Petroleum directly out of the ground is called crude oil. Crude oil was formed over millions of years ago from the remains of tiny aquatic plants and animals that lived in ancient seas. It was believed that crude oil had medicinal benefits by ancient Persians, 10th century Sumatrans, and pre-Columbian Indians. Around 4,000 BC in Mesopotamia, bitumen, a tarry crude, was used as caulking for ships, a setting for jewels and mosaics, and an adhesive to secure weapon handles. The walls of Babylon and the famed pyramids were held together with it, and Egyptians used it for embalming. During the 19th century, an oil find was often met with dismay. Pioneers who dug wells to find water or brine, were disappointed when they struck oil. It wasn’t until 1854, with the invention of the kerosene lamp, that the first large-scale demand for petroleum was created. Surprisingly, crude oil is an abundant commodity. The world has produced approximately 650 billion barrels of oil, but another trillion barrels of proved reserves have yet to be produced. Crude oil was the world’s first trillion-dollar industry and accounts for the single largest product in world trade.
Futures and options on crude oil trade at the New York Mercantile Exchange (NYMEX) and at the International Petroleum Exchange in London (IPE). NYMEX trades two main types of crude oil: light sweet crude oil and Brent crude oil. The light sweet futures contract calls for the delivery of 1,000 barrels of crude oil in Cushing, Oklahoma. Light sweet crude is preferred by refiners because of its low sulfur content and relatively high yield of high-value products such as gasoline, diesel fuel, heating oil, and jet fuel. The Brent blend crude is based on a light, sweet North Sea crude oil. Brent blend crude production is approximately 500,000 barrels per day, and is shipped from Sullom Voe in the Shetland Islands.
Prices – NYMEX crude oil prices on the weekly nearest-futures chart rallied early in 2003 and posted a 13-year high of .99 per barrel in late February 2003 due to the war with Iraq and concerns about supply disruptions in the Middle East. After it became clear that the war would be relatively short, crude oil prices fell sharply and hit a 1-1/4 year low of .04 in late April. Prices then rallied fairly steadily in the fourth quarter of 2003 and ended the year near per barrel, little changed from the close in 2002 but still at the upper end of the price ranges seen in the last two decades. Bullish factors supporting prices later in year included the weak dollar (which boosts the real value of crude oil priced in dollars), much stronger demand as the US economy revved up in Q3 and Q4, weak production from Iraq as the US struggled to revive the moribund Iraqi oil production machinery, OPEC’s relative discipline in limiting production, and tight inventories which dropped to the lowest level in decades. OPEC blamed the Q4 rally in crude oil prices on the weak dollar and stronger demand, rather than a shortage of supply. OPEC late in the year therefore refused to boost production even though prices rose above OPEC’s target range of -28 for a basket of OPEC crude. NYMEX crude oil trades about higher than the OPEC basket price due to higher quality and transport costs. OPEC produces about one-third of world demand for oil.
Supply – World crude oil production in 2002, the last full reporting year, fell –1.7% to 66.819 million barrels per day. The world’s largest oil producers in 2002 were Saudi Arabia (with 11.4% of world production in 2002), Russia (11.1%), the United States (8.7%), Iran (5.2%), and China (5.0%). US production in 2002 rose +0.3% to 5.817 million barrels per day, with Alaskan production of 984,000 barrels per day accounting for 17% of total US production. Production of oil in Alaska has been declining. In 1988 it was 2.02 million barrels per day, more than double current production levels.
Demand – US demand for crude oil in 2002 fell –1.3% to 14.926 million barrels per day, which accounted for 22% of total world production even though the US only accounts for about 5% of world population. Most of that demand went for US refinery production into products such as gasoline and diesel fuel, aviation fuel, heating oil, kerosene, asphalt, and lubricants.
Trade – The US is highly dependent on imports of crude oil to meet its energy needs. US imports in 2002, the latest full reporting year, fell –3.0% to 9.047 million barrels per day, accounting for 61% of US usage. US exports of crude oil have dropped sharply in the past several years and totaled a miniscule 9,000 barrels per day in 2002 versus 118,000 barrels as recently as 1999.