Crude Oil, Its Prices, Trends, and Impact on the Economy and You
How It Affects Everything You Buy
Crude oil is a liquid fuel source located underground. It was created when the remains of prehistoric algae was heated under pressure by the earth itself over millions of years. That's why it's considered nonrenewable.
West Texas Intermediate crude oil is of very high quality because it is light-weight and has low sulphur content. For these reasons, it is often referred to as “light, sweet” crude oil. These properties make it excellent for making gasoline. That's why it is the major benchmark of crude oil in the Americas.
Brent Blend is a combination of crude oil from 15 different oil fields in the North Sea. It is less “light” and “sweet” than WTI but still excellent for making gasoline. It is refined in Northwest Europe and is the primary benchmark for crude oils in Europe or Africa. Find out more about the difference between WTI and Brent Blend.
Shale oil is crude oil that lies between layers of shale rock. The rock must be broken up to allow access to the layers of oil. New technology has allowed this oil to come to market at a competitive price. As a result, oil prices have dropped. For details, see U.S. Shale Oil Boom and Bust.
Oil shale is oil that's derived from kerogen. That's an early form of oil that requires more pressure and heat to become usable fuel.
Crude oil prices measure the spot price of various barrels of oil, most common of which are either West Texas Intermediate or the Brent Blend. The basket price of the Organization of Petroleum Exporting Countries and the futures price of the New York Mercantile Exchange are also sometimes quoted.
WTI has historically sold at a $4 per barrel discount to Brent. In December 2015, that price differential fell to $2 per barrel. The U.S. Congress removed the ban on oil exports. It responded to demands from U.S. shale oil producers. For example, prices for other crude oils in these two continents are often priced as a differential to Brent, i.e., Brent minus $0.50.
The OPEC basket price is an average of the prices of oil from Algeria, Indonesia, Nigeria, Saudi Arabia, Dubai, Venezuela and Mexico. OPEC uses the price of this basket to monitor world oil market conditions. OPEC prices are lower because the oil from some of the countries has higher sulfur content. That makes it more “sour” and less useful for making gasoline.
The NYMEX futures price for crude oil is reported in almost every major U.S. newspaper. It is the value of 1,000 barrels of oil at some agreed-upon time in the future. The oil is commonly WTI. In this way, the NYMEX gives a forecast of what oil traders think the WTI spot price will be in the future. But the futures price follows the spot price pretty closely since the oil traders can’t know about sudden disruptions to the oil supply, etc.
Impact on Economy and You
Higher crude oil prices directly affect the cost of gasoline, home heating oil, manufacturing and electric power generation. How much? According to the U.S. Energy Information Administration, oil is needed by 96 percent of transportation, 43 percent of industrial product, 21 percent of residential and commercial and only 3 percent of electric power. But if oil prices rise, then so does the price of natural gas which is used to fuel 14 percent of electric power generation, 73 percent of residential and commercial and 39 percent of industrial production.
(Source: “U.S. Primary Energy Consumption by Source and Sector,” EIA, 2004.)
For this reason, higher oil prices increase the cost of everything you buy, especially food. That's because a lot of food costs depends on transportation. High oil prices will ultimately increase inflation.
Crude oil prices most directly affect you in higher gasoline prices and higher home heating oil prices. This is primarily true for those who live in the Northeast United States. Crude oil accounts for 55 percent of the price of gasoline. Distribution and taxes influence the remaining 45 percent.
Oil prices rise in the summer. These are driven by high demand for gas during vacation driving times. It then drops in the winter if it happens not to be so cold. This is because there is lower-than-expected demand for home heating oil.
Until 2015, oil prices seem to be rising earlier and earlier each spring. In 2013, prices started rising in January, reaching a peak of $118.90 in February. In 2012, oil prices began rising in February. The price for a barrel of WTI crude broke above $100 a barrel February 13, 2012. In 2011, prices didn't break $100 a barrel until March 2 and didn't peak until May at $113 a barrel.
Fortunately, none of these peaks were as high as the June 2008 all-time high. This was when the price of WTI crude oil hit $143.68 per barrel. Investors were afraid that China's economic growth would create so much demand that it would overtake supply, driving up prices. But most analysts now realize that the sudden increase in oil prices was due to increased investment by hedge fund and futures traders. By December, it plummeted to a low of $43.70 per barrel.
The U.S. average retail price for regular gasoline also hit a peak in July 2008 at $4.17. This rose as high as $5 a gallon in some areas. By December, it had dropped to $1.87 a gallon. (Source: "EIA Oil Price Trends," EIA.)