The Dynamics of

Crude Oil Pricing

A concise walk-through
A Bit About Crude Oil and Fossil Fuels
 BROAD CLASSIFICATION OF CRUDE TYPES
 As we have now established, ‘Crude Oil’ is a term used to describe many different types of
raw oil extracted from the ground.  Within the industry, we categorize these different types
into four main categories based on three factors: their viscosity, volatility, and toxicity.
 Viscosity refers to the oils ability to flow.  Higher viscosity oils do not flow as easily and
therefore take more energy and effort to pump from the ground.
 Volatility describes how quickly and easily the oil evaporates into the air.  Higher volatility
oils need additional processes to control their environments during extraction to ensure that
as little oil as possible is lost.
 Toxicity refers to how poisonous and harmful the oil is to the environment, wildlife, and
humans during the extraction and refinement process.  When oil spills do occasionally occur,
each oil poses different challenges and priorities during the cleanup.

 With that said, the four main types of Crude Oil are:
 Very light oils – these include: Jet Fuel, Gasoline, Kerosene, Petroleum Ether, Petroleum
Spirit, and Petroleum Naphtha. They tend to be very volatile, evaporating within a few days
which in turn evaporates their toxicity levels.
 Light oils – These include Grade 1 and Grade 2 Fuel Oils, Diesel Fuel Oils as well as Most
Domestic Fuel Oils. They are both moderately volatile and toxic.
 Medium oils – These are the most common types of Crude Oil. They generally have low
volatility and a higher viscosity than the light oils which leads to higher toxicity and a greater
environmental impact during cleanups.
 Heavy fuel oils – These include the heaviest Grade 3,4,5 and 6 Fuel Oils along with Heavy
Marine Fuels. These are the most viscous and least volatile Crude Oils as well as the most
toxic.
Selected Producers of Crude
RELATIVE POSITION
Crude Production Map of the World

(This map is merely indicative)

Oil Consumption Map of the World

Legend: The darker the colour the higher the production

 Units for Volume of Crude
 BARREL(bbl) (By Volume)

Unit of volume for crude oil and petroleum products. One barrel equals 42

US gallons or 35 UK (imperial) gallons, or approximately 159 litres or 9,702
cubic inches (5.6 cubic feet); 6.29 barrels equal one cubic meter and (on
average) 7.33 barrels weigh one metric ton (1000 kilograms). Generally ‘bpd’
or ‘bopd’)

 TMT – Thousand Metric Tonnes (By Weight)

 In August 2018, production of crude oil for India was 697.92 thousand barrels
per day. Though India production of crude oil fluctuated substantially in recent
months, it tended to decrease through September 2013 - August 2018 period
ending at 697.92 thousand barrels per day in August 2018.
Consumption and Import Patterns
 Oil Consumption of India Since 2012

250

200

150
INDIA'S
OIL
100 CONSUMPTION

50

0 DATA IN
FY 2012 FY 2013FY 2014FY 2015FY 2016FY 2017FY 2018 MILLION METRIC
TONNES
 Oil Imports of India Since 2012

250

200

150
INDIA'S
OIL
100 IMPORTS

50

0
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 DATA IN
MILLION METRIC
TONNES
Oil Imports of India Since 1971

India produces only 15% of the needed oil by itself, so we have to import
the major part of our consumption. Though data shows that the oil
imported by India has surged very steeply over the last two decades, India
currently is the third largest buyer of oil in the world (with the thirst of
roughly 4 million barrels per day).
Oil Imports of India Since 2012
250

200

150

100 INDIA'S
OIL
50 IMPORTS

0 DATA IN
MILLION
METRIC
TONNES

DATA IN
MILLION METRIC
TONNES
 List of Countries by Oil Consumption

RANK COUNTRY CONSUMPTION YEAR %AGE

WORLD 99,558,000 2018 100
1 USA 19,880,000 2017 20
2 EU 15,000,000 2017 15
3 CHINA 13,226,000 2017 13
4 INDIA 4,690,000 2017 5
5 JAPAN 3,988,000 2017 4

India has plans to add 190 mmtpa tonnes

per year of refining capacity over the next
10 years to its existing 228 mmtpa FIGURES ARE IN BBL/DAY
tonnes per years. (Rounded off to nearest decimal)
 List of Countries by Oil Imports

CRUDE
RANK COUNTRY YEAR
IMPORTS

1 EU 14,060,000 2017
2 CHINA 8,400,000 2018
3 USA 7,900,000 2017
4 INDIA 4,930,000 2018
5 JAPAN 3,441,000 2017

India has plans to add 190 mmtpa tonnes

per year of refining capacity over the next
10 years to its existing 228 mmtpa FIGURES ARE IN BBL/DAY
tonnes per years. (Rounded off to nearest decimal)
Trends in the top five crude Importing countries

(1960 to 2012)
 CRUDE
PRICING
DYNAMICS
 Cartels
Monopoly
A monopoly refers to an economic market for a specific product or service where there is only a single
provider of that service. This means that the single provider, be it a government entity or a corporation,
can dictate prices and other factors and that the end consumers for the most part need to accept it. In
many countries monopolies are frowned upon and governments actively oppose them, and in extreme
cases like Standard Oil they have forced the companies to break into smaller entities. The reason for this is
that government and the public in general want to avoid situations where a company can dictate terms to
people and charge far more than is justified for their product because there are no alternatives.

Very few industries have a monopoly in place though in recent years both Microsoft and Google have been
plagued by government inquiries and actions directed at their near monopolies in their respective
industries. In a way this is a result of too much success, as they both rose to the top and defeated their
competition to end up being the market leader by an insurmountable margin.

Oligopoly
An oligopoly refers to an economic market where there are a small number of players, be they government
or corporations, which dominate the industry. While in some industries this is sufficient to still keep a
competitive environment, where each is seeking to beat the others, there is a risk that the limited number
of players will collude.

Historically a prime example of an oligopoly has been the Organization of the Petroleum Exporting
Countries (OPEC) where a limited number of countries have dictated oil production and prices to the global
economy. This has changed significantly over time as more and more countries become oil producers, but
OPEC still has a major role on the global economy. OPEC's oil embargo of 1973 was a key example of what
can happen when producers collude on pricing, where oil prices globally increased over 300% in a few short
months.
 Cartels
Many governments limit the creation of oligopoly condition markets by
putting major mergers under review. The oil industry and the telecom
industry in America have both seen large mergers reviewed to ensure
that the industry does not become so closely held that consumers suffer.

Monopoly v/s Oligopoly

Both of these market structures are generally going to result in a negative
position for consumers, as the consumers will be at the whim or a single
company or a limited group of companies. One of the key risks with a
monopoly or oligopoly structure occurring is that it can then become
nearly impossible for a new competitor to enter the market. Either they
could never compete on the same scale, or the monopoly company could
afford to sell at a loss or no profit until the new entrant folds.
 The Seven Sisters Regime (1927-1960)
1. Anglo-Iranian Oil Company (United Kingdom) – This company became British Petroleum.
Following the takeover of Amoco  (which in turn was formerly Standard Oil of Indiana)
and Atlantic Richfield by British Petroleum, the name was shortened to BP in 2000.

2. Gulf Oil  (United States) – In 1984, most of Gulf was acquired by SoCal and the enlarged
SoCal entity became Chevron. The smaller parts of Gulf Oil were acquired by BP and Cumberland
Farms. A network of service stations largely in the northeastern United States still bears the Gulf
name.

3. Royal Dutch Shell (Netherlands/United Kingdom)

4. Standard Oil Co. of California (SoCal) (United States) – Became Chevron  in 1984 when
SoCal acquired Gulf Oil.

5. Standard Oil Co. of New Jersey (Esso) (United States) – Became Exxon, which
renamed itself ExxonMobil following the acquisition of Mobil in 1999.

6. Standard Oil Co. of New York (Socony) (United States) – Became Mobil which was
acquired by Exxon in 1999 to form ExxonMobil.

7. Texaco (United States) – Acquired by Chevron in 2001.

As of 2017, the surviving companies from the Seven Sisters are BP, Chevron, ExxonMobil and Royal Dutch Shell, which form four members of the "supermajors" group.
https://en.wikipedia.org/wiki/Mad_Max_2
 The Emergence of OPEC -1960
The head of the Italian state oil company (Eni), Enrico Mattei, sought membership for
his company, but was rejected by what he dubbed the "Seven Sisters", the American
and British companies that largely controlled the Middle East's oil production
after World War II. British writer Anthony Sampson took over the term when he wrote
the book The Seven Sisters in 1975, to describe the oil cartel that tried its best to
eliminate competitors and keep control of the world's oil resource. The term for the
oil cartel was further popularized, along with a fictional logo, in Mad Max 2:
The Road Warrior, a 1981 film about apocalyptic fuel shortages.
Being politically influential, vertically integrated, well organized, and able to negotiate
cohesively as a cartel, the Seven Sisters were initially able to exert considerable power
over Third World oil producers. However, in recent decades, the dominance of the
Seven Sisters and their successor companies has been challenged by the following
trends:

a) The increasing influence of the OPEC cartel (formed in 1960 and expanded steadily

through 1975), b) the declining share of world oil and gas reserves held
by OECD* countries, and c) the emergence of powerful state-owned oil companies in
emerging-market economies.

As of 2018, the surviving companies from the Seven Sisters are BP, Chevron, ExxonMobil
and Royal Dutch Shell, which form four members of the “SUPERMAJORS" group.

*The Organisation for Economic Co-operation and Development

 The Organisation for Economic Co-operation and Development (OECD 

French: Organisation de coopération et de développement économiques, OCDE) is

an intergovernmental economic organisation with 36 member countries, founded in
1961 to stimulate economic progress and world trade. It is a forum of countries
describing themselves as committed to democracy and the market economy,
providing a platform to compare policy experiences, seeking answers to common
problems, identify good practices and coordinate domestic and international
policies of its members. Most OECD members are high-income economies with a
very high Human Development Index (HDI) and are regarded as developed
countries. (Current members approx 36).
 Did You Know? The Birth of OPEC
No organization, corporation or country has caused such a pronounced effect on the world geopolitical landscape as
The Organization of Petroleum Exporting Countries (OPEC). The history of OPEC is fascinating and worth knowing as
OPEC’s influence on world petroleum markets (and other markets too) is substantial. Moreover, oil prices affect
more than just our gasoline prices since crude oil and its byproducts encompass plastics, synthetic materials,
chemicals and a host of other items we take for granted. Any energy trader will always keep an eye on OPEC
meetings and announcements.

In 1960 five countries, Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, established OPEC. The organization was
open to any country with a substantial net export of crude oil and had fundamentally similar interests to other
member countries. Soon thereafter, more countries joined OPEC (Qatar, Indonesia, Libya, United Arab Emirates,
Algeria, Nigeria, Ecuador and Gabon). Currently 15 countries are members of OPEC.

Following World War II, a group of seven large integrated oil companies controlled 85% of global oil production.
These seven companies were known as the Seven Sisters and included:

Algeria, Anglo Persian Oil Company (now British Petroleum), Congo, Ecuador, Equatorial Guinea, Gabon,
Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela

Around the 1970s, OPEC wanted a greater share of the profits from oil extracted from countries forming the seven
sisters[RM1] . OPEC continued to flex its muscles and in 1973, the organization punished nations that supported
Israel in the Arab-Israeli war in 1973. The resulting embargo caused prices to skyrocket from about $3 a barrel to
$12.

While OPEC tried to keep oil prices stable over the years, massive supply and demand changes, such as “ hydraulic
fracking” in the United States, led to major sources of new supply and a significant drop in prices over the past few
years. WTI has been as low as $9 a barrel over the past few decades and as high as $150/bbl.
Clearly, traders need to watch OPEC’s every move as their influence on oil is significant. However, other nations,
such as Russia and the United States, now exert considerable influence on world oil markets.
 Current member Countries of OPEC
Algeria, Angola, Ecuador, Equatorial Guinea,
Gabon, Iran, Iraq*, Kuwait, Libya, Nigeria, Qatar*,
Republic of Congo, United Arab Emirates,
Venezuela and Saudi Arabia (the de facto leader)
THE OPEC FLAG
*(Rumours are rife that some nations are likely to quit OPEC)

Other Major Players

RUSSIA

USA

CHINA

CANADA
 Benchmark Pricing Explained

A "crude oil benchmark" is a standardized petroleum product that serves as a

convenient reference price for buyers and sellers of crude oil, including
standardized contracts in major futures market since 1983. Benchmarks are used
because oil prices differ (usually by a few dollars per barrel) based on variety,
grade, delivery date and location, and other legal requirements.

The OPEC Reference Basket of Crudes has been an important benchmark for oil
prices since 2000. It is calculated as the weighted average of prices for petroleum
blends from the OPEC member countries: Saharan Blend (Algeria), Girassol
(Angola), Oriente (Ecuador), Rabi Light (Gabon), Iran Heavy (Islamic Republic of
Iran), Basra Light (Iraq), Kuwait Export (Kuwait), Es Sider (Libya), Bonny Light
(Nigeria), Qatar Marine (Qatar), Arab Light (Saudi Arabia), Murban (UAE), and Merey
(Venezuela).

North Sea Brent Crude Oil is the leading benchmark for Atlantic basin crude oils,
and is used to price approximately two-thirds of the world's traded crude oil. Other
well-known benchmarks are West Texas Intermediate (WTI), Dubai Crude, Oman
Crude and Ural Oils.
 Brent Crude Elaborated

BRENT CRUDE is the benchmark against which the majority of the 100m barrels
of crude oil traded every day are priced. At the start of October the price of
Brent crude rose above $85 a barrel, its highest level in four years. But the
black stuff that makes up the Brent benchmark comprises a tiny fraction of the
world’s extracted oil. Why is it used to determine the value of 60% of oil on
international markets?

The international oil trade is relatively new. It was not until 1861 that the first
deal between two countries was recorded, when the Elizabeth Watts, a cargo
ship, took a consignment of oil from Pennsylvania to London. Before the second
world war, oil was mainly traded regionally. After the war the market became
increasingly global as the number of producers expanded. Its price was largely
set by oil companies, and later by the 15 countries that make up OPEC, the oil-
producers’ cartel. It is only since the late 1980s that prices have been
determined by international markets. As crude oil differs in quality and
availability depending on where it comes from, producers and traders need a
reliable benchmark against which to judge the correct price. Therefore “BRENT”
The Correlation
 Historical Oil Prices Chart
Spot Oil Price: West Texas Intermediate
10 Year Chart

150

100

50

10
2008 2010 2012 2014 2016 2018

The above chart plots monthly historical Spot Oil Prices: West Texas Intermediate. Measurement is in Dollars per Barrel.
Source: Dow Jones & Company
The Correlation
Any Guesses How many Products
Are Made from Petroleum ?.?.?
?
 Here is a partial list of products made from petroleum.
This list is constantly growing as new inventions are created. Here are some of the items which are made from petroleum.
Solvents Diesel fuel Motor Oil Bearing Grease
Ink Floor Wax Ballpoint Pens Football Cleats
Upholstery Sweaters   (that explains the itchy Boats Insecticides
sweater I have at home) Shoe soles
Automobile tyres Sports Car Bodies Nail Polish Fishing lures
Dresses Tires Golf Bags Perfumes
Cassettes Dishwasher parts Tool Boxes Shoe Polish
Motorcycle Helmet Caulking Petroleum Jelly Transparent Tape
CD Player (do people still have these?) Faucet Washers Antiseptics Clothesline
Curtains Food Preservatives Basketballs Soap  (that explains why soap doesn’t
Roads Vaseline / Petroleum Jelly clean oil off your hands)
Vitamin Capsules Antihistamines Purses Shoes
Dashboards Cortisone Deodorant Footballs
Putty Dyes Panty Hose Refrigerant
Percolators Life Jackets Rubbing Alcohol Linings
Skis TV Cabinets Shag Rugs Electrician’s Tape
Tool Racks
Mops
Umbrellas
Slacks
Yarn
And this list is not
Car Battery Cases Epoxy
Insect Repellent
Fertilizers
Paint
Oil Filters
Hair Coloring

exhaustive!! ;-)
Roofing Toilet Seats Fishing Rods Lipstick
Denture Adhesive Linoleum Ice Cube Trays Synthetic Rubber
Speakers Plastic Wood Electric Blankets Glycerin
Tennis Rackets Rubber Cement Fishing Boots Dice
Nylon Rope Candles Trash Bags House Paint
Water Pipes Hand Lotion Roller Skates Surf Boards
Shampoo Wheels Paint Rollers Shower Curtains
Guitar Strings Luggage Aspirin Safety Glasses
Antifreeze Football Helmets Awnings Eyeglasses (I thought they were made
from glass)
Clothes Toothbrushes Ice Chests Footballs
Combs CD’s & DVD’s Paint Brushes Detergents
Vaporizers Balloons Sun Glasses Tents
Heart Valves Crayons Parachutes Telephones
Enamel Pillows Dishes Cameras
Anesthetics Artificial Turf Artificial limbs Bandages
Dentures Model Cars Folding Doors Hair Curlers
Cold cream Movie film Soft Contact lenses Drinking Cups
Fan Belts Car Enamel Shaving Cream Ammonia
Refrigerators Golf Balls Toothpaste (Yuck) Gasoline
 Some websites for Petroleum Stats:

 http://www.factfish.com/statistic/crude%20oil%2C%20production

 https://en.wikipedia.org/wiki/List_of_countries_by_oil_production

o https://www.innovativewealth.com/inflation-monitor/what-products-
made-from-petroleum-outside-of-gasoline/

o https://www.mckinseyenergyinsights.com/services/market-intelligence/

o https://www.beroeinc.com/category-intelligence/crude-oil-market/

Bloomberg, Wikipedia, The Economist etc. . .

For listening patiently and with keen interest