The wild swings in the price of oil are truly baffling. Early July last summer saw prices above $140/barrel. Now, only 5 months later, the price is below $40/ barrel. Demand is down some 5-10%. So why a 70% price drop in oil?
First, a very brief oil primer. When oil and gas is pumped out of the ground you usually get a “witches brew” of compounds, from heavy tar like liquids to methane gas and a lot of stuff in between. “Sweet” oil is low in sulfur. West Texas Light/Intermediate (WTI) is light and low in sulfur high grade of oil. The tar sands of Canada hold lots of oil but it tends to be heavy and high in sulfur requiring more refining. One of the problems we have is that the easy to get light oils are in decline so more and more we need to tap the heavy, more costly oils.
What is usually called the “price of petroleum” is the spot (payment and delivery now) price of WTI/Light crude as delivered to the large storage facilities near Cushing, Oklahoma. Sometimes, it may also refer to the price of Brent as traded on the Intercontinental Exchange (ICE) in Scotland. Lower in quality grades sell for less. Iran has a lot of oil but it is of a heavier grade so costs less.
Now, back to the price fluctuations. It seems that even professionals have a hard time predicting these. Back in July, practically no one expected the high prices to last, even the most bearish predicted a price of around $80/barrel. Yet, today it is around $40/barrel. Why? Some obvious factors are speculation and the faltering economy. However, it is still perplexing.
Where things go from here is hard to say. Some say prices will go down to $25/barrel, while others say we will be bottoming soon. No one disputes the following however.
First, a very brief oil primer. When oil and gas is pumped out of the ground you usually get a “witches brew” of compounds, from heavy tar like liquids to methane gas and a lot of stuff in between. “Sweet” oil is low in sulfur. West Texas Light/Intermediate (WTI) is light and low in sulfur high grade of oil. The tar sands of Canada hold lots of oil but it tends to be heavy and high in sulfur requiring more refining. One of the problems we have is that the easy to get light oils are in decline so more and more we need to tap the heavy, more costly oils.
What is usually called the “price of petroleum” is the spot (payment and delivery now) price of WTI/Light crude as delivered to the large storage facilities near Cushing, Oklahoma. Sometimes, it may also refer to the price of Brent as traded on the Intercontinental Exchange (ICE) in Scotland. Lower in quality grades sell for less. Iran has a lot of oil but it is of a heavier grade so costs less.
Now, back to the price fluctuations. It seems that even professionals have a hard time predicting these. Back in July, practically no one expected the high prices to last, even the most bearish predicted a price of around $80/barrel. Yet, today it is around $40/barrel. Why? Some obvious factors are speculation and the faltering economy. However, it is still perplexing.
Where things go from here is hard to say. Some say prices will go down to $25/barrel, while others say we will be bottoming soon. No one disputes the following however.
- The price of oil has not broken out of its downward trend yet
- The price is probably now well below average “production price” (maybe $45-50/barrel)
- Give the above, at some time in the future, prices will again rise, possibly drastically.
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