Crude oil is the world’s primary energy source — the backbone of transportation as well as electricity generation, which powers almost every aspect of our lives.
In this guide to understanding crude oil, we’ll explain why it’s valuable, discuss its history, describe how it’s produced, and explain what drives its price. We also answer some common questions about this crucial energy commodity.
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Why Is Crude Oil Valuable?
Crude oil is unrefined petroleum that occurs naturally and is mostly composed of hydrocarbon deposits. It’s a finite resource that can be refined to produce everyday products like gasoline, diesel fuel, and petrochemicals for plastics.
Before the Industrial Revolution, agricultural staples like corn and wheat ruled the commodities market. Today, however, crude oil and its derivatives are the most actively traded commodities in the world.
That’s not surprising, considering that oil touches just about every aspect of the global economy, both in terms of creating consumer goods as well as their production and transportation.
If you think of oil mainly as fuel to power cars, trains, jets, and ships, you’re only seeing a tiny piece of the puzzle.
Oil is a major component in the manufacture of:
- Synthetic textiles (acrylic, nylon, spandex, polyester)
How Much Oil Is Used Per Day?
As of 2019, the average American uses approximately three gallons of petroleum products per day.
A 42-gallon barrel of crude oil produces roughly 45 gallons of petroleum. Of this, most goes to creating different kinds of fuel sources with roughly 13% going to produce consumer products.
A Brief History of Oil
Oil didn’t become a significant factor in human history until the mid-19th century but has become intrinsic to our modern way of life.
|1775||English colonies in North America begin using kerosene, a petroleum product, instead of whale oil for lighting, grease, and medicine|
|Mid-late 1800s||First oil well built and world’s first oil pipeline opens|
|Early 1900s||Massive oil geyser is discovered in Spindletop, TX, producing almost 100,000 barrels a day. Invention of Bakelite, a plastic made from petroleum.|
|1931||Great Depression causes oil prices to plummet|
|1941||US enters World War II, accelerating plastics production|
|1960||Organization of Petroleum Exporting Countries (OPEC) formed|
|1972||First recycling mill for residential plastics opens|
|2000s||Toyota launches Prius hybrid car. Tesla Motors releases all-electric car, the global financial crisis begins, and OPEC enacts first production cut.|
|2020||COVID-19 pandemic sends the price of crude oil into negative numbers|
What Are the Different Types of Crude Oil?
Although the market for oil is global, oil trading has clustered around several primary regions.
The crude oil in each of these geographies has slightly different characteristics, typically referred to in terms of viscosity (light versus heavy) and sulfur content (sweet versus sour).
Each of the major trading regions has established benchmarks to track price movements in oil commodities:
|Crude Oil Name||Region||Viscosity||Sulfer Content||Description|
|West Texas Intermediate (WTI)||Texas||Light||Sweet||A light, sweet crude oil, with a gravity of around 40 on the American Petroleum Institute (API) gravity scale and low sulfur content.|
|Brent Crude||North Sea||Light||Sweet||A light, sweet crude oil from the North Sea. Its gravity is similar to WTI, but its sulfur content is slightly higher. From an oil trading point of view, it’s closest in quality to WTI.|
|Bonny Light||Nigeria||Light||Sweet||A light sweet crude from Nigeria that’s useful as a benchmark for African oil. Its properties are similar to WTI and Brent, and in fact, demand for Bonny Light is primarily driven by European and American oil refineries.|
|Dubai Crude||Middle East||Medium||Sour||Also known as Fateh, is denser (heavier) than both WTI and Brent and has a higher sulfur content, making it a sour crude. It’s useful in oil trading as a benchmark for oil shipments in the Middle East.|
|OPEC Reference Basket||Middle East||Heavy||Sour||A weighted average of the mix of crudes produced in the OPEC region. It is heavier than both WTI and Brent.|
|Urals||Russia||Heavy||Sour||A heavy sour crude representative of Russia’s oil exports.|
Which Countries Produce the Most Oil?
|Rank||Country||Flag||Oil Production (Millions of barrels per day)|
Note that these numbers include crude oil, other petroleum liquids, and biofuels. Source: US Energy Information Administration.
Top Countries by Oil Reserves
|Rank||Country||Flag||Proven Reserves (millions of barrels)|
Source: US Energy Information Administration
Oil Pricing: How Much Is Oil Trading at Today?
You can find crude oil futures prices by visiting a commodities exchange like the CME Group and searching for crude oil in the search box. Here’s an example of the information you’ll see:
Popular Oil Company Stock Prices
Please note, this is an example trade – not a recommendation. This screenshot is only an illustration. Current market prices can be found on the broker website.
What Affects The Price of Oil?
In financial terms, oil is a “fungible” commodity, which means that specific grades of oil are identical for oil trading purposes, regardless of where they were produced.
For example, a contract for 1,000 barrels of WTI crude will be the same product whether the oil was extracted in Texas or North Dakota.
Supply and Demand
As with all commodities, supply-and-demand plays a major role in oil pricing. However, the global pool of oil and the ease with which oil moves around the world levels some of these price pressures.
The global nature of oil also tends to somewhat limit the influence of any particular oil producer.
From time to time new oil resources come online — like Canadian oil sands or US shale oil — which add to the global supply. New sources can exert a downward force on oil prices even in times of heavy demand.
However, extraction costs are typically higher for new resources which means these oils are only competitive in lower-supply and higher-price environments.
In 2019, the International Energy Agency (IEA) predicts increasing global demand for crude oil due to:
- An increasing world population
- Increased energy consumption in developing countries
- Growth in transportation, petrochemical, and aviation industries.
Even though the Organisation for Economic Cooperation and Development (OECD) countries are reducing their road transportation oil consumption on a per-vehicle basis, the growing automobile fleet in developing countries far outpaces those minor reductions.
Many unforeseen events can also impact the price of crude oil, either increasing or decreasing it.
- After the Iranian revolution in the late 1970s, the price of oil rose sharply.
- The 2020 outbreak of the COVID-19 pandemic saw crude oil plummet to a negative price per barrel. The IEA expects crude oil consumption to be much lower in 2020.
Crude Oil vs Natural Gas
Sometimes crude oil is confused with natural gas. They are similar but they have key differences that account for them being traded as separate commodities.
Both crude oil and natural gas are flammable, nonrenewable energy sources found underground. Here are the main differences:
- Crude oil: Also called petroleum, crude oil is drilled in liquid form. One of the products created from crude oil is gasoline.
- Natural gas: Found in gas form alongside crude oil, composed mostly of methane.
Gasoline, used to fuel cars, is sometimes referred to as “gas” for short, despite the fact that it’s a liquid.
Get Breaking News About Oil in Your Inbox
An easy way to get breaking news about the crude oil market is to create a Google Alert which will email you top news stories about oil as they occur.
- Go to Google Alerts.
- Type “crude oil” in the search box.
- Choose how often you’d like to receive alert emails:
- As it happens
- once a day
- once a week.
- Choose the sources you want Google to search — eg, Blogs, Finance, or News.
- Choose the language of the content you want to search through.
- Choose the country of the content’s origin.
- Choose how many results to have delivered:
- All results
- Only the best results, based on Google’s algorithms
- Enter the email address where you want to receive your alerts.
Regulated Brokers: Where Can I Trade Crude Oil?
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Below we answer some common questions about crude oil.
How is crude oil formed?
Crude oil is composed of carbon and hydrogen from animals and plants that died between the Paleozoic and Mesozoic eras — the period from roughly 541 million to 65 million years ago. These organic remains combined with rocks, mud, heat, and pressure over millennia became what we now call “fossil fuels.” Coal and natural gas are also considered fossil fuels.
Where does crude oil come from?
Crude oil can be found in various parts of the world including North and South America, Asia, and the Middle East. The oil comes from deep in the earth or at the bottom of the ocean. Some off-shore ultra-deep oil platforms can drill up to 1,500 meters beneath the surface.
What is crude oil used for?
Crude oil can be refined to perform many different functions — including fuel for vehicles, kerosene, heating oil, asphalt, waxes, lubricants, synthetics, and plastics. Crude oil can also be used to create chemicals that go into making synthetic rubber, dyes, detergents, and fibers.
Credits: Original article written by Lawrence Pines . Major updates and additions in May 2020 by Natalie Mootz with contributions from the Commodity.com editorial team.