Special Topics in Economics
Econ. 491
Chapter 7:
Fundamentals of Oil Market
I. Introduction
 The discovery of petroleum and the
development of its useful products have made
possible a giant leap in the living conditions of
mankind.
 The word petroleum is a Latin word which
means two words; “petr” means a rock, and
“oleum” means fossil oil .
 According to studies of structural geology, the
place of the petroleum can be found and then it
is recovered mostly through oil drilling.
II. Retail Sales of Petroleum Products
 Products and services use some forms of
petroleum.
 Fuel and electricity are often used in housing;
Clothing uses petroleum based synthetic
fabrics; Producing food needs fertilizers and
pesticides.
 Marketable petroleum can be divided into
broad classes that provide for transportation,
electrical generation and industry, home and
commerce, agriculture, and petrochemicals.
 These general area are supplied by different
cuts of crude ( separated by their boiling points
from high to low).
 This is including gases, liquefied petroleum
gas, gasoline, aviation fuels, kerosine, diesel
fuel, lubricating oils, waxes, fuel oils, and
miscellaneous products.
 consumers of car fuels experience the effects
of petroleum marketing most directly at the
retail outlet. The marketing chain of operations
moves from refiner to distributor to retailer,
and finally to the consumer.
III. Needs of Petroleum
1- Aviation fuel
 The need for air transport fuels has developed
dramatically in this century.
 This is as the size, capacity, and number of
worldwide airliners have all increased.
 The demands placed on fuel quality for aircraft
are more than those for car’s fuel.
 Aviation fuel must be free of contaminants
(water or dirt) and be pumpable at low
temperatures.
2- Electrical Generation & Industry
 The industrial sector consumes more than half
of the total output of the world’s petroleum
products.
 A large portion, especially natural gas, goes into
the creation of electricity at generating plants..
 Oil and coal are also fuel sources for generating
plants.
 The gas, oil, or coal is burned to heat water that
provides steam to turn turbines. The energy
created by turbines is converted by generators
into electiricty.
3- Home and Commerce
 The conversion from solid fuel to oil for heating
the home has been widespread in this century.
 Since the 1973 rise in crude prices, the use of
gas and electricity has intensified.
 Both gas and electricity provide the convenient
aspect of being piped and wired into the
consumer’s property, while oil has to be
delivered by trucks.
 Natural gas has become the major competitor to
oil for heating. The electricity is usually a more
expensive alternative for heating.
 Although gas and electricity are used
increasingly for residences, the heating oil
continues to be marketed to heat commercial
buildings such as hospitals, schools, and factors.
4- Agriculture
 Petroleum products play a vital role in farming
today .
 Using the internal combustion engine to power
the tractor was greatly responsible for
transforming the traditional rural farm into a
modern industry.
 The development of diesel fuels and liquefied
petroleum gas for tractors and other mechanized
implements has revolutionized farming.
 Other important petroleum derivatives used for
agriculture are the chemicals used for fertilizer.
5- Petrochemicals
 Marketing petrochemicals is different in several
aspects .
 Few petrochemicals are end products
themselves. They are usually intermediate
chemicals that are sold to manufactures.
 Factory processes then turn them into such
articles as tires, fabrics, plastics, and a host of
other products.
 Volumes of petrochemicals are relatively small
compared to gasolines and fuel oils .
IV. Some Facts about Oil Production
 Top ten oil-producing countries accounted for
over 63% of the world's oil production in 2011.
 There are three countries that are competing to
be the largest oil producer in the world. Who are
they?.
 The USA remains by far the largest user of oil.
Oil Production By Country:
Country
Production (bbl/day)
Share of
World %
World
84,820,000
100%
1
Russia
10,900,000
13.28%
2
Saudi Arabia
9,900,000
12.65%
3
United States
8,453,000
9.97%
4
Iran
4,231,000
4.77%
5
China
4,073,000
4.56%
6
Canada
3,592,000
3.90%
7
Iraq
3,400,000
3.75%
8
United Arab Emirates
3,087,000
3.32%
9
Venezuela
3,023,000
4.74%
10
Mexico
2,934,000
3.56%
11
Kuwait
2,682,000
2.96%
12
Brazil
2,633,000
3.05%
13
Nigeria
2,525,000
2.62%
14
Norway
1,998,000
2.79%
15
Algeria
1,885,000
2.52%
Rank
Oil Consumption By Country:
Rank
Country/Region
Oil - consumption
(bbl/day)
-
World
93,250,000
1
United States
19,150,000
2
China
9,400,000
3
Japan
4,452,000
4
India
3,182,000
5
Saudi Arabia
2,643,000
6
Germany
2,495,000
7
Canada
2,209,000
8
Russia
2,199,000
9
Korea, South
2,195,000
10
Mexico
2,073,000
11
Brazil
2,029,000
12
France
1,861,000
13
Iran
1,845,000
14
United Kingdom
1,622,000
15
Italy
1,528,000
V. Oil Prices
 The trading currency for petroleum is the U.S.
dollar (called Petrodollar).
 The price of a barrel of oil is highly dependent
on both its grade, determined by factors such as
its specific gravity or API (The American
Petroleum Institute gravity) and its sulphur
content, and its location.
 The demand for oil is highly dependent on
global macroeconomic conditions..
Oil prices over time (1961-2011)