barrels per day and Iran with 4,13 million barrels per day.
The major benchmarks for crude oil are the West Texas Intermediate (WTI) and the Brent. The WTI crude oil is mainly produced in the Permian Basin, which is located in the US states of Texas and New Mexico. Brent oil is produced in the fields of the North Atlantic sea. Oil market’s analysts suggest that Brent has become a better indicator of worldwide prices in recent years.
Shale oil and the impact on the US economy
Shale oil is a kind of crude oil produced by fracturing rock layers that contain the layers of oil. The methods used for extracting the oil from the ground are still considered controversial. Fracking, as the method is called, requires vast quantities of natural resources such as water and the effects of using this technique on the environment are unknown.
The US is the top shale oil producer in the world. According to a Forbes report published on March 5th 2018, the US has substantially reduced its net imports of crude oil, from 66% of US consumption recorded in 2008 to 38% in November 2017. Market analysts suggest that the US economy is now less sensitive to oil price fluctuations such as the ones recorded during the 1973-1974 oil crisis.
OPEC (Organisation of the Petroleum Exporting Countries) influences the oil market
OPEC is an intergovernmental organization consisted of 14 nations and has its headquarters in Vienna, Austria. Almost 65% of the OPEC’s oil production capacity and reserves are in its 6 Middle-East country members, located around the Persian Gulf. OPEC’s decisions regarding its members’ oil production play a significant role in the global oil market, having an effect on oil prices, but it is also about international relations.
OPEC members decided to cut the organisation’s oil production by 1 million barrels per day in September 2016, in an effort to reduce the oil supply and increase the price per barrel. The reduction in OPEC’s oil production was offset by the increase of shale oil production in the US. In December 2017, OPEC and Russia decided to extend the oil production cut of 1.8 million barrels per day until the end of 2018. The price of Brent crude oil on March 8th 2018 stood at $64 per barrel. It should be noted that its price fell as low as $30 per barrel in January 2016.
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