The Story of Oil

The procedure for distilling kerosene from petroleum was invented in 1847 by James Young in Derbyshire, England.  Young was able to use some of this distilled petrol to light a small oil lamp and in the process obtained a thick oily substance which could be used for lubricating machinery. He started a business refining the crude oil in 1848.

Oil exploration expanded throughout Europe, Canada and America and by the beginning of the early 20th century later the US took over as the leading producer of refined oil. As petroleum production in the US peaked during the 1960s, however, the United States was surpassed by Saudi Arabia and the Soviet Union.

Petrol Industry

The petroleum industry today classifies crude oil by the geographic location in which it is produced –i.e. West Texas Intermediate, Brent, or Oman; its API gravity (a measure of density by an the oil industry ); and its sulfur content. Light crude has low density; heavy crude has high density. If it is referred to as sweet, it contains relatively little sulfur; it’s sour if it contains substantial amounts of sulfur.

The largest segment of petroleum products are fuel oil and petroleum. Petrol is also the raw material for many chemical products, including pharmaceuticals, solvents, fertilizers, pesticides, and plastics.

Oil products account for a large percentage of the world’s energy consumption. According to one estimate, the world consumes over 99 million barrels of oil each day with the United States at the top of the list. China follows, consuming only half that amount and Japan is close behind.

When it comes to oil production, which essentially refers to the quantity of crude extracted from reserves and not the actual creation of the product itself, Saudi Arabia still leads the world. Russia follows close behind and the U.S. takes 3rd place.

Oil Price Fluctuation

Oil prices fluctuate considerably and are vulnerable to fundamental factors taking place throughout the world. News out of the Middle East tends to move prices dramatically which makes investing in oil a highly risky endeavor.

The current price of Brent Crude wavers around $104.00; WTI Crude stands at $111.00. But buyers of oil for physical delivery rarely pay the price listed on the WTI index or the Brent crude index. The price of oil as discussed in the news is the price of a commodity , not the price charged at the gas pump.

Why the difference? Crude oil is the base product that gets processed into gasoline at oil refineries. If the price of oil goes up, the price of gas goes up accordingly.  But there are other factors that affect the price of gasoline and that is why gas prices and oil prices do not always move in synchronization. One factor is that the refining capacity can rise and fall. If a major refinery develops problems and must close its doors, then the amount of gasoline that can be produced drops. The price of gasoline rises because of shortages, but the price of crude oil will fall because of gluts.

Delivery Costs

Another factor affecting both the price of gas and the price of oil is transport costs from the refineries to the gas stations. If the price of transport rises meaningfully at any stage of this supply chain, the pump price of gas will increase irrespective of what the price of crude is doing.

In addition, the federal government of a country can decide how much crude oil should be released to the market at any time for a specific reason.  The President of the United States, for example, can limit oil consumption by imposing taxes and levies on oil companies, refineries and gas stations thus increasing the price of gas.

Despite the advances made in the creation of alternative energy methods, oil continues to maintain its position as the main product used today for energy and other processes. This will probably continue for many years to come.

Adam Lemon, is the Chief Analyst at DailyForex.com, a Forex trader who has worked within financial markets for over 12 years. He is certified in Fund Management and Investment Management by the U.K. Chartered Institute for Securities & Investment.

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