Crude Oil

Petroleum, in one form or another, has been used since ancient times, and is now important across society, including in economy, politics and technology. The rise in importance was mostly due to the invention of the internal combustion engine, the rise in commercial aviation and the increasing use of plastic.

The top three oil producing countries are Saudi Arabia, Russia, and the United States. About 80% of the world’s readily accessible reserves are located in the Middle East, with 62.5% coming from the Arab world: Saudi Arabia, UAE, Iraq, Qatar and Kuwait. The top three consuming regions are United States, China and Japan.

Oil prices are largely controlled by OPEC, or the Organization of the Petroleum Exporting Countries, including Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. These 12 countries control 40% of the world’s crude oil supply. This puts OPEC in the unique position of having a lot of influence on the price of gas around the world. OPEC controls gas prices by either increasing or decreasing the amount of oil available. If the amount available goes down, the prices go up. This is the law of supply and demand. This increase or decrease in supply by OPEC can affect the cost of oil in indirect ways as well. The cost of crude oil controls more than just the price of gasoline; heating costs are also affected. Higher gas prices also influence the cost of travel. If gas prices are high, car buyers are more likely to buy smaller, more gas efficient vehicles. Fewer families can afford to travel, decreasing the money brought into the economy by tourism.

Crude oil began futures trading on the NYMEX in 1983 and is the most heavily traded commodity. Crude Oil Futures trade in units of 1,000 U.S. barrels (42,000 gallons). Crude Oil Futures trade 30 consecutive months plus long-dated futures initially listed 36, 48, 60, 72, and 84 months prior to delivery. Additionally, trading can be executed at an average differential to the previous day’s settlement prices for periods of two to 30 consecutive months in a single transaction. Crude Oil Futures are quoted in dollars and cents per barrel. The price of a barrel of oil is highly dependent on both its grade, determined by factors such as its specific gravity or API and its sulphur content, and its location. The vast majority of oil is not traded on an exchange but on an over-the-counter basis. The price of oil, like the price of all commodities, is subject to major swings over time, particularly tied to the overall business cycle.

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