The price of petroleum as quoted in news generally refers to the spot price of either WTI/Light Crude as traded on the New York Mercantile Exchange (NYMEX) for delivery at Cushing, Oklahoma, or of Brent as traded on the Intercontinental Exchange (ICE, into which the International Petroleum Exchange has been incorporated) for delivery at Sullom Voe. The price of a barrel of oil is highly dependent on both its grade, determined by factors such as its specific gravity or API and its sulphur content, and its location. The vast majority of oil is not traded on an exchange but on an over-the-counter basis. Other important benchmarks include Dubai, Tapis, and the OPEC basket. 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 demand for oil is highly dependent on global macroeconomic conditions. According to the International Energy Agency, high oil prices generally have a large negative impact on the global economic growth. Others argue that the run-up in oil prices over the past few years actually led to an acceleration in global growth. The huge surpluses built up by oil exporting countries were recycled through sovereign wealth funds and the banking system and (through the money multiplier) greatly increased investments in emerging markets and helped hold down interest rates in the U.S.
The Organization of the Petroleum Exporting Countries (OPEC) was formed to control the price of oil, and essentially worked as a cartel.
Oil price has undergone a significant decrease since the record peak it reached in July 2008. On December 23, 2008, WTI crude oil spot price fell to US$30.28 a barrel, the lowest since the global financial crisis began, and has been trading between US$35 a barrel and US$82 a barrel in 2009.
History
Further information: 1967 Oil Embargo, 1973 oil crisis, 1979 energy crisis, 1980s oil glut, and Oil price increase of 1990
Recent price history
Further information: 2000s energy crisisA recent low point was reached in January 1999 of $17 (all prices are in US$ per barrel), after increased oil production from Iraq coincided with the Asian Financial Crisis, which reduced demand. Prices then increased rapidly, more than doubling by September 2000 to $35, then fell until the end of 2001 before steadily increasing, reaching $40-50 by September 2004. In October 2004, light crude futures contracts on the NYMEX for November delivery exceeded $53 and for December delivery exceeded $55. Crude oil prices surged to a record high above $60 in June 2005, sustaining a rally built on strong demand for gasoline and diesel and on concerns about refiners' ability to keep up. This trend continued into early August 2005, as NYMEX crude oil futures contracts surged past $65 as consumers kept up the demand for gasoline despite its high price. Crude oil futures peaked at a close of over $77 in July 2006, and in December 2006 at about $63. That is just about where they began the year 2006. In September 2007, US crude (WTI) crossed $80. Multiple factors caused this high price. OPEC announced an output increase lower than expected. US stocks fell lower than experts predicted, changes in federal oil policies , and six pipelines were attacked by a leftist group in Mexico. In October 2007 US light crude rose above $90 for the first time, due to a combination of tensions in eastern Turkey and the reducing strength of the US dollar.
On January 2, 2008, a single trade was made at $100, but the price did not stay above $100 until late February.
Oil broke through $110 on March 12, 2008, $125 on May 9, 2008, $130 on May 21, 2008 , $135 on May 22, 2008, $140 on June 26, 2008 and $145 on July 3, 2008. On July 11, 2008, oil prices rose to a new record of $147.27 following concern over recent Iranian missile tests.
However, oil prices declined by more than $20 over the next two weeks, settling around $125 a barrel on July 24, 2008.A strong contributor to this price decline was the drop in demand for oil in the US. Miles driven there in a month were down in March-May 2008 compared to 2007, with the 4% decline in May being the largest drop in history. Oil further dropped down to its lowest price in 3 months, at around $112 a barrel, on August 11, 2008, and on September 15, oil price fell below $100 for the first time in seven months.On October 11, oil fell as much as $8.89, or 10.17% to $77.70 per barrel as global equities slide . Oil traded below $70 on October 16, 2008. On December 21, 2008, oil was trading at $33.87 a barrel, less than one fourth of the peak price reached four months earlier. Prices did not rebound once 2009 started. Instead, after initially climbing above $48, prices descended by mid-February to below $34, hurt by forecasts for further declines in world demand. Through March and April 2009, oil traded at about $40 per barrel. By August 2009, prices returned to $70 a barrel.
Reasons for trends
The price of oil, like the price of all commodities, is subject to major swings over time, particularly tied to the overall business cycle. When demand for a commodity like oil exceeds production capacity, the price will rise quite sharply because both demand and supply are fairly inelastic in the short run. Users of oil might be shocked by much higher prices, but they have commitments and habits that determine their energy use, and these take time to adjust. On the supply side, especially at the outer edge of existing production capacity, adding new capacity is time-consuming and expensive. Moreover, the supply side is severely influenced by oligopolistic group of swing producers. Over time, however, both businesses and individuals figure out ways to cut back their oil consumption in response to high prices, and the high prices promote new investment in production and the arrival of new sources in the market, gradually restoring a supply-demand balance. The extraordinary spike in prices in mid-2008 represents to a large extent the consequences of a brief period where global oil demand outran supply. When supply exceeds demand, on the other hand, microeconomic theory says the price should collapse to the marginal cost of production of the most expensive source. As the price drops, the most expensive wells become uneconomical and are shut down, at least temporarily. Price equilibrium is reached somewhere near the production cost of the most expensive source needed to meet global demand. The swing from what the market will bear in the first days of shortage to the marginal cost of the last well in times of surplus can be huge. Most commodity prices (metals, grains, even manufactured commodities like NAND flash memory) are subject to similar large swings over time.
As global oil production begins to decline (after "peak oil"), the medium-term volatility of oil prices is likely to be higher than before, because the range of production costs among all sources supplying the market will be much greater. Major oil fields exist where the cost of production is comfortably below US$10 per barrel, and these are adequate to supply all global demand for many years. A large portion of the world's supply still comes from such inexpensive sources. Future shortages and high prices, however, will spur the development of oil sources with production costs of $50, $70, even $100 per barrel, including deep water sites, tar sands, oil shale, and secondary recovery from depleted fields. But eventually, when the energy needed to produce oil from these sources exceeds the energy we get out of them, the extraction will decline. In the language of microeconomic theory, the supply curve will be much steeper than in past years. Shifts in demand (artificially created or otherwise), either up or down, will cause relatively larger swings in market price.
Benchmark pricing
Main article: Benchmark (crude oil)After the collapse of the OPEC-administered pricing system in 1985, and a short lived experiment with netback pricing, oil-exporting countries adopted a market-linked pricing mechanism. First adopted by PEMEX in 1986, market-linked pricing received wide acceptance and by 1988 became and still is the main method for pricing crude oil in international trade. The current reference, or pricing markers, are Brent, WTI , and Dubai/Oman.
Market listings
Main article: Commodities marketsOil is marketed among other products in commodities markets. See above for details. Widely traded oil futures, and related natural gas futures, include:
- Petroleum
- Nymex Crude Future
- Dated Brent Spot
- WTI Cushing Spot
- Nymex Heating Oil Future
- Nymex RBOB Gasoline Future
- Natural gas
- Nymex Henry Hub Future
- Henry Hub Spot
- New
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