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.