CONCEPT – GLOBAL OIL PRICES

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CONCEPT – GLOBAL OIL PRICES

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• What it is: The price of oil refers to the spot price of a barrel of benchmark crude oil, which is a reference price for buyers and sellers of crude oil such as West Texas Intermediate (WTI), Brent ICE, Dubai Crude, OPEC Reference Basket, Bonny Light, Urals oil, etc.
• Why prices differ: There is a differential in the price of a barrel of oil based on its grade, decided by factors such as its specific gravity or API and its sulphur content. The location also matters, for example, proximity to tidewater and/or refineries.
• A general rule: Heavier, sour crude oils lacking in tidewater access (Western Canadian Select) are less expensive than lighter, sweeter oil (WTI).
• OPEC founded: In 1960 the Organization of the Petroleum Exporting Countries (OPEC) was founded in Baghdad, Iraq by its first five members. The goal was to increase its influence in the world oil market, then dominated by a cartel "Seven Sisters", five of which were headquartered in the United States. These companies had been controlling posted prices since the so-called 1927 Red Line Agreement and 1928 Achnacarry Agreement, and had achieved a high level of price stability until 1972. Everything changed after OPEC became the lead player.

• What about the future of oil prices:  A period of low prices was witnessed from 2013 onwards.

1. One group believes that the market has undergone structural changes and that low oil prices are here to stay for a prolonged period.
2. But there are those who think that this is yet another cycle and oil prices will recover sooner rather than later.

• Factors responsible for price changes:

1. Most major oil price fluctuations dating back to 1973 are largely explained by shifts in the demand for crude oil. As the global economy expands, so does demand for crude oil. The price of oil has also increased at times due to greater "demand for stocks (or inventories) of crude oil... to guard against future shortages in the oil market.
2. Inventory demand has been high in times of geopolitical tension in the Middle East, low spare capacity in oil production, and strong expected global economic growth.
3. Political events can have a strong influence on the oil price. Historical examples include OPEC’s 1973 embargo in reaction to the Yom Kippur War and the 1979 Iranian Revolution.
4. The PRIX index was developed in attempt to fill this gap with a metric on political developments and corresponding export trends from world’s 20 largest oil exporters.
5. The supply of oil is dependent on geological discovery, the legal and tax framework for oil extraction, the cost of extraction, the availability and cost of technology for extraction, and the political situation in oil-producing countries.

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