A Crude Future

Recently I have been looking into what causes the changes in the cost Petrol/Gas, which is a product of oil.  Oil is a commodity, commodities are raw materials or primary agricultural products that can be bought and sold basically stuff that comes out of the ground or grown like:

• Corn
• Coffee beans
• Copper
• Gold

The price of oil sits upon a wobbly tripod (simplified):

Supply & Demand

High demand decreased supply will raise the price and the inverse will drop the price.

Speculators (futures market)

If enough buyers speculate that the price will rise then the suppliers will hold back until it rises in order to sell at a high price.  There have been a number of regulations put in the place since the 1990’s to stop this from spiraling out of control however Speculators can still affect the price.  And according to some 60% of the oil market is pure speculation and they could be right since any money market is effectively based upon a fantasy of potential profits.

Geopolitical Nature of the Economy

If a large country is in recession this means less manufacturing is going on, less jobs,  less people driving buying petrol/gas and less oil produced goods required by said country.  This affects their demand for oil products and we are back to supply and demand.

OPEC controls about 40% of the oil supply in the world which is based mostly in middle eastern countries which over years have been stricken with war.  In 1973 an oil embargo was placed against Canada, Japan, the Netherlands, the United Kingdom and the US for their involvement with the Yom Kippur War.  The price oil rose from $3 per barrel to $12 globally by end of the embargo in 1974

Natural disasters also affect the price normally making it rise.

The Industry

The oil industry is split into three categories: Upstream, midstream and downstream (midstream is considered to be part of the downstream)

Upstream

This covers all oil exploration, development and production of crude oil or natural gas.

Downstream and Midstream

This covers oil tankers, refiners, retailers and consumers

All three of these streams are contributing factors to the price.

United Kingdom Continental Shelf (UKCS) – North Sea Oil
 
From the year 2000 UKCS has been in decline compared to ten years after 1966, between 2000 and 2008 there has been a 90% drop in new oil discoveries in the North Sea.  According to the Department of Energy and Climate Change who are responsible for UKCS over 50% over the North Sea oil reserve has been extracted in the last forty years, in theory there is up to 25 billion barrels are left.

As of 2013 the UK consumes more oil products than it produces which means it has become a net importer to balance its demand.  Offshore conditions make the UK a high-cost producer of oil however the UK exports oil-related goods and services that are worth more than $40 billion a year.

The cost of Brent Crude (which comes from the North Sea fields) is a major benchmark for the international oil market however its price has had a widening divergence from those of the other markets.  Lots of theories have been put forward for this and most of those appear in that wobbly tripod at the top of the page.

The Upshot

A butterfly flaps its wings in Japan and the cost of oil makes up its own damn chaotic mind.