Petroleum : A Historical Review

PETROLEUM - Basic Informations Of The Black Gold

Petroleum was first used in 1556 in a published by the German mineralogist Georg Bauer, known as Georgius Agricola. Petroleum is a naturally occurring, flammable liquid found in rock formations in the Earth consisting of a complex mixture of hydrocarbons of various molecular weights, plus other organic compounds.

The dream of all alchemist was to create oil (like all another commodities `like for example gold or silver - which is never been really realizing until right here righ now !!!


Basic Informations About The OIL PRICE

The price of standard crude oil on NYMEX was under $25/barrel in September 2003, and with inflation adjustments had remained below this mark since the mid 1980s. A series of events led the price to reach over $60 by August 11, 2005, surpass $75 in the summer of 2006, fall to between $50 and $60/barrel in the early part of 2007, then rise steeply, reaching $92/barrel by October 2007 and $99.29/barrel for December futures in New York on November 21, 2007. Throughout the beginning of 2008, oil hit several new record highs. On February 29, 2008, oil prices hit an inflation-adjusted all-time peak at $103.05 per barrel, and reached $110.20 on March 12, 2008, the sixth record high in seven trading days.

It remains to be seen if the rising trend will become a long plateau or continue to rise steadily. Prices of $100 (2007 US dollars) are equal to the inflation adjusted maximum of 1980, which was $95-100 per barrel in mid 2007 dollars. This has contributed to fears of an economic recession similar to that of the early 1980s. In the United States, gasoline consumption dropped by .5% in the first two months of 2008 in resonse to higher prices, compared to a drop of .4% total in 2007.

Commentators have attributed the price increases of this period to a variety of factors, including reports from the U.S. Department of Energy and others showing a decline in petroleum reserves, worries over peak oil, Middle East tension, and oil price speculation. Some events have had short term effects on oil prices, such as North Korean missile launches, the crisis between Israel and Lebanon, tensions over Iranian nuclear energy, unrest in Nigeria and the declining nominal value of the U.S. dollar.


OIL Supply Growth

An important contributor to price increases has been the slow down in oil supply growth, which has continued since oil production surpassed new discoveries in 1980. In addition, turbulence in the Middle East, the world's largest oil-producing region, has led to decreased exports, especially civil unrest in Iraq after the 2003 U.S. invasion. Outside the Middle East, Venezuela has experienced strikes and political unrest, and there is growing instability in West Africa.

Leonardo Maugeri, who in late 2006, when oil fell from $75 to $60 per barrel, predicted prices would continue to fall, maintained at that time that oil producing nations have avoided digging new wells since the mid 1980s, when large amounts of petroleum drove down the price of oil.

Alternatively, lower production rates may be due to the fact that oil's historically high ratio of Energy Returned on Energy Invested continues a significant decline. The increased price of oil also makes other, non-conventional sources of oil attractive to businesses. The most prominent example of this are the massive reserves of the Canadian tar sands. They are a far less cost-efficient source of heavy, low-grade oil than conventional crude, but with oil trading above $60/bbl, the tar sands have become very attractive to exploration and production companies. Recent months have seen billions of dollars invested in the tar (bitumen) sands.

In view of tighter supplies worldwide, terrorist and insurgent groups have increasingly targeted oil and gas installations to maximise both mayhem and political gains. Sometimes, such attacks are perpetrated by militias in regions where oil wealth has produced little tangible benefits for the local citizenry, as is the case in the Niger delta. The terror factor adds an additional premium, including insurance costs, to the price of oil.

Even if total oil supply does not decline, increasing numbers of experts feel the easily accessible sources of light sweet crude are almost exhausted and in the future the world will depend on more expensive sources of heavy oil and renewable energy sources. CERA (a consulting company wholly owned by energy consultants IHS Energy do not feel this is such an immediate problem. However, other organisations, such as the International Energy Agency (IEA), are much less optimistic in their latest assessments.


OIL Price Indicators

Labor strikes, hurricane threats to oil platforms, fires and terrorist threats at refineries, and other short-lived problems are not solely responsible for the higher prices. Such problems do push prices higher temporarily, but have not historically been fundamental to long-term prices increases.

One more long-term fundamental cause of rising prices is that global oil production will decline at some point, leading to lower supply. This is because there is a limited amount of fossil fuel, and the remaining accessible supply is consumed more rapidly each year. Increasingly, remaining reserves become more technically difficult to extract and therefore more expensive. Eventually, reserves will only be economically feasible to extract at high prices. Although there is much contention about the exact timing and form of peak oil, there are very few parties who do not acknowledge the concept of a production peak is valid. Some claim oil is of abiotic origin, and rapidly self renewing, though this theory has few remaining serious proponents. Others claim that oil producers, afraid that overproduction of oil may lead to price drops such as those of the early 1980s, have held back on the search for new oilfields.

Recently, there has also been increasing speculation on the oil market that tends to push up prices. Speculators try to preempt increased demand, decreased supply, or both, which leads to a long term increase in the price of oil. If speculators are wrong, current prices trends may become a price bubble, which would be followed by a price collapse. A July 14, 2005 Morgan Stanley report suggests that opinions of the oil market could burst just like a bubble if indications of declining Asian demand continue.


Effects Of The OIL Price Development

The effect that rising oil prices have on a market is not directly proportional to the cost of crude oil. For example, while crude oil prices increased 400% from 2003-2008, United States gasoline prices did not rise by the same amount. This is because the profits of distributors and retailers, production costs (such as refining, transportation), and taxes are all part of the price of auto fuel.

There is debate over the effect the current long term elevation of oil prices will have. Some speculate that an oil-price spike could create a recession comparable to those that followed the 1973 and 1979 energy crises or a potentially worse situation such as a global oil crash.


Effects Of The OIL Price Development
Perhaps We Can Write : "INLATION AND RECESSION"

The perceived increase in oil price differs internationally according to currency market fluctuations and purchasing power of currencies. For example, excluding changes in relative purchasing power of various currencies, from 2002-01-01 to 2008-01-01:

* In US$, oil price rose from $20.37 to nearly $100, about 491% growth;
* In the same period, the Taiwanese dollar gained value over the US dollar to make oil in Taiwan 4.53 times more expensive ;
* In the same period, the Japanese Yen gained value over the US dollar to make oil in Japan 4.10 times more expensive;
* In the same period, the Euro gained value over the US dollar to make oil in the Eurozone 2.94 times more expensive.

On average, oil price has increased approximately 400% for these areas, with the US population being the most affected due to the recent depreciation of the US dollar.


Effects Of The OIL Price Development
Perhaps We Can Write : "THE EFFECT OF DOLLAR VALUE, EXCHANGE RATES & METALS"

Because oil is almost always bought and sold in US dollars, even when this is not the currency of either vendor or buyer, it is easy to be confused by the movement of the dollar relative to other currencies. It is informative to contrast the price of oil against other currencies, and against other internationally traded non-perishable commodities such as metals. This article neatly illustrates this point, and provides European oil price graphs for the last 18 months or so against major currencies, and also the price of gold. It is apparent that some of the peaking could be seen as a symptom of a decline in the value of the US$, rather than high oil price per se. However, there is still a very clear upward trend visible in all currencies, although as the price of gold falls, it could be seen as a general devaluation of world economies. This European tribune article includes a stacked plot, allowing the relative drift of the currencies to be seen as well as a general inflation of all currencies against the gold price. In a later graph, it also illustrates the fact that the price of those metals whose extraction is energy intensive (aluminum is the best example, as the ore is moved long distances for refining) have very nearly kept pace with an oil price that has gone up nearly 3-fold over 4 years.


Effects Of The OIL Price Development
Perhaps We Can Write : "THE EFFECT OF THE DOLLAR AND THE UNITED STATES"

It is easiest to gauge the effects of oil prices in the United states, where comparison of oil prices to average income are simplified. One of the most closely watched measures is the price of gas. There are also many other items in the average United States consumer's basket of goods which produced from petroleum products.

Despite the rapid increase in the price of oil, neither the stock markets nor the growth of the global economy have been noticeably affected. Arguably, inflation has increased; in the United States, inflation averaged 3.3% in 2005-2006, as compared to an average of 2.5% in the preceding 10-year period. As a result, during this period the Federal Reserve has consistently increased interest rates to curb inflation.


Effects Of The OIL Price Development
Perhaps We Can Write : "THE EFFECT OF THE DOLLAR AND THE GDP OF THE UNITED STATES"

In the United States, for instance, each 1000 dollars in GDP required 2.4 barrels of oil in 1973 when adjusted for inflation, while this number had fallen to 1.15 by 2001. For calendar 1981, United States oil consumption was 5,861,058,000 bbl and GDP was $5,291.7 billion (chain-volume 2000 dollars), a ratio of $902.86/bbl. In 2005, consumption was 7,539,370,000 bl and GDP was $11,048.6 billion, a ratio of $1,465.45/bbl.


Effects Of The OIL Price Development
Perhaps We Can Write : "THE EFFECT OF THE DOLLAR AND THE STOCK MARKETS OF THE UNITED STATES"

The increase in oil prices over two years was mirrored by an increase in stock values in the energy sector. Energy ETFs like XLE (an overall energy sector fund) and OIH (an oil service industry fund) did well during the period, with XLE's price increasing from $26 (01/01/2004) to $54 (3/2/2006), and OIH's price increasing from $60 (01/01/2004) to $143(3/2/2006).

The value of the stock in companies such as Apache and Conoco-Phillips rose sharply during this period. These prices increased more rapidly toward the end of August, particularly after Hurricane Katrina.

Wal-Mart shares continued their decrease in value that began with the increase in the oil prices. Over two years, stock in Wal-Mart dropped in value by 25% from $60 per share to under $45 per share. Earlier in August, Wal-Mart announced that higher than expected oil prices cut into the corporation's profits for the 2nd quarter of 2005. Since oil prices after the end of the 2nd quarter continued to rise, 3rd quarter profits from Wal-Mart are expected to be small. Because Wal-Mart's distribution system relies on the customer to drive to a large discount big-box store, increases in the price of fuel might discourage some customers from making the trip as often. Wal-Mart, like all retailers, will also face higher shipping costs to get goods from the factory to the stores. This will likely cause inflationary pressures.


Effects Of The OIL Price Development
Perhaps We Can Write : "THE EFFECT OF THE DOLLAR AND EUROPE"

In the developed countries of western Europe, the prices of transport fuels are made up of the price of the refined product, plus a substantial tax element, which can vary between roughly 2/3 and 3/4 of the total price. (in the UK nearly 70% of the price of a litre of petrol is made up of fuel duty and VAT. A doubling of the oil price would add perhaps 30% to the cost of fuel at the pump in the UK, if the duty was not changed.) These taxes are not harmonised, nor are different countries' budgets updated at the same time. As a consequence, people who live nearby will often find it worthwhile to drive over the border to fill up, despite the hassle and traffic congestion this causes. However, in general, by having a large tax fraction, governments have the benefit of some room for manoeuvre, to smooth sudden price shocks by relaxing and then slowly ramping back the fuel duties, and the population has lifestyles that are already well adapted to fuel prices that would appear very high to consumers in the USA (where the tax fraction is less than 20%). These two effects conspire to make European demand largely independent of the crude oil price, at least over short periods of a few years. The high prices also stimulate interest in hybrid cars and alternative fuels, as well as encouraging the use of public transport in cities, and are a major factor in limiting European urban sprawl.


Possible Mitigations

Economists say that the substitution effect will spur demand for alternate energy sources, such as coal or liquefied natural gas. For example, China and India are currently heavily investing in natural gas and coal liquefaction facilities. Nigeria is working on burning natural gas to produce electricity instead of simply flaring the gas, where all non-emergency gas flaring will be forbidden after 2008. Outside the U.S., more than 50% of oil is consumed for stationary, non-transportation purposes such as electricity production where it is relatively easy to substitute natural gas for oil.

The United States Strategic Petroleum Reserve could, on its own, supply current U.S. demand for about a month in the event of an emergency, unless it were also destroyed or inaccessible in the emergency. This could potentially be the case if a major storm were to hit the Gulf of Mexico, where the reserve is located. While total consumption has increased, the western economies are less reliant on oil than they were twenty-five years ago, due both to substantial growth in productivity and the growth of sectors of the economy with little oil dependence such as finance and banking, retail, etc. The decline of heavy industry and manufacturing in most developed countries has reduced the amount of oil per unit GDP; however, since these items are imported anyway, there is less change in the oil dependence of industrialized countries than the direct consumption statistics indicate.

Most economists see this as unlikely, partly because such price shocks could potentially be mitigated in the many developed countries which have high fuel taxes by temporarily or permanently suspending these taxes as fuel costs rise. France, Italy, and the Netherlands lowered taxes in 2000 in response to protests over high prices, but other European nations resisted this option. The issue came up again in 2004, when oil reached $40 a barrel causing a meeting of 25 EU finance ministers to lower economic growth forecasts for that year. Because of budget deficits in several countries, they decided to pressure OPEC to lower prices instead of lowering taxes. In 2007, European truckers, farmers, and fishermen again raised concerns over record oil prices cutting into their earnings, hoping to have taxes lowered. In England, where fuel taxes were raised in October and are scheduled to rise again in April 2008, there was talk of protests and roadblocks if the tax issue was not addressed. This method of softening price shocks is even less viable to countries with much lower gas taxes, such as the United States.


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PETROLEUM : A Historical Review : Part 1 of 6

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