Understanding the Oil Market

With the Middle East and North Africa uprising, the prices of oil in many developed countries have spiked, with critics urging for countries like Saudi Arabia to turn the taps on its oil reserves in order to keep prices reasonable. Others have argued that the world would be a better place without a commodity that pollutes the Earth and causes wars to erupt over vulnerable and scarce resource with only thoughts of capitalist greed and corruption amongst ruling families and political elites. While I agree with both, I read an interesting commentary from Alan Duncan - International Development Minister and adviser on oil supply - in a parliamentarian magazine (The House), which I wanted to share as a means to better educate readers on the complexities of the global oil market.

In his commentary, Alan Duncan addressed how dependent we are on oil in running our daily life, for without the supply of oil, "the world simply would not go round". Amidst the current upheaval in Libya, commentators are looking towards Saudi Arabia to solve the supply problem, but switching from Libyan oil to Saudi oil isn't as simple as possible. Duncan states that there is no such thing as 'the oil market', rather that there are many markets within it, each with their different significance. According to Duncan, there are well over a hundred different qualities of crude oil, each with different characteristics affecting the diet of an oil refinery. Some crudes are heavy and good for making bitumen, others are light and better for making petrol. Some are full of sulphur, whereas others share the runny consistency of washing liquid or hardens like butter. Libyan oil is made up of lighter low-sulphur which cannot easily be substituted for Saudi crude that does not share the same property. Also, many factors - such as shipping costs, insurance rates, demurrage rates (price paid for a ship's delay at port) - affect the prices of crude rather than straightforward supply volumes.

In closing, Duncan warns that we are living in dangerous times and the factors which could influence the price of oil, and hence the unwelcome cost of filling our car at the petrol station, are affected by much more than scarce resource and conflict in the originating countries. And such factors complicate the nature of a simple switch over from one type of oil to another.