- Introduction- To analyze Oil and Gas prices by understanding the basics of oil and gas, major event in past and important players in the oil and gas industry.
- Key Points
- Major Players in the Oil and Gas Markets.
- Story of Oil and Gas through decades.
- Decoding the pricing of Oil and Gas
- What is the future of Oil and Gas?
- Body of the paper
- The major players that operate in oil and gas industry globally who have the political and economical clout to alter and change oil and gas dynamics.
- The idea is to recognise the companies, governments and organisation that have a big impact in determining Oil and Gas prices; this is done by researching websites of EIA (energy information administration) and OPEC.
- Once we get to know the major players, we can understand the story behind oil and gas prices.
- The story behind the foundation and history of oil and gas prices.
- Major global events in the past, research based on academic book, journal on oil and gas and government websites.
- Once we know the story of oil and gas prices, we can look into the actual pricing process.
- How is the pricing of oil and gas done in the international markets?
- Spot prices, speculations, supply demand factors and crude quality are some of the factors. Research based on books and websites.
- Pricing of oil helps us analyse what can be the future of oil and gas?
- Trying to predict the future of oil and gas by using several facts and past events.
- Futures Markets, Climate Patterns, Economic conditions, Wars, Production Quotas, Technology and Future Estimations are important here.
- Summary:
In order to analyse the pricing of oil and gas, we need adopt a systematic approach. We need to first identify companies, people, international committees and cartels that have a major impact in oil and gas markets. Then, we need to know about the major events that affected oil and gas prices such as oil shocks, wars and economic recessions. These events changed the way in which people perceived the importance of oil and gas. Then, it is imperative to understand the dynamics of oil and gas pricing, factors such as spot pricing, speculation and supply demand factors must be analysed and their impact must be evaluated. Finally, we need to evaluate and predict the future of our world with reference to oil and gas prices. How will the prices be in the future? How will they impact our lives?
- Conclusion:
References
Agnihotri, Gaurav. Oil-Past, present, future. First Edition. New Delhi. New Delhi Publishers, 2013.Print
Avro, Samuel. http://www.energytrendsinsider.com/ Energy Trends. n.d. Web.03.Feb.2014
Agnihotri, Gaurav http://www.oilandgasiq.com/ IQPC.n.d.Web.05.Feb.2014
Ascher, Barbara. Compassion. Web. 07.Feb.2014
“Crude Oil Price” . www.oil-price.net n.d.Web. 08. Feb.2014
Energy Efficiency” IEA. International energy agency. N.d. Web. 07. Feb.2014
Erhlich, Gretel. Chronicles of Ice. Web. 04. Feb.2014
Javdani,Marie. Plato o Ploma: Silver or Lead. Web. 07.Feb.2014
Quindlen, Anna. Homeless. Web. 04. Feb.2014
Saukki, Linnea. How to poison earth. Web. 09. Feb.2014
Weekly Oil and Gas Update”. Oilandgasiq.com. IQPC. N.d.Web.05.Feb.2014
Yergin, Daniel. Quest-Energy, Security and the remaking of Modern World. Fifth Edition. Penguin Books, 2013. Print.
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Analyzing Oil and Gas Prices and their myth
What is it about this black-sticky thing which makes the world go crazy over it? Oil and gas are true ‘Global’ commodities. Pricing of oil and gas is critical to the world economy because it has a direct impact on the cost of transportation, cost of goods, essential commodities and service. A slight increase in price of oil and gas has a direct impact on all related services and sectors resulting in higher Inflation. However before we analyse how these precious commodities are priced let us first understand the basics of Oil and gas and who are the major players in oil and gas Industry?
Are oil and gas prices so important that countries can fight over it? It is difficult to believe that such a simple looking commodity can be so important for world-peace. We will analyse whether oil and gas is worth fighting for. Or, should countries come together and peacefully find a solution to their problems. Is pricing of oil and gas so important? What can countries do to resolve it? We will find these answers here.
Oil has been around for more than thousands of years, as early as 347 A.D. when ‘oil –wells’ were drilled in China. However, it was in 1859 that Colonel Edwin Drake drilled the first successful oil well in the town of Titusville, Pennsylvania. Since then, it has been a long journey. “Poisoning the earth can be difficult as the earth is always trying to cleanse and renew itself” (Kennedy et al., 1997, p208), these lines are a tribute to the earth that has given us such a precious thing. At present, there are more than 160 ‘Internationally traded’ Crude oils. Crude oils are mainly composed of hydrocarbons, which are made by the combination of elements of carbon and hydrogen. In addition, most crude contain sulphur compounds and traces of quantities of oxygen, nitrogen and heavy metals. The difference in crude oils is accounted for by the amount of sulphur compounds and molecular weights of hydrocarbons in the oil. The hydrocarbon found in crude oil vary in size from smallest molecules (methane) which contain one atom of carbon, to the largest ones containing Paraffin’s, Napthenes , Aromatics, etc. crude oil is extracted from the earth, formed naturally from the fossils of animals and plant, in oil ‘reservoirs’.
Oil is refined and processed by a distillation that process separates crude oil into broad categories of ‘fractions’. Lighter products such as Butane, Liquid Petroleum Gas (LPG), Naphtha and Gasoline, are obtained at lower temperatures. Kerosene, jet fuel and diesel are obtained at medium temperatures where as heavy gas oils and residual fuel oil are distilled at higher temperatures of about 1000 degree Fahrenheit. ‘Residual fuel oil’ is the heaviest product formed above 1000 degree Fahrenheit and requires further reprocessing. Western Texas Intermediate (WTI) is excellent crude when it comes to extracting Gasoline as it gives larger portion of gasoline when refined. Brent, on the other hand, gives more of Gasoline and middle level distillates such as diesel and kerosene.
Major players: In 2010, about 58% of the world’s energy consumption was from oil and gas, and it was the largest source of energy that was consumed. No wonder oil called ‘black gold’ by many. To understand the dynamics of oil and gas, we need to first look at the major players that operate in oil and gas industry globally. They have the political and economical clout to alter and change oil and gas dynamics. Consisting of companies, organisations and countries, these players have a major role in today’s oil and gas markets.. The National Oil Companies or ‘NOC’ act as an extension of their governments or government agency, Saudi Aramco (Saudi Arabia) and Pemex (Mexico) are some of the major NOCs. These companies support their governments' programs financially and strategically. They often provide energy to the domestic consumers at prices lower than international markets. They do not always have the incentive to develop their reserves at the same pace as the commercial companies. Due to the diverse situations and objectives of the governments of their countries, these NOCs pursue variety of objectives that are not necessarily market-oriented. Their objectives include employing citizens, furthering the government's domestic or foreign policy objectives, generating long-term revenue and supplying affordable domestic energy. Saudi Aramco is the biggest oil company in the world.
National Oil Companies, Independent from their Government: The main objective of these NOCs is to make profits and to be market-oriented. These companies have their independent corporate strategies in line with the developmental concerns of their countries. Petrobras (Brazil) and Statoil (Norway) are examples of such NOCs. Oilfield Services Companies are the ones who provide exploration and production services to other companies but do not produce petroleum themselves. Schlumberger, Halliburton, Saipem, Weatherford, Transocean and Baker Hughes are some of the biggest Oilfield services companies in the world.
Let us now focus on one of the most important institutions for oil and gas, the OPEC. Formed in 1960, the Organisation of Petroleum Exporting Countries was formed for negotiating with Oil companies on matters of Oil prices and production. There are 12 members in OPEC; they are Algeria, Angola, Iraq, Iran, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, Equador, Venezuela and United Arab Emirates. OPEC has been accused of acting like a ‘cartel’ and altering the oil prices based on the ‘production quotas’. As per EIA (Energy Information Administration), OPEC members had over 70% of the total proven world oil reserves in 2010 and produced 41% of the total world oil supply .The OPEC country members thus have a large influence in the world. “Even when cartels and corrupted governments are often caught there seems to be forget and forgive mentality thus putting the same people back into the power” (Silver or Lead, Javdanis, p472).
The U.S is the biggest producer of natural gas and shale gas in the world. The biggest oil producer in the world is Saudi Arabia. However, according to International Energy Agency (IEA), this would change thanks to the rise of America’s energy portfolio. As per IEA, the U.S will surpass Saudi Arabia as No 1.oil producer by 2017. By 2035, the U.S. will be energy self -sufficient and a net exporter of oil. According to IEA’s projections, the U.S. oil-imports from the middle-east will be nullified in the near future. This is largely due to technology that has made it possible in the U.S. to extract large reserves of oil and gas trapped in Shale rock.
In order to clearly understand the dynamics of oil and gas prices, we need to dwell in the history of oil and gas to find out what major events of the past affected the price and availability to oil and gas.
1956- Suez Crisis: The Suez Canal was the only access by sea from the Mediterranean Sea to the Indian Ocean; this allowed shipping between Europe and Asia without navigating through Africa. In 1956, Egypt nationalised the Suez Canal and bought it under its control. The Britain and France along with Israel attacked Egypt to regain control of Suez Canal. However, in 1957 Britain and France had to back down due to pressure and immense criticism from United Nations and the U.S. The canal was given back to Egypt in 1957. In 1967, there was again a six-day war between Israel and the Arab world which resulted in the closure of Suez Canal.
The formation of OPEC in 1960: OPEC is an inter-governmental organisation that was founded in Baghdad in 1960.It has the capability and clout to create a major impact in world oil markets as its members hold more than 40% of the total world- oil supply. The OPEC sets ‘production quotas’ and has been criticised for following the ‘restrictive production’ policy in recent times, which, according to some, have played a major role in increasing the crude oil prices over the last few years .
1973- The First ‘oil shock’: The U.S. was on Israel’s side in the Yom Kippur War that started in 1973, when Egypt and Syria attacked Israel. The members of OAPEC (Organisation of Arab Petroleum Exporting Countries, consisting of Arab members of OPEC including Tunisia, Syria and Egypt) declared an oil ban on Israel’s supporter, U.S. This led sudden reduction in the supply thus increasing the oil prices from $2.9 to almost $12 a barrel. This led to high rate of inflation in the industrialised countries as they depended on oil supplies from the OAPEC nations. This was the turning point in the history of oil and gas as the need and importance to find new sources of oil, alternate fuels and better conservation techniques came into the picture.
1979- The second ‘oil Shock’: 1979 was a year of Islamic revolution in Iran. Amidst massive protest, the Shah of Iran was deposed and oil exports from Iran stopped. U.S was importing a large part of its crude oil supplies from Iran and was badly affected by this shortfall. The prices increased to almost $32 per barrel as 5% of the overall crude supply was affected.
In 1980, Iraq launched a war against Iran, the battle between two big oil producing countries blocked about 8% of the total crude oil supply. The crude price rose to $34 per barrel by 1981. However, after learning a lesson in 1979, many countries began to make substantial efforts in increasing their oil and gas reserves. Saudi Arabia and other OPEC nations ramped up production to avert any supply crisis.
1980’s: Sinking of Oil Prices – Oil Glut: The oil price fell in 1986 from $27 to below $10 a barrel. The reason for this was slow economic growth of industrial countries due to oil shocks, energy conservation initiatives and over -production.
1990- 1991 Gulf War: In August 1990, Iraq invaded Kuwait. The combined loss of production along with the threat of blockage of production in Saudi Arabia made price spiral to $46 per barrel in October. The Gulf War (2 August 1990 – 28 February 1991), codenamed Operation Desert Storm was a war started by a U.N.-authorized force from 34 nations led by U.S, against Iraq in response to invasion of Kuwait. The UN imposed sanctions on Iraq after that war.
1997-1998: Oil and gas prices again collapsed as Iraq’s oil exports resumed (UNSC –United Nations Security Council approved Iraqi oil exports under the programme “Oil for food”) and Asian Oil Demand in the wake of severe economic crisis fell sharply in 1998. Another reason for fall in demand was a ‘warmer winter’. U.S. is one the largest consumers of residual fuels during winter. These factors reduced the demand for oil and resulted in fall of oil prices. This even resulted in OPEC cutting the Production quotas of their members.
Recent Price Fluctuations: Oil and gas prices have been very volatile over the past few years. During 2003, price of crude oil rose above $30 per barrel, reaching $60 by 11 August 2005, and peaked at $147.30 per barrel in July 2008. Prices continued to be volatile and reached a low of $30 per barrel in December 2008 as the global economic recession which began from the USA dampened the demand. However, in 2009-2010 improving economic conditions, steady growth of developing economies like India and China made the prices head north. As per EIA, the prices rose to an average of $62 a barrel in 2009 and $79 a barrel in 2010. In 2011, the price of WTI crude reached $113 a barrel while Brent reached $127 a barrel.
The Prices: On news-channels and newspapers, we often read that oil and gas prices have increased or decreased. It is interesting to see how the price of oil changes over a period of time. Is the pricing of oil simply determined by Supply and Demand factors and the high cost price? What are those factors that determine the pricing of Oil? Let us look at the major factors that affect the pricing of oil in the world. Spot prices, future markets and Speculation: Oil-price is set in the ‘oil futures market’. A ‘futures contract’ is used where the buyer purchases a barrel of oil at a ‘fixed’ price on a fixed date in the future. It is a simple contract between a buyer and seller. This involves hedging and speculation.
Market sentiments: If there is a sentiment in the market that supply of oil would reduce in future, oil prices will increase owing to the large number of oil-futures contracts being hedged and speculated. If there is a fear in the market that demand of oil would reduce from emerging economies like China and India, Oil prices will fall purely based on these speculations. Hence, sentiments play a vital role in the pricing of oil.
Crude oil type and quality: There are different types of crude oil available in the market; they have different chemical properties, purity levels and are priced accordingly. There are three ‘benchmark’ crude oils. They are Western Texas Intermediate (W.T.I, light crude traded in New York Mercantile Exchange or NYMEX), Brent (light sweet crude traded in Intercontinental Exchange or ICE) and Dubai Crude (Traded in Singapore market). According the OPEC, in 2012, the monthly trading volumes at ICE (Inter Continental Exchange)-Brent were constantly above those of NYMEX –WTI and so was the price of Brent over WTI. OPEC Reference Basket is a weighted average of the prices of different petroleum blends produced by OPEC countries. It is one of the important benchmarks for crude oil prices as OPEC contributes almost 40% of the total world oil supply. OPEC regulates the prices of ORB by varying its production levels.
Shale oil and Shale gas: Oil shale is a sedimentary rock that contains ‘kerogen’. Using modern technology, ‘shale oil’ and ‘shale gas’ can be extracted from it. The cost of producing oil and natural gas with this technique is highly uncertain and costly. The future oil shale production will depend on the rate of technological progress and volatility of future oil prices. At this moment, U.S has the highest production of recoverable Shale oil and gas. It is being predicted that U.S will surpass Saudi Arabia as the biggest producer of Oil owing to the oil shale boom in the coming future.
Supply and Demand Factors: “As glacier balances its gains and losses like a banker” ”(Chronicles of Ice, Enrlich,88), if supply is more than demand, crude prices would come down, and if supply is less than demand then prices would increase. Although this seems to be an obvious case, crude prices are not only dependant on these factors. The supply and demand of crude oil may vary due to factors such as Weather Conditions (winter in the U.S. for example), Natural Calamities, Sanctions/Embargos, Wars, Economic Recessions and Production quotas set by OPEC.
The global supply of crude oil is rising year after year. As per EIA’s international energy outlook 2011, global supply of oil, liquid hydrocarbons,. In 2011 alone, seven out of fifteen top Oil producing nations were Non-OPEC countries, and they represented more than 50 % of the total oil production. Most significant were the U.S., Russia, Brazil, Canada and China. The dominance of OPEC is set to diminish owing to increase in production of oil from non OPEC countries.
Oil demand has remained subdued and below previous projections, right from Europe to Asian Markets like China where the crude imports fell sharply in the first half of 2013. If we look at the supply and demand factors, we can make out that the prices of crude benchmarks are bound to fall over the period of time. However, can we rely on these statistics alone? A political unrest that occurs in Syria or speculation of shrinking U.S crude inventory triggers panic in the market and the prices move up. The dynamics of oil and gas pricing is volatile, complex puzzle which never ceases to amaze.
The Future: If we look at some of the major events in the past,1973 Yom Kippur war, 1991 Gulf war and 2008 economic recession, we find that all these events had a major impact on oil prices and its supply; but most importantly the world realised the need to conserve oil and develop new technologies for exploration, production and conservation. Today, oil and gas price is not only dependent on a mere supply-demand balance but also on several factors such as Speculation and Futures Markets, Climate Patterns, Economic conditions, Wars, Production Quotas, Technology and Future Estimations.
The future of oil and gas looks promising. Although, current estimates indicate that the world has enough conventional oil sources to meet the demand for next 25 years, it would be a big mistake to rely on these sources alone. No one knows what is going to happen in the future. As seen in the past, oil has seen many spurts of volatility. “People lucky enough to have a home often take small and big things for granted” ” (Homeless, Quindlen, p49)., it is necessary to find more resources by improving existing technology. It is also important to reduce wastage of oil by effective oil conservation strategies and find alternate sources for producing oil. “Empathy is born because the rich and poor come together and rich can feel what poor is going through” (Compassion, Ascher, p123). Similarly, nations such as U.S and Saudi Arabia need to empathise with under-developed nations and try to exploit their natural resources through joint-partnerships. Who knows, it might turn out to be a ‘gold-mine’ for them in terms of discovering newer oil and gas resources.
It would be incorrect if we just consider the ‘proven resources’ as the only means to satisfy the world energy demand because no one can predict the future. As seen in the past, oil prices have seen many ups and downs. It is imperative to find more resources by improving existing technologies, reduce wastage of oil by effective oil conservation strategies and finding alternate sources of producing oil and gas. Countries across the world need to join hands for exploring and creating ‘black gold’!
Sources Cited
Agnihotri, Gaurav. Oil-Past, present, future. First Edition. New Delhi. New Delhi Publishers, 2013.Print
Avro, Samuel. http://www.energytrendsinsider.com/ Energy Trends. n.d. Web.03.Feb.2014
Agnihotri, Gaurav http://www.oilandgasiq.com/ IQPC.n.d.Web.05.Feb.2014
Erhlich, Gretel. Chronicles of Ice. Web. 04. Feb.2014
Quindlen, Anna. Homeless. Web. 04. Feb.2014
“Oil Market Report”. IEA. International energy agency. n.d. Web. 05. Feb.2014
‘Energy Efficiency” IEA. International energy agency. N.d. Web. 07. Feb.2014
“Weekly Oil and Gas Update”. Oilandgasiq.com. IQPC. N.d.Web.05.Feb.2014
“Crude Oil Price” . www.oil-price.net n.d.Web. 08. Feb.2014
Saukki, Linnea. How to poison earth. Web. 09. Feb.2014
Yergin, Daniel. Quest-Energy, Security and the remaking of Modern World. Fifth Edition. Penguin Books, 2013. Print.
Ascher, Barbara. Compassion. Web. 07.Feb.2014
Javdani,Marie. Plato o Ploma: Silver or Lead. Web. 07.Feb.2014
- What is the future of Oil and Gas 8
