What is Crude Oil?
- Crude oil is a type of unrefined, fossil fuel that is composed of hydrocarbon deposits and other organic deposits.
- It’s refined to get fine petroleum using the fractional distillation process in onshore and offshore refineries.
- There are more than 100 different kinds of crude oil available and traded internationally. However, the main benchmark crude oil would be the West Texas Intermediate (WTI), Brent Crude, and Dubai Crude. These benchmark crudes serve as a reference price for buyers and sellers of crude oil.
Important Crude Oil Benchmarks Discussed
WTI Benchmark is a lighter crude oil with lower API gravity and is sweeter due to low sulphur content (just 0.34%). The main source for this crude is inland Texas. The main delivery point for physical exchange and price settlement of the WTI is Cushing in Oklahoma, which is popularly known as the “Pipeline Crossroads of the World”. Brent crude oil has higher sulphur content and is darker. Two third of the crude oil contracts are for brent crude oil. The price of Brent Crude Oil is higher too. Dubai Crude is a medium sour crude oil extracted from Dubai. It is somewhat heavier and has a high sulphur content.
Pricing of Crude Oil
The price of crude oil refers to the spot price for a barrel of benchmark crude oil. The factors that affect its pricing are specific gravity or API, Sulphur content and location. The global oil pricing essentially depends upon the partnership between the global oil exporters instead of a well-functioning competition. OPEC, a thirteen member body, works as a cartel and fixes prices accordingly. In the year 2016, OPEC allied with other top non-OPEC oil-exporting nations to form OPEC+.
Impact of Fluctuations in the Price of Crude Oil
Changes in the price of any of the benchmark crudes will directly impact the cost of other fuels such as gasoline, natural gas etc. This in turn will impact the transportation sector, impacting the distribution of goods such as food products, essentials and even movement of people. This shortage of supply created will result in cost push inflation. The price of the crude oil will also influence the consumption levels of the same, impacting the environment.
