Price of petroleum

This article is about the price of crude oil; see gasoline usage and pricing for information about derivative motor fuels.

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Brent spot prices, May 1987 – April 2008.

Weekly reports on crude oil inventories or total stockpiles in storage facilities like these tanks have a strong bearing on oil prices.

The price of petroleum means the spot price of either WTI/Light Crude as traded on the New York Mercantile Exchange (NYMEX) for delivery in 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, typically with reference to a marker crude oil grade that is typically quoted via pricing agencies such as Argus Media Ltd and Platts. 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. Some economists say that high oil prices have a large negative impact on the global growth.

OPEC, consisting of Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela, was formed to maintain the price of oil at a level most beneficial to its membership considered as a whole, and is considered to be a cartel by some observers. ^[1]

[edit] History

Main articles: 1967 Oil Embargo, 1973 oil crisis, 1979 energy crisis, 1980s oil glut, and Oil price increase of 1990

Long-term oil prices, 1861-2007 (orange line adjusted for inflation, blue not adjusted).

[edit] Recent price history

Main article: Oil price increases since 2003

Price for West Texas Intermediate from 1999 to June 2008 in US$

A recent low point was reached in January 1999 of $16 (all prices are in US$ 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. ^[2] 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.^[3] In September 2007, US crude (WTI) crossed $80. Multiple factors caused this high price. OPEC announced an output increase lesser than expected.^[4] US stocks fall lower than experts predicted^[5] and six pipelines were attacked by a leftist group in Mexico. ^[6]

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.^[7]

On January 2, 2008, a single trade was made at $100^[8], but the price did not stay above $100 until late February.

Oil prices for Brent in US$ and Euro

Oil broke through $110 on March 12, 2008^[9], $125 on May 9, 2008^[10], $130 on May 21, 2008 ^[11], $140 on June 26, 2008 and $145 on July 3, 2008^[12].

On July 11th 2008, oil prices rose to a new record of $147.27 following concern over recent Iranian missile tests^[13].

Afterwards, however, oil prices lost more than 20$ within two weeks, settling around $125 a barrel on July 24,2008.^[14]

[edit] Future

Fatih Birol, chief economist of the International Energy Agency said in October 2007 that oil prices will remain high for the foreseeable future due to rapid increases in demand from the rapidly growing economies of India and China.^[15] This does not quite align with the fact that prices started climbing in 2003, when no special event took place in either country, but when Iraq was invaded. Then prices doubled again between 2006 and 2008, this time due to speculation, when US trading was allowed to take place through the US-owned ICE Futures exchange in London rather than the NYMEX, thereby escaping US regulatory requirements. ^{[16] [17]} The ministers of OPEC, meeting in early December 2007, appeared to reach a consensus for high, but stable prices. This price point would deliver consistently high income to the oil producing states, but avoid prices so high that they would depress the economies of the oil consuming nations. A range of $70-80 was suggested by some analysts to be OPEC's goal.^[18] This would be in step with the price of shale oil, which, though more expensive to drill, will not likely go above $100. ^[19] The ministers of OPEC Major oil-exporting countries are rapidly developing and are using more oil domestically. Particularly significant are Indonesia, which no longer exports oil, Mexico and Iran, where projected demand will exceed production in about five years, and Russia, which is growing rapidly.^[20]

Due to rapidly changing valuations of the United States dollar, it is unclear when these price points will break. While it is not expected to reach as high as $200 anytime soon, backsliding but still leveling at the previously unheard of $70 could become the norm.

Russian energy giant Gazprom meanwhile forecast that soaring oil prices would "very soon" hit 250 dollars a barrel. OPEC's president predicted prices may reach $170 by the summer.^[21][22]

A difficult factor to isolate is the total volume of the futures markets themselves. As there are many indirect owners of futures (401k plans, mutual funds, and even simple savings accounts are routinely invested in such things without the account holder being explicitly aware,) the knock-on effect of a downwardly spiraling economy could itself further devalue oil. Similar factors corrected the run away that gold and silver experienced in the early 1980s, for example.

As with any speculation market, it is well within investors' ability to drive up the price of futures well out of proportion with the supplies and demands involved. But there are two dangers that can quickly affect such transient spikes. Demand can drop off, and supply can increase. This was the case in 1998/1999 when the Asian market collapsed, reducing demand, and Iraq increased production by over 12%, increasing supply. This caused the all-time low of $8.

In the post-Sept 11th world, after an initial dip below $25 a barrel, oil has continued its meteoric and unparalleled rise. First it crossed a threshold (after the 1st $100-per-barrel sale for someone to lay claim to being the first to pay that much) in 2007. As it pertains to recent events, the demand side is slowing, though not appreciably enough. The US Congress opened to panels to investigate the potential speculation fraud on Tuesday June 17. On the same day, Saudi Arabian oil production increased by 200,000 barrels a day, the largest in its history was announced as a potential option. This and other factors caused oil to drop for fourth day in a row, closing at $133.53.^[23] A weak dollar and Iran war talk caused the biggest single day increase ever. A rise of $11 in a single day took the price to $138.^[24] Once again war games by and with Iran raised the price of oil to above $146.^[25] Ironically enough, on July 16, 2008, mounting concerns of spiralling oil prices and the effect on the economy helped plunge the oil by its biggest ever single day fall since 1991^[26] of $6.44 (at one point more than $10 on the same day). According to the AP, "an extremely volatile session" coupled with "fears that record fuel prices are spreading broad economic pain exacerbated the third big sell-off in just over a week."^[27]

[edit] Market listings

Main article: Commodities markets

Oil is marketed among other products in commodities markets. See above for details. Widely traded oil futures, and related natural gas futures, include:^[28]

• 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 York City Gate Spot

[edit] Oil Futures Investigation

The U.S. Commodity Futures Trading Commission announced "Multiple Energy Market Initiatives" on May 29th 2008. Part 1 is "Expanded International Surveillance Information for Crude Oil Trading." The CFTC announcement stated it has joined with the United Kingdom Financial Services Authority and ICE Futures Europe in order to expand surveillance and information sharing of various futures contracts.^[29] This announcement has received wide coverage in the financial press, with speculation about oil futures price manipulation.^{[30] [31] [32]}

[edit] References

• Skyrocketing oil prices pummel U.S. national security.

[edit] See also

• Asymmetric price transmission
• Elasticity (economics)
• Energy crisis
• Energy efficiency
• Food vs fuel
• Gasoline usage and pricing
• Peak oil
• Stagflation

[edit] External links

• Gasoline and diesel fuel prices, EIA, Department of Energy.
• Oil-price.net, daily crude prices.
• FACTBOX-The World's Oil Shocks (Planet Ark)
• NYMEX future prices for light sweet crude, Session Overview.
• NYMEX future prices for light sweet crude, Session Expanded table.
• "It's Still About Oil," by Michael Johns, April 30, 2007.
• History and Analysis of Crude Oil Prices.
• Oil Change International