The average price of a gallon of unleaded gas, which climbed above the $3 mark last May and hasn’t looked back, really took off after Russia invaded Ukraine in late February.
Russia is one of the world’s biggest producers of oil, which is used to make gasoline. And less Russian oil on the market—partly due to U.S.and European Union sanctions meant to penalize the invasion—led to one of the biggest supply shortfalls since the 1970s, driving up oil and gas prices alike.
The soaring price at the pump put a renewed focus on the production and sale of oil. The oil market remains a mystery to many, though, with government officials, economists, and pundits tossing around terms like “Brent,” “fracking,” and “OPEC.” To help you understand oil—and the underlying factors influencing gas prices—here’s a guide to translating the jargon.
Crude oil is naturally occurring (unrefined) liquid petroleum that is drilled from the ground and reformulated into different fuels, including gasoline, diesel, and jet fuel. Because it is literally the remains of plants and animals that lived in a marine environment millions of years ago, crude oil (also referred to broadly as petroleum) is often called a “fossil fuel.” It’s a mixture of hydrogen and carbon atoms (“hydrocarbon” is another common synonym for crude oil). Since the cost of crude is the biggest factor in the price of gasoline—accounting for more than 53% of the price of a gallon of unleaded—countries that have vast oil supplies can have a big impact on gas prices.
Crude is bought and sold based on supply and demand, which can be affected by the likes of severe weather, refinery or pipeline problems, and geopolitical events (like the war in Ukraine). Oil prices are set mainly by a sort of global auction for futures contracts—contracts to buy or sell the commodity for a certain price at a certain future date—with buyers and sellers ranging from oil producers and airlines to banks and other money managers. Crude is also sold on the spot market (see below).
The spot market for crude oil consists of commodity exchanges where barrels of crude are bought and sold in one-off transactions for near-term delivery. While the spot market comprises only a small portion of the oil trade—most crude deals are made with longer term contracts—it often serves to set the prices for all other transactions.
Crude oil producers are the primary sellers on the spot market, and buyers can include refineries, fuel retailers like gas stations and convenience stores, airlines, and professional trading firms. The price of crude oil on the spot market at any point in time is often referred to as the spot price, the movements of which are closely tracked by so-called price-assessment professionals every day.
A barrel is the 42-gallon vessel used to measure crude oil supplies. One barrel of crude oil typically produces 19 to 20 gallons of gasoline, plus other fuels, and it’s the metric that’s commonly used to discuss the price of oil, which fluctuates based on supply and demand. Most crude oil consumption and production is defined in terms of “barrels per day” (or B/D). For example, while the U.S. consumed an average of 19.78 million B/D in 2021, in January it was producing about 11.3 million B/D.
West Texas Intermediate, or WTI, is one of the most significant types of “benchmark” crude oil bought and sold widely on the world market. WTI is described as both “light,” meaning it requires less refining and produces more gasoline, and “sweet,” which reflects its low sulfur content, also making it easier to refine into gasoline. WTI is produced in the U.S. and is used to set the price for the oil market in North America. Since 2017, the per-barrel price of WTI has generally ranged between about $40 and $100. It reached a recent high of $123.64 on March 8, after Russia’s invasion of Ukraine, and was back below $100 in late April. (The average price of a gallon of unleaded gas also hit a record high of $4.33 in March, before falling back some.)
Brent, another light, sweet crude oil, is the most widely used benchmark for setting international oil prices. Produced from four major oil fields in the North Sea, Brent crude is used to price oil that’s produced and traded in Europe, Asia, Africa, and the Mediterranean. Since 2017 the price of Brent crude has typically ranged between about $45 and $90 per barrel before reaching a recent high of $133.18 on March 8. It was back below $100 in late April.
Oil reserves are a measurement of how much crude oil a country can potentially access from its underground formations. These “informed estimates” of production capability are classified as proved or unproved (also called probable or possible) reserves. According to BP’s 2021 Statistical Review of World Energy, Venezuela had the most proved oil reserves in the world at the end of 2020, with 303.8 billion barrels of crude. It was followed by Saudi Arabia’s 297.5 billion barrels and Canada’s 168.1 billion. The U.S. had proved reserves of 68.8 billion barrels.
Release from the Reserve
In addition to a country’s underground oil reserves, the U.S. and other countries also maintain their own strategic petroleum reserves. These are storehouses of crude oil that’s already been pumped and purchased and can be sold for refining and used to help control prices in the event of supply shortages.
The U.S.’s “rainy day fund,” called the Strategic Petroleum Reserve (SPR), consists of four major underground storage facilities in the Gulf Coast region that are authorized to hold nearly 715 million barrels of oil. By releasing some of this stockpile back to the oil market via sales or exchange contracts, the U.S. has used the SPR on multiple occasions to help slow or reverse a spike in gasoline prices. For example, an SPR release was used to ease fuel shortages after Hurricane Katrina hit oil platforms in the Gulf of Mexico in 2005.
On March 31, President Joe Biden announced that the U.S would release 180 million barrels from the reserve over the next six months. Biden said the move would help make up for supply that was lost after the U.S. banned Russian oil imports. In 2021, Russia provided the U.S. with 8% of its total petroleum (including crude oil) imports, according to the Energy Information Administration.
Hydraulic fracturing typically using horizontal drilling techniques—a process that’s often simply called fracking—refers to an advanced drilling technology that’s intended to increase production from oil wells. Using high-pressure bursts of a mixture of water, chemicals, and sand, this blast of power will “fracture” the impermeable underground rock formations where petroleum has been trapped, releasing it upward to be collected by oil wells.
The technology can be used to free crude oil as well as natural gas. In the U.S., fracking has been linked to strong gains not only in the production of oil but also of natural gas, a petroleum product that’s mostly used to generate electricity, to make fertilizers and chemicals, to heat homes and buildings or as a power source for industrial plants.
Environmental groups argue that fracking could contaminate drinking water and also potentially deplete valuable water resources, making the technology’s use controversial.
The Organization of the Petroleum Exporting Countries (OPEC) is a group of 13 oil-exporting countries that coordinate their members’ petroleum policies in an effort to ensure stable oil markets. The OPEC countries, which include Saudi Arabia, Iraq, Kuwait, and Venezuela, together control nearly 80% of the world’s proved oil reserves.
Representatives of these countries periodically set production targets on their exports to help regulate the supply and, therefore, the price of this global commodity. When OPEC reduces its production targets, the price of crude oil—and with it, gasoline—historically has increased.
OPEC has expanded its reach in recent years by coordinating with several oil-exporting countries that aren’t formal OPEC members. Referred to as OPEC+, this group includes Russia, the world’s third-largest producer, as well as Mexico and Kazakhstan. The group held its most recent meeting on March 31, when they reaffirmed their earlier decision to raise their production levels by 432,000 barrels per day.
A refinery is an industrial facility that separates and processes crude oil into different types of petroleum products.
One barrel of crude not only produces 19.4 gallons of gasoline, it also makes 12.5 gallons of the distillate often used for diesel fuel and 3.5 gallons of jet fuel. The remaining roughly 6.5 gallons of crude are used to make plastics, asphalt, and other products.
Refineries are sometimes mentioned in the news because outages at these facilities—due to mechanical problems or natural disasters, for example—can disrupt the supply of gasoline and create price spikes in the regions they serve. That’s especially true in California, according to the Energy Information Administration. A 2015 refinery explosion in the Golden State had a significant—and long-lasting—impact on gas prices there, one leading energy economist has written.
In energy terms, a producer can be a company that pumps crude oil or natural gas from the ground. It can also refer to a country that has oil or natural gas beneath its surface and is able to extract that resource. The world’s largest producer of crude oil is the U.S., which overtook Saudi Arabia, now the second-largest producer, in 2018, partly due to production increases in Texas and North Dakota. The third-leading producer is Russia, followed by Canada and China.
Countries that sell oil to other countries are crude oil exporters. Russia, before it invaded Ukraine, was the world’s second-largest exporter of crude oil, behind Saudi Arabia, according to the International Energy Agency. In 2021, the U.S. got more than half of its imported petroleum from Canada, followed by 8% from Mexico and Russia and 5% from Saudi Arabia.
The original version of this story was published on April 28, 2022.
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