International Oil Market : Production, Sales, Distribution and Pricing Mechanism
The distribution of oil and gas reserves among the world’s 50 largest oil companies. The reserves of the privately-owned companies are grouped together. The oil produced by the “super major” companies accounts for less than 15% of the total world supply. Over 80% of the world’s reserves of oil and natural gas are controlled by national oil companies. Of the world’s 20 largest oil companies, 15 are state-owned.
The petroleum industry, also known as the oil industry or the oil patch, includes the global processes of exploration, extraction, refining, transporting (often by oil tankers and pipelines). and marketing of petroleum products. The largest volume products of the industry are fuel oil and gasoline (petrol). Petroleum (oil) is also the raw material for many chemical products, including pharmaceuticals, solvents, fertilizers, pesticides, synthetic fragrances, and plastics. The extreme monetary value of oil and its products has led to it being known as “black gold” The industry is usually divided into three major components: upstream, midstream. and downstream. Midstream operations are often included in the downstream category.
Petroleum is vital to many industries, and is of importance to the maintenance of industrial civilization in its current configuration, and thus is a critical concern for many nations. Oil accounts for a large percentage of the world’s energy consumption, ranging from low of 329% for Europe and Asia, to a high of 53% for the Middle East.
Other geographic regions’ consumption patterns are as follows: South and Central America (44%), Africa (41%), and North America (40%). The world Consumes 30 billion barrels (4.8 km3) of oil per year, with developed nations being the largest consumers. The United States consumed 25% of the oil produced in 2007. The production, distribution, refining, and retailing of petroleum taken as a whole represents the world’s largest industry in terms of dollar value.
Governments such as the United States government provide a heavy public subsidy to petroleum companies, with major tax breaks at virtually every stage of oil exploration and extraction, including the costs of oil field leases and drilling equipment.
Current World Oil Market
The current market for crude oil is truly global in reach. Oil cargoes move with relative ease between countries and across oceans, while most U.S. oil imports come from a relatively small group of countries, it is misleading to think that only those countries have an impact prices on oil prices in the United States. Because oil can and does move So freely from one area to another across the globe, it is better to think of the oil market as a global pool, rather than as a network of suppliers and buyers. If one supplier shrinks the overall depth of the pool by withholding supply (or floods the pool by producing a lot of oil), then the impact will be felt uniformly throughout the pool.
Pricing of oil is determined largely by a mix of supply factors, demand factors, and panic. How much of any given oil-price movement is due to each of these three factors is an eternal mystery that keeps a small army of editorial columnists and television talking-heads in business. The supply-demand balance is perhaps the easiest piece to explain – when demand is high (for example, during the wintertime when heating oil demands are high or during the summer when people tend to derive more often and further distances), consumers are willing to pay more for refined petroleum products, and higher-cost oil supplies must be brought online.
Thus, the price goes up. Similarly, when accidents, political strife, or war keep supplies offline, higher-cost replacements must be found, and the price goes up. Panic in the oil market is not always rational but does happen. Its roots can be traced back to OPEC’s successes in the 1970s of increasing world oil prices, even for brief periods. Believing that OPEC had the power to do pretty much whatever it wanted, market participants began engaging in a series of self-fulfilling prophecy games. They worked something like this. First, one or more market participants would believe that OPEC would act to increase prices or reduce supply. Afraid of getting caught short or unable to fulfill contracts, stockpiling commenced, pushing up spot prices. Thus, all OPEC needed to do was cause panic in the markets by spreading rumors of policy changes. The gains were nearly always short lived as the high cost of inventories would result in sell-offs, bringing oil prices down to pre-panic levels. Nowadays, broader geopolitical concerns, particularly in the Middle East and Africa, have replaced the grumblings of OPEC as the source for panic-induced spikes in oil prices.
OPEC was mentioned earlier as an entity that has been able to exert substantial influence on global markets for crude oil. OPEC operates as a cartel – a group of producing countries that attempt to coordinate supply decisions in order to exert some influence on prices. OPEC does not try to set prices directly, is as often believed. What OPEC countries try to do is to expand or Contract oil production in order to keep the world price within some band that the countries collectively deem desirable.