Why is Oil SUCH a Powerful Commodity?

by 26 September 2019

Oil, or Crude Oil to be specific, is perhaps the world’s most powerful and arguably vitally important natural resource. Not only to commerce, it has a direct impact on the daily lives of average people worldwide. Oil is such a powerful commodity and the price of it could be considered the most important price. A magical commodity which does not bend to the normal logic of economics.

The BBC highlights its impact ‘…It’s the source of more than a third of the world’s energy. That’s more than coal, and more than twice as much as nuclear, hydroelectric and renewable energy sources combined. Oil and gas together provide a quarter of our electricity, and the raw material for most plastics.’

Where a product is concerned, it’s clear no one can question just how significant, imperative and important it really is in modern life. It comes as no surprise the term ‘to strike oil’ has become synonymous with being successful.

One reason for its ultimate power over our day to day lives and the fundamental impact to business, is the fluctuations in the price of oil. The price of oil affects individual spending choices, it forces companies to make difficult as well as huge decisions. It can even change relations between countries and effect political relations.

Oil can be found on all of the earth’s continents. Some places have less, like Australia, who have very little (it is estimated that by 2030 they will be 100% reliant on imports). The Middle East is the centre of the world’s oil supply. The region sits on top of a liquid gold mine; experts estimate the region holds more than 1.2 trillion barrels of oil in its various fields and reserves or roughly 49% of all the world’s resource, see map of countries with proven oil reserves below. Saudi Arabia has the second most oil reserves in the world (behind Venezuela), however, the quality of it’s oil (in producing usable sources of energy/product) comes in first.

Source: Wikipedia

Forbes explains ‘…Venezuela has the world’s largest crude oil reserves with 303 billion barrels of proved reserves. But, a lot of this oil is extra-heavy crude oil and may not be economical to produce at prevailing prices. Thus, some portion of Venezuela’s barrels may in reality no longer be in the “proved reserves” category.’ Countries that have large reservoirs of oil are key players on the world stage. They are sitting on top of one of the most important global resources.

In order to make a usable product, oil has to be refined. This is where the raw product is transformed into practical forms e.g. petroleum, heating oil, jet fuel etc

But if oil is so significant, why does the price of this valuable product rise and fall, as well as behave so unpredictably?

There are many groups which can effect the price of a commodity and how it behaves on the stock market. The Organization of Petroleum Exporting Countries, (OPEC) has a massive impact. They describe themselves…‘OPEC is a permanent intergovernmental organization of 14 oil-exporting developing nations that coordinates and unifies the petroleum policies of its Member Countries.’ Investopedia explains the impact of this cartel ‘As of 2018, OPEC controlled roughly 72% of the world’s total crude oil reserves and produced 42% of the world’s total crude oil output.’

Due to their accumulative ownership of the worlds oil supply, they hold the majority of the power when it comes to the price per barrel. This means they can manipulate and influence the market enormously. This is done by increasing or withholding the number of barrels per day the group sell on the world oil market. Price rise? – they reduce the amount of oil contributed, price drop? increase the number of barrels entered. While other countries such as Canada, Russia, America, and other producers can also increase/decrease supply, their impact is no where near as large.

All of this activity is passed onto the markets, onto businesses and then eventually onto the consumers and general members of the public.

Apart from the obvious cartels, there are also other aspects which effect oil prices. Perception of the market is a massive aspect. If it is perceived that the market will drop or rise in future, that in itself will cause the price to rise or fall (whether it would have happened or not). The quality and ease of refining of oil as well as investment in oil futures all effects the price of oil as well.

Here at Utility Team we understand that the market is complex, the whole of the energy industry can be a bit of a minefield and that’s where we are here to help.

We monitor the market on a daily, weekly and monthly basis. We have specialised software which means we can monitor every aspect of the stock market, especially facets which may potentially effect the price of energy and utilities. We collectively have hundreds of years worth or experience and access to the vast majority of suppliers. This all means we are best placed to offer our clients the greatest of advice in an impartial fashion.

Contact us today, enquiries@utilityteam.co.uk / 02476 997 901.

 

Article written by: Kirk Cadden, Senior Energy Consultant