Good afternoon, back to energy 101, and today we're going to talk about world oil
price. there's a lot of discussion in the press
and the media about oil price. Particularly gasoline in the U.S.
has gone to $4 this fall. Of course I'm recording this before the
actual offering of the course starting in January.
But oil, when gasoline hit about $4 a barrel, people, and in the election also
at the same time, people started talking about we need to do something to bring
the price of oil down, and gasoline down. so it I want to make the point today and
show the data and the information as to why the U.S.
doesn't have its own oil market that prices, and we determine the price of our
oil. The reason we don't because we don't
produce all our oil that we need and there's a world price that everybody the
world over pays essentially the same price.
Europe pays the same price for oil landed in their port as Japan the same as the
US. The same as, as Australia so it's the
world oil price. Now, you, you kind of get mislead on that
particular if you travel to Europe, and you're paying $8 a gallon for gasoline or
diesel fuel and over here you're paying $4.
You say well oil is more expensive over there, oil actually is the same.
They pay the same for oil in France, Germany, Europe in general as we pay. the
difference is taxes. They have about $4 a gallon taxes on
their their gasoline and deisel so that, that, Is the reason their gasoline costs
so much more. It's an energy policy issue with them.
They have very little oil for their transportation system. They import
essentially all of it so trying to reduce the consumption of it like we try to
reduce the consumption of cigarettes, we put a lot of tax on it.
It causes more efficient cars to be built, and purchased, and, but the actual
oil price we're going to see worldwide is essentially the same, it's what we call a
fungible commodity. It's that fungible just means that it's,
a commodity that it's, oil is oil is oil, which isn't actually quite true.
There is varieties, there's brands and there's.
crude, but the, there's light oil there's different grades, but essentially they,
they are all priced very similar. It's a fungi, fungible commodity like
steel and it's traded and shipped worldwide, throughout the world.
And the reason the price is set by world market and not by the local market is
because the shipping cost is small relative to the cost of the product.
It cost 2 to $5 to ship a barrel of oil across the ocean and that is small
compared to the $100 that you're paying for the actual product.
So, because the shipping cost is low compared to the cost of the product, then
that, that means that everybody pays about the same because it's really is a
free market place, the world over. And even though there might not be a free
market place within a country itself for many things in the oil trade world wide,
it is a free market place. here's just a map to give you an idea of
where oil flows and where it's shipped. we look, you see there's a lot of arrows
going into the U.S. Here's the U.S.
over here. And you notice all the arrows coming in
there? you notice there's arrow coming from Venezuela, we purchase a significant
amount of oil from Venezuela. We purchase a significant amount of oil
from Mexico and this one is an arrow representing oil coming into Canada.
from Canada. So, and then, what's the origin of them
over here? Well, here's Nigeria, Nigeria is shipping a lot of oil.
you notice this component is coming to the US. We get a significant amount of
oil from them. We we get it from the Middle East over
here. And which is all bundled together up
here. Saudi Arabia, all these arrows come in
and to the US. they also ship, the Middle East also
ships oil to China over here. China is, since about 10, 15 years ago,
China has consuming more oil than they are producing by significant margin and
therefore they have to import significant amount of oil as we do.
So Japan, Japan has very little oil of their own.
That they can produce essentially none, and they have to import al, almos, almost
essentially all of the oil and gas they get.
So it kind of gives you an idea of the how much of the oil is traded and shipped
around the world. They're actually in some cases, oil is
produced and put on a large tanker. And starts across the ocean before it is
actually sold. because they know that, that there will
be a need that, a need for it. And they just sell it to the highest
bidder while it's on the high seas. So, it's, it's
amazing world commodity. I wanted to point out that, there is one
area that is great security concerns, to the U.S and to the rest of the world
also. Not just the U.S.
and that is a choke point. There are several choke points but the
major ones, where oil has to go through. For the, rest of the world to get its oil
and the major one is the Strait of Hormuz.
And, there, tankers move through that Strait, and there's a narrow Strait, it's
a couple miles wide, and, therefore it can be blockaded with very little effort,
compared to trying to block a, what's coming across the Atlantic Ocean, for
instance. but there's about 17 million barrels per
day, that is shipped through that, that strait.
And that, that strait is bordered, and is the, and basically, controlled by Iran,
is the one that dominates it, and United Arab Immigrants has also got a small
coast on it but it's, the Strait is dominantly controlled by and dominated by
Iran that concerns a lot of the security people.
this 17 by the way is is not an insignificant number compared to the
world's oil supply. That's 17 I just put the fact that world
oil supply and demand is about 75 million barrels per day.
There again, I'm, I'm talking about oil when I mean oil.
It does not inclulde the natural gas liquids and every other product that's
classified when you add it to oil is petroleum.
You have to watch that, it's missued. Oil is attached to a lot of numbers that
you see. That it actually says oil when it's
really the numbers of the total petroleum, which is a confusing factor.
but that, that's, that strait is right over here.
The Strait of Hormuz, whoop, and right here.
Well, if I get it here. right here, right in the, middle of the
screen, and right here. And it's only about two miles wide, where
all the tankers come through there, and about one third of all the oil that is
consumed and produced in the world, comes through that strait.
It's a, it's a frightening number, about 30% actually.
It comes through 25, 30% of the oil that is used and produced in the entire world
is shipped by tanker right through that straight and that's a security concern to
a lot people, just want to point that out that it is a world commodity and fungible
commodity. But that leads to having to have free
shipment of it around the world. so, how is the world oil price determined
and what affects it? Well, OPEC. Produces about 30 million barrels of oil
a day. I've already said that the total world
oil production in consumption is about 75, so they produce 30 million barrels
per day. And they adjust their production.
OPEC adjust their oil production to meet certain targets.
And their target, now, is to, just their, their oil production to control the price
of oil between 90 and $100 a barrel. It's very difficult.
it it control it exactly because demand goes up, and demand drops off for various
reasons. And, and it takes them a while to
respond. Once they decide to increase it, it
really takes, on the order of six months for the increase in production to get to
market, or the decrease production to start taking away the glut on the market.
So there's a delay time there, and by the time The impact of their increased or
decreased production. Gives the market place the demand has
already changed by a positive side or negative side.
But this is a plot that demonstrates how they basically influence the market.
The blue bars down here is the OPEC production target, and it's the million
barrels per day change from the previous year.
These, this bar is how much the production, how much the production
changed For that month compared to a year ago that same time.
So, they increased production, this was an increase in production but this was a,
a decrease in production. The red line, the red line shows the
price of oil, the worldwide price of oil. By the way, WTI, I couldn't think of it a
while ago, West Texas Crude is the other major crude oil that's traded on the
market, and Brent being the other one. but you notice that the price of oil,
this is the percent change This, this price over here, scale, shows the percent
change on a year to year basis. So this, this side shows the where the
blue bars, shows the million barrels per day of the production targets that OPEC
has set and, and, and generally Abide by, and this shows the percent change in
price. Well you notice when they reduced out
here in early 2000, reduced the quota on how much oil they would produce, the
price was low and it started up, and it, and when it started up, its it got up to
where there was as much as a 50%. Changed from the previous year and price,
and so they started increasing then the quota and increasing the oil production
by as much as 4, 3.5 million barrels of oil.
Per day compared to the previous year. And then it was fairly stable and then
price started to going up again, right inhere and they increased the production
in order to try to bring it back down again.
And, so you see it's a tremendous correlation.
Here's another one, prices got low. They don't want prices to get too low, it
affects their, their cash flow and so they decreased, decrease the amount of
oil by, compared to the previous year by about 4 million barrels per day, down
here. And drove the price back up.
So there's concrete data here that shows that OPEC does.
Carry a great influence and have dominant influence over world markets.
Because it's a very, very price inelastic situation that you don't have to change
supply very much in order to change price dramatically, because you people have to
for instance, drive to work, so when price goes up From $3 to $4.
They can't use less than they can cut down a few things.
But they got to commute to work, which is probably their biggest gasoline
consumption. So it just shows that the world's oil
price and the A market is greatly influenced by OPEC and just to give you
an example of this, this week, that I'm recording this, there was an article in
the Wall Street Journal, 12th December, and OPEC held their meeting in Vienna.
Which they normally meet in to set these targets.
And they so, they don't make it a secret as it's shown here it came out in the
press. OPEC on Wednesday maintained its oil
production ceiling of 30 million barrels a day and extended the tenure of its
secretary general for a year in the face of a forecast decline in demand for the
group's oil. So, the point is, is that they do set
these quotas and they do have meaning. Now the discipline of the member
countries is varied, depending, with how they meet these, abide by these quotas.
But as we've already pointed out, or I think I did, the members produce about
35% of the world's oil and the OPEC members are Saudi Arabia, Iran, United
Arab Emmirates, Kuwait, Nigeria, Iraq, Angola, Venezuela, Algeria and Qatar.
but the thing we have to realize is that they are not all created equal, so to
speak and have equal weight. Saudi Arabia dominates the OPEC.
Production. Why do I say that? Because this data
right here. You see that this is the percent of total
OPEC production produced by each of the countries.
OPEC member's production in 2011. Here's Saudi Arabia produces over 30% of
the total OPEC members oil production. Number 2 is Iran, that is less than 10%.
United Arabs Emirates is about the same, about 10%.
Kuwait, Nigeria, Iraq, Angola, Venezuela, Algeria and Qatar and the others, that's
not all of them, about three I think others.
But they are less than 5%. But the point is, is that Saudi Arabia's
the big dog on the, on the block. and many times, it is noted that, people
that follow this very closely. That, Saudi Arabia is the one that
actually enforces for themselves with their oil production, the quota.
And the rest of the countries. Don't make much adjustments in their oil
production and supply they pretty well maintain at their maximum production rate
but but but Saudi is left up to Saudi Arabia which they can easily do with
having over 30% of production. That is they take on the responsibility
of abiding by the, seeing that the total Oil production is in line with the quota.
So in conclusion, the US oil price is set by world supply and demand.
Increasing US oil production does not have a significant effect on world price
or US price. In other words, we can increase, are
increasing somewhat. Our oil production, but it has a s-- very
small influence on the world market because we produce a small, and the
increase is a sm-- very small percentage of the world market.
And as a matter of fact, if it did have a, start having an effect, Saudi Arabia
and OPEC members would decrease their supply and keep the price where they
Where they want it. but basically, and I have down here OPEC,
but in parenthesis Saudi Arabia who is the big dog along the OPEC block, is
controls that, the oil price by adjusting production.
One note that I wanted to make, that this is totally different than natural gas.
Natural gas price is not set by world markets and the reason is not Is because,
natural gas is a gasseous form, it's low density.
And, and, it's, it is shipped by pipelines.
Well, you don't ship oil across the Atlantic or the Pacific in a pipeline.
You, and so the cost to ship natural gas is very high compared to the cost of the
product. It essentially doubles at least the cost
of the product when you add shipping. And the reason it's so expensive to ship
is, if you ship it as a gas, it takes up too much volume.
And you have to cool it at minus 260 degrees Fahrenheit to liquify it.
And then you have to put it on a special LNG tanker, that has to be specially
built and maintained and in order to ship it, and that is an expensive proposition.
So I just want to make a note that oil world, oil markets.
Is, are different than natural gas markets.
Natural gas markets are set in the North America, Canada, US and Mexico because we
do have pipelines that ship natural gas between these countries overland in North
America. Thank you.