Energy Sector is essentially made up of three major commodities. They are Crude Oil, Refined Products and Natural Gas. Let us briefly understand each of them in detail.
What is Crude oil, and why is it so valuable?
Crude oil is an unrefined form of petrol. Crude oil is composed of hydrocarbons. Crude oil is valuable because it is used to produce everyday items gasoline, diesel and a multiple of petrochemicals. Another reason why it is so expensive is that it is a non-renewable resource. It is limited in nature. It is a significant component in the manufacturing of plastics, synthetic textiles, fertiliser, cosmetics and steel.
It is estimated that a, developed county resident uses about three gallons of petroleum products per day.
Types of Crude oil
Crude oil is characterised based on its viscosity and sulfur content. There are major regions were crude oil is found and established their own benchmarks to track price movements in oil.
- West Texas Intermediate (WTI) – This is a light sweet crude oil and has a gravity of around 40 on the gravity scale. It has low sulfur content.
- Brent Crude – It is also light sweet crude oil from the North Sea. It has approximately the same gravity as that of WTI. It has higher sulfur content.
- Dubai crude – It is also known as Fateh. Dubai crude is more substantial than both WTI and Brent crude oil. Its sulfur content is even higher than the other two, which makes it sour crude. It is used for trading in the Middle East.
What determines the price of Crude oil?
In financial language, crude oil is said to be “fungible” commodity. This means that specific grades of oil will remain identical regardless of where they are produced. For example, a production of 500 barrels of WTI oil has the same value, whether it is extracted in Texas or North Dakota.
As with all assets, forces of supply and demand play a significant role in deciding oil price.
Availability of new sources of oil, specifically Canadian oil sands and U.S. shale oil has helped during a shortage. This has exerted downward pressure on the oil price.
The International Energy Agency (IEA) also influences the oil price by looking at global demand.
What are refined products?
Refined petroleum products are derived from crude oil through processes such as cracking and distillation. Refining is a vital step after oil extraction. It is only after refining that oil should be burnt to create end products.
What are those refined products?
- Gasoline – It is used as fuel for internal combustion engines. They are the most basic machine used in the automobile and industrial equipment.
- Kerosene – It is also known as jet fuel. It is used as fuel in planes, and for cooking.
- 2 Fuel Oil – It is commonly used in diesel engines and in homes for heating purposes.
- 4 Fuel Oil – It is also known as bunker oil. It is also used in large stationary engines, power plants and large commercial boilers. This fuel contains several contaminants including nickel and sulfur.
- Lubricating Oil – It is a non-heavy weight material that flows smoothly and gets dispersed very easily if appropriately treated. This oil has low volatility but is persistent in the environment.
What affects the price of refined products?
The prices of refined products also fluctuate for many reasons, but the most important ones are:
- Crude oil prices-Refined products are derived from refining crude oil. Therefore, the price of crude oil has a significant impact on its price.
- Refining costs- Seasonal pollution requirements for refined products has lead to disparities in pricing. There are also weather-related disruptions to refinery operations.
- Political factors-Disturbances in oil-producing countries can create a sudden increase in refined products prices. There have been wars, political coups and acts of terrorism which have created fear of supply disruptions and higher prices.
- Global demand-This factor always dominates the pricing of any good. Changing global demand and how refineries respond to these changes can affect refined products prices.
What is natural gas, and why is it so valuable?
Natural gas is a type of fossil fuel that is formed from dead plan matter trapped between rock deposits deep below the surface of the earth. Its main component is methane. Natural gas also contains some hydrocarbon liquids and non-hydrocarbon gases.
Where is natural gas used?
- Electricity-Natural gas is used in electric power generation. In the U.S., 27% of the electricity generation takes place using natural gas.
- Industry-The Industrial sector uses natural gas for heat and power systems. They are also used as raw materials to produce chemicals and fertilisers.
- Household-Natural gas is used by almost half of the people in a country. They use it to heat water, cook food and dry clothes.
- Transport-The transportation sector uses natural gas as fuel to operate compressors that move natural gas through pipelines.
What impacts the price of natural gas?
- Production rate – When the production of natural gas increases in a period; consumer prices fall. Whereas, a decline in the production levels leads to high prices.
- Weather – Severe winter condition causes an increase in the demand for natural gas. Natural gas is used for heating by residential customers. Sudden weather changes can also have an impact as supplies can fall short.
- Growth in the economy – A rise in production and earning in the industrial sector means higher demand for natural gas. Because natural gas is used as fuel and a component in fertilisers and pharmaceuticals.
- Storage – The storage of natural gas in underground facilities also impacts prices. Storage provides supply when production and imports are not enough. When there is low demand, storage absorbs production and prevents the prices from falling too much.
- Substitutes – There are other sources of energy which are acting as the alternative fuel. These include coal, solar, wind and hydroelectric power. Coal is the biggest competition for natural gas. Consumers tend to use those which are renewable and cheaper.
That’s about one of the most important commodities, Crude oil. Hope you had a good read. Let us know if you have any questions in the comments below.