1 00:00:00,012 --> 00:00:07,740 Good afternoon, back to energy 101, and today we're going to talk about world oil 2 00:00:07,740 --> 00:00:12,618 price. there's a lot of discussion in the press 3 00:00:12,618 --> 00:00:18,829 and the media about oil price. Particularly gasoline in the U.S. 4 00:00:18,829 --> 00:00:24,979 has gone to $4 this fall. Of course I'm recording this before the 5 00:00:24,979 --> 00:00:28,945 actual offering of the course starting in January. 6 00:00:28,945 --> 00:00:35,274 But oil, when gasoline hit about $4 a barrel, people, and in the election also 7 00:00:35,274 --> 00:00:41,580 at the same time, people started talking about we need to do something to bring 8 00:00:41,580 --> 00:00:48,848 the price of oil down, and gasoline down. so it I want to make the point today and 9 00:00:48,848 --> 00:00:52,970 show the data and the information as to why the U.S. 10 00:00:52,970 --> 00:00:59,285 doesn't have its own oil market that prices, and we determine the price of our 11 00:00:59,285 --> 00:01:02,365 oil. The reason we don't because we don't 12 00:01:02,365 --> 00:01:08,599 produce all our oil that we need and there's a world price that everybody the 13 00:01:08,599 --> 00:01:12,240 world over pays essentially the same price. 14 00:01:12,240 --> 00:01:18,617 Europe pays the same price for oil landed in their port as Japan the same as the 15 00:01:18,617 --> 00:01:22,115 US. The same as, as Australia so it's the 16 00:01:22,115 --> 00:01:26,532 world oil price. Now, you, you kind of get mislead on that 17 00:01:26,532 --> 00:01:32,694 particular if you travel to Europe, and you're paying $8 a gallon for gasoline or 18 00:01:32,694 --> 00:01:36,182 diesel fuel and over here you're paying $4. 19 00:01:36,182 --> 00:01:41,808 You say well oil is more expensive over there, oil actually is the same. 20 00:01:41,808 --> 00:01:48,207 They pay the same for oil in France, Germany, Europe in general as we pay. the 21 00:01:48,207 --> 00:01:52,690 difference is taxes. They have about $4 a gallon taxes on 22 00:01:52,690 --> 00:01:59,421 their their gasoline and deisel so that, that, Is the reason their gasoline costs 23 00:01:59,421 --> 00:02:02,774 so much more. It's an energy policy issue with them. 24 00:02:02,774 --> 00:02:07,334 They have very little oil for their transportation system. They import 25 00:02:07,334 --> 00:02:12,303 essentially all of it so trying to reduce the consumption of it like we try to 26 00:02:12,303 --> 00:02:16,370 reduce the consumption of cigarettes, we put a lot of tax on it. 27 00:02:16,370 --> 00:02:21,602 It causes more efficient cars to be built, and purchased, and, but the actual 28 00:02:21,602 --> 00:02:28,391 oil price we're going to see worldwide is essentially the same, it's what we call a 29 00:02:28,391 --> 00:02:33,831 fungible commodity. It's that fungible just means that it's, 30 00:02:33,831 --> 00:02:40,258 a commodity that it's, oil is oil is oil, which isn't actually quite true. 31 00:02:40,258 --> 00:02:44,842 There is varieties, there's brands and there's. 32 00:02:44,842 --> 00:02:52,950 crude, but the, there's light oil there's different grades, but essentially they, 33 00:02:52,950 --> 00:02:58,880 they are all priced very similar. It's a fungi, fungible commodity like 34 00:02:58,880 --> 00:03:04,810 steel and it's traded and shipped worldwide, throughout the world. 35 00:03:04,810 --> 00:03:10,889 And the reason the price is set by world market and not by the local market is 36 00:03:10,889 --> 00:03:16,018 because the shipping cost is small relative to the cost of the product. 37 00:03:16,018 --> 00:03:21,434 It cost 2 to $5 to ship a barrel of oil across the ocean and that is small 38 00:03:21,434 --> 00:03:26,862 compared to the $100 that you're paying for the actual product. 39 00:03:26,862 --> 00:03:33,222 So, because the shipping cost is low compared to the cost of the product, then 40 00:03:33,222 --> 00:03:38,307 that, that means that everybody pays about the same because it's really is a 41 00:03:38,307 --> 00:03:43,552 free market place, the world over. And even though there might not be a free 42 00:03:43,552 --> 00:03:49,647 market place within a country itself for many things in the oil trade world wide, 43 00:03:49,647 --> 00:03:55,009 it is a free market place. here's just a map to give you an idea of 44 00:03:55,009 --> 00:04:01,425 where oil flows and where it's shipped. we look, you see there's a lot of arrows 45 00:04:01,425 --> 00:04:04,173 going into the U.S. Here's the U.S. 46 00:04:04,173 --> 00:04:07,624 over here. And you notice all the arrows coming in 47 00:04:07,624 --> 00:04:13,136 there? you notice there's arrow coming from Venezuela, we purchase a significant 48 00:04:13,136 --> 00:04:17,579 amount of oil from Venezuela. We purchase a significant amount of oil 49 00:04:17,579 --> 00:04:22,292 from Mexico and this one is an arrow representing oil coming into Canada. 50 00:04:22,292 --> 00:04:26,669 from Canada. So, and then, what's the origin of them 51 00:04:26,669 --> 00:04:31,854 over here? Well, here's Nigeria, Nigeria is shipping a lot of oil. 52 00:04:31,854 --> 00:04:38,469 you notice this component is coming to the US. We get a significant amount of 53 00:04:38,469 --> 00:04:42,871 oil from them. We we get it from the Middle East over 54 00:04:42,871 --> 00:04:47,354 here. And which is all bundled together up 55 00:04:47,354 --> 00:04:51,637 here. Saudi Arabia, all these arrows come in 56 00:04:51,637 --> 00:04:56,808 and to the US. they also ship, the Middle East also 57 00:04:56,808 --> 00:05:03,862 ships oil to China over here. China is, since about 10, 15 years ago, 58 00:05:03,862 --> 00:05:10,787 China has consuming more oil than they are producing by significant margin and 59 00:05:10,787 --> 00:05:16,512 therefore they have to import significant amount of oil as we do. 60 00:05:16,512 --> 00:05:20,882 So Japan, Japan has very little oil of their own. 61 00:05:20,882 --> 00:05:27,037 That they can produce essentially none, and they have to import al, almos, almost 62 00:05:27,037 --> 00:05:30,167 essentially all of the oil and gas they get. 63 00:05:30,167 --> 00:05:35,997 So it kind of gives you an idea of the how much of the oil is traded and shipped 64 00:05:35,997 --> 00:05:40,057 around the world. They're actually in some cases, oil is 65 00:05:40,057 --> 00:05:45,891 produced and put on a large tanker. And starts across the ocean before it is 66 00:05:45,891 --> 00:05:50,773 actually sold. because they know that, that there will 67 00:05:50,773 --> 00:05:56,506 be a need that, a need for it. And they just sell it to the highest 68 00:05:56,506 --> 00:06:01,232 bidder while it's on the high seas. So, it's, it's 69 00:06:01,232 --> 00:06:06,604 amazing world commodity. I wanted to point out that, there is one 70 00:06:06,604 --> 00:06:12,795 area that is great security concerns, to the U.S and to the rest of the world 71 00:06:12,795 --> 00:06:14,737 also. Not just the U.S. 72 00:06:14,737 --> 00:06:19,830 and that is a choke point. There are several choke points but the 73 00:06:19,830 --> 00:06:26,888 major ones, where oil has to go through. For the, rest of the world to get its oil 74 00:06:26,888 --> 00:06:30,278 and the major one is the Strait of Hormuz. 75 00:06:30,278 --> 00:06:36,666 And, there, tankers move through that Strait, and there's a narrow Strait, it's 76 00:06:36,666 --> 00:06:43,185 a couple miles wide, and, therefore it can be blockaded with very little effort, 77 00:06:43,185 --> 00:06:48,537 compared to trying to block a, what's coming across the Atlantic Ocean, for 78 00:06:48,537 --> 00:06:52,446 instance. but there's about 17 million barrels per 79 00:06:52,446 --> 00:06:56,168 day, that is shipped through that, that strait. 80 00:06:56,168 --> 00:07:02,015 And that, that strait is bordered, and is the, and basically, controlled by Iran, 81 00:07:02,015 --> 00:07:08,494 is the one that dominates it, and United Arab Immigrants has also got a small 82 00:07:08,494 --> 00:07:17,238 coast on it but it's, the Strait is dominantly controlled by and dominated by 83 00:07:17,238 --> 00:07:22,720 Iran that concerns a lot of the security people. 84 00:07:22,720 --> 00:07:28,638 this 17 by the way is is not an insignificant number compared to the 85 00:07:28,638 --> 00:07:33,030 world's oil supply. That's 17 I just put the fact that world 86 00:07:33,030 --> 00:07:37,314 oil supply and demand is about 75 million barrels per day. 87 00:07:37,314 --> 00:07:41,672 There again, I'm, I'm talking about oil when I mean oil. 88 00:07:41,672 --> 00:07:47,352 It does not inclulde the natural gas liquids and every other product that's 89 00:07:47,352 --> 00:07:50,917 classified when you add it to oil is petroleum. 90 00:07:50,917 --> 00:07:56,722 You have to watch that, it's missued. Oil is attached to a lot of numbers that 91 00:07:56,722 --> 00:08:00,032 you see. That it actually says oil when it's 92 00:08:00,032 --> 00:08:05,502 really the numbers of the total petroleum, which is a confusing factor. 93 00:08:05,502 --> 00:08:13,992 but that, that's, that strait is right over here. 94 00:08:13,992 --> 00:08:22,322 The Strait of Hormuz, whoop, and right here. 95 00:08:22,322 --> 00:08:29,532 Well, if I get it here. right here, right in the, middle of the 96 00:08:29,532 --> 00:08:34,983 screen, and right here. And it's only about two miles wide, where 97 00:08:34,983 --> 00:08:41,330 all the tankers come through there, and about one third of all the oil that is 98 00:08:41,330 --> 00:08:46,612 consumed and produced in the world, comes through that strait. 99 00:08:46,612 --> 00:08:51,833 It's a, it's a frightening number, about 30% actually. 100 00:08:51,833 --> 00:08:58,068 It comes through 25, 30% of the oil that is used and produced in the entire world 101 00:08:58,068 --> 00:09:04,470 is shipped by tanker right through that straight and that's a security concern to 102 00:09:04,470 --> 00:09:11,392 a lot people, just want to point that out that it is a world commodity and fungible 103 00:09:11,392 --> 00:09:16,722 commodity. But that leads to having to have free 104 00:09:16,722 --> 00:09:25,300 shipment of it around the world. so, how is the world oil price determined 105 00:09:25,300 --> 00:09:32,155 and what affects it? Well, OPEC. Produces about 30 million barrels of oil 106 00:09:32,155 --> 00:09:36,047 a day. I've already said that the total world 107 00:09:36,047 --> 00:09:42,052 oil production in consumption is about 75, so they produce 30 million barrels 108 00:09:42,052 --> 00:09:45,432 per day. And they adjust their production. 109 00:09:45,432 --> 00:09:49,651 OPEC adjust their oil production to meet certain targets. 110 00:09:49,651 --> 00:09:55,715 And their target, now, is to, just their, their oil production to control the price 111 00:09:55,715 --> 00:10:00,358 of oil between 90 and $100 a barrel. It's very difficult. 112 00:10:00,358 --> 00:10:06,453 it it control it exactly because demand goes up, and demand drops off for various 113 00:10:06,453 --> 00:10:09,775 reasons. And, and it takes them a while to 114 00:10:09,775 --> 00:10:12,787 respond. Once they decide to increase it, it 115 00:10:12,787 --> 00:10:17,917 really takes, on the order of six months for the increase in production to get to 116 00:10:17,917 --> 00:10:22,607 market, or the decrease production to start taking away the glut on the market. 117 00:10:22,607 --> 00:10:28,137 So there's a delay time there, and by the time The impact of their increased or 118 00:10:28,137 --> 00:10:33,232 decreased production. Gives the market place the demand has 119 00:10:33,232 --> 00:10:37,662 already changed by a positive side or negative side. 120 00:10:37,662 --> 00:10:44,187 But this is a plot that demonstrates how they basically influence the market. 121 00:10:44,187 --> 00:10:51,150 The blue bars down here is the OPEC production target, and it's the million 122 00:10:51,150 --> 00:10:55,149 barrels per day change from the previous year. 123 00:10:55,149 --> 00:11:01,211 These, this bar is how much the production, how much the production 124 00:11:01,211 --> 00:11:06,844 changed For that month compared to a year ago that same time. 125 00:11:06,844 --> 00:11:14,703 So, they increased production, this was an increase in production but this was a, 126 00:11:14,703 --> 00:11:20,357 a decrease in production. The red line, the red line shows the 127 00:11:20,357 --> 00:11:27,996 price of oil, the worldwide price of oil. By the way, WTI, I couldn't think of it a 128 00:11:27,996 --> 00:11:34,507 while ago, West Texas Crude is the other major crude oil that's traded on the 129 00:11:34,507 --> 00:11:41,312 market, and Brent being the other one. but you notice that the price of oil, 130 00:11:41,312 --> 00:11:48,288 this is the percent change This, this price over here, scale, shows the percent 131 00:11:48,288 --> 00:11:54,641 change on a year to year basis. So this, this side shows the where the 132 00:11:54,641 --> 00:12:01,314 blue bars, shows the million barrels per day of the production targets that OPEC 133 00:12:01,314 --> 00:12:07,746 has set and, and, and generally Abide by, and this shows the percent change in 134 00:12:07,746 --> 00:12:11,412 price. Well you notice when they reduced out 135 00:12:11,412 --> 00:12:18,025 here in early 2000, reduced the quota on how much oil they would produce, the 136 00:12:18,025 --> 00:12:24,881 price was low and it started up, and it, and when it started up, its it got up to 137 00:12:24,881 --> 00:12:31,202 where there was as much as a 50%. Changed from the previous year and price, 138 00:12:31,202 --> 00:12:38,093 and so they started increasing then the quota and increasing the oil production 139 00:12:38,093 --> 00:12:41,882 by as much as 4, 3.5 million barrels of oil. 140 00:12:41,882 --> 00:12:47,070 Per day compared to the previous year. And then it was fairly stable and then 141 00:12:47,070 --> 00:12:52,512 price started to going up again, right inhere and they increased the production 142 00:12:52,512 --> 00:12:55,447 in order to try to bring it back down again. 143 00:12:55,447 --> 00:12:58,661 And, so you see it's a tremendous correlation. 144 00:12:58,661 --> 00:13:03,899 Here's another one, prices got low. They don't want prices to get too low, it 145 00:13:03,899 --> 00:13:09,716 affects their, their cash flow and so they decreased, decrease the amount of 146 00:13:09,716 --> 00:13:16,285 oil by, compared to the previous year by about 4 million barrels per day, down 147 00:13:16,285 --> 00:13:19,198 here. And drove the price back up. 148 00:13:19,198 --> 00:13:24,142 So there's concrete data here that shows that OPEC does. 149 00:13:24,142 --> 00:13:30,572 Carry a great influence and have dominant influence over world markets. 150 00:13:30,572 --> 00:13:37,742 Because it's a very, very price inelastic situation that you don't have to change 151 00:13:37,742 --> 00:13:44,672 supply very much in order to change price dramatically, because you people have to 152 00:13:44,672 --> 00:13:50,083 for instance, drive to work, so when price goes up From $3 to $4. 153 00:13:50,083 --> 00:13:54,586 They can't use less than they can cut down a few things. 154 00:13:54,586 --> 00:14:00,465 But they got to commute to work, which is probably their biggest gasoline 155 00:14:00,465 --> 00:14:04,327 consumption. So it just shows that the world's oil 156 00:14:04,327 --> 00:14:10,057 price and the A market is greatly influenced by OPEC and just to give you 157 00:14:10,057 --> 00:14:16,032 an example of this, this week, that I'm recording this, there was an article in 158 00:14:16,032 --> 00:14:22,072 the Wall Street Journal, 12th December, and OPEC held their meeting in Vienna. 159 00:14:22,072 --> 00:14:25,356 Which they normally meet in to set these targets. 160 00:14:25,356 --> 00:14:30,345 And they so, they don't make it a secret as it's shown here it came out in the 161 00:14:30,345 --> 00:14:33,283 press. OPEC on Wednesday maintained its oil 162 00:14:33,283 --> 00:14:38,369 production ceiling of 30 million barrels a day and extended the tenure of its 163 00:14:38,369 --> 00:14:43,579 secretary general for a year in the face of a forecast decline in demand for the 164 00:14:43,579 --> 00:14:47,529 group's oil. So, the point is, is that they do set 165 00:14:47,529 --> 00:14:53,999 these quotas and they do have meaning. Now the discipline of the member 166 00:14:53,999 --> 00:15:01,360 countries is varied, depending, with how they meet these, abide by these quotas. 167 00:15:01,360 --> 00:15:08,211 But as we've already pointed out, or I think I did, the members produce about 168 00:15:08,211 --> 00:15:13,882 35% of the world's oil and the OPEC members are Saudi Arabia, Iran, United 169 00:15:13,882 --> 00:15:19,257 Arab Emmirates, Kuwait, Nigeria, Iraq, Angola, Venezuela, Algeria and Qatar. 170 00:15:19,257 --> 00:15:24,632 but the thing we have to realize is that they are not all created equal, so to 171 00:15:24,632 --> 00:15:28,972 speak and have equal weight. Saudi Arabia dominates the OPEC. 172 00:15:28,972 --> 00:15:33,527 Production. Why do I say that? Because this data 173 00:15:33,527 --> 00:15:38,799 right here. You see that this is the percent of total 174 00:15:38,799 --> 00:15:43,625 OPEC production produced by each of the countries. 175 00:15:43,625 --> 00:15:50,232 OPEC member's production in 2011. Here's Saudi Arabia produces over 30% of 176 00:15:50,232 --> 00:15:56,532 the total OPEC members oil production. Number 2 is Iran, that is less than 10%. 177 00:15:56,532 --> 00:16:00,677 United Arabs Emirates is about the same, about 10%. 178 00:16:00,677 --> 00:16:07,517 Kuwait, Nigeria, Iraq, Angola, Venezuela, Algeria and Qatar and the others, that's 179 00:16:07,517 --> 00:16:11,032 not all of them, about three I think others. 180 00:16:11,032 --> 00:16:16,487 But they are less than 5%. But the point is, is that Saudi Arabia's 181 00:16:16,487 --> 00:16:22,937 the big dog on the, on the block. and many times, it is noted that, people 182 00:16:22,937 --> 00:16:28,467 that follow this very closely. That, Saudi Arabia is the one that 183 00:16:28,467 --> 00:16:34,257 actually enforces for themselves with their oil production, the quota. 184 00:16:34,257 --> 00:16:39,869 And the rest of the countries. Don't make much adjustments in their oil 185 00:16:39,869 --> 00:16:46,555 production and supply they pretty well maintain at their maximum production rate 186 00:16:46,555 --> 00:16:52,951 but but but Saudi is left up to Saudi Arabia which they can easily do with 187 00:16:52,951 --> 00:16:58,468 having over 30% of production. That is they take on the responsibility 188 00:16:58,468 --> 00:17:04,765 of abiding by the, seeing that the total Oil production is in line with the quota. 189 00:17:04,765 --> 00:17:09,477 So in conclusion, the US oil price is set by world supply and demand. 190 00:17:09,477 --> 00:17:14,884 Increasing US oil production does not have a significant effect on world price 191 00:17:14,884 --> 00:17:18,289 or US price. In other words, we can increase, are 192 00:17:18,289 --> 00:17:22,592 increasing somewhat. Our oil production, but it has a s-- very 193 00:17:22,592 --> 00:17:27,072 small influence on the world market because we produce a small, and the 194 00:17:27,072 --> 00:17:30,942 increase is a sm-- very small percentage of the world market. 195 00:17:30,942 --> 00:17:35,852 And as a matter of fact, if it did have a, start having an effect, Saudi Arabia 196 00:17:35,852 --> 00:17:40,702 and OPEC members would decrease their supply and keep the price where they 197 00:17:40,702 --> 00:17:45,473 Where they want it. but basically, and I have down here OPEC, 198 00:17:45,473 --> 00:17:51,467 but in parenthesis Saudi Arabia who is the big dog along the OPEC block, is 199 00:17:51,467 --> 00:17:55,489 controls that, the oil price by adjusting production. 200 00:17:55,489 --> 00:18:01,326 One note that I wanted to make, that this is totally different than natural gas. 201 00:18:01,326 --> 00:18:07,107 Natural gas price is not set by world markets and the reason is not Is because, 202 00:18:07,107 --> 00:18:11,072 natural gas is a gasseous form, it's low density. 203 00:18:11,072 --> 00:18:14,612 And, and, it's, it is shipped by pipelines. 204 00:18:14,612 --> 00:18:20,502 Well, you don't ship oil across the Atlantic or the Pacific in a pipeline. 205 00:18:20,502 --> 00:18:26,410 You, and so the cost to ship natural gas is very high compared to the cost of the 206 00:18:26,410 --> 00:18:29,827 product. It essentially doubles at least the cost 207 00:18:29,827 --> 00:18:35,091 of the product when you add shipping. And the reason it's so expensive to ship 208 00:18:35,091 --> 00:18:38,860 is, if you ship it as a gas, it takes up too much volume. 209 00:18:38,860 --> 00:18:43,830 And you have to cool it at minus 260 degrees Fahrenheit to liquify it. 210 00:18:43,830 --> 00:18:48,794 And then you have to put it on a special LNG tanker, that has to be specially 211 00:18:48,794 --> 00:18:54,597 built and maintained and in order to ship it, and that is an expensive proposition. 212 00:18:54,597 --> 00:18:58,652 So I just want to make a note that oil world, oil markets. 213 00:18:58,652 --> 00:19:01,911 Is, are different than natural gas markets. 214 00:19:01,911 --> 00:19:07,912 Natural gas markets are set in the North America, Canada, US and Mexico because we 215 00:19:07,912 --> 00:19:14,487 do have pipelines that ship natural gas between these countries overland in North 216 00:19:14,487 --> 00:19:15,887 America. Thank you.