Tuesday, April 22, 2008

Saudi Arabia's Arab Light

Looking at the list known as the "Opec basket price" for crude oil, I'm reminded of the coffee beans menu at coffee bean roasting proprietor:

Saudi Arabia's Arab Light
The United Arab Emirates's Dubai
Nigeria's Bonny Light
Algeria's Saharan Blend
Indonesia's Minas
Venezuela's Tia Juana Light
Mexico's Isthmus.

The leading story of today's BBC News Business section headline read: "Oil Rises to Yet Another Record". I was curious to learn more as to what drives the cost of petroleum.

I am a conditioned consumer of petroleum products, particularly what I pump into my car. I am accustomed to living my life with the use of a car. Without the supply of gas would be synonymous to my autonomous nervous system shutting down. It is as constant as my heartbeat. I take it for granted that gas will always be available.

But at the cost of $4.39 per gallon (the average cost in San Francisco these days for premium gas) I have opted to take the Metro. Luckily the city is well planned and developed for a far-reaching urban transit system. I recently moved here from Los Angeles, where I think that a car is almost 99.9% necessary, because the there is limited transit service. People speculate it has something to do with the physical geography where LA and outlying areas have stretches of land where ribbons of tar can be laid out. The freeways there are congested with traffic of cars occupied generally by one person during the rush hours.

There's one salient example of what affects the cost of gas prices: supply and demand wrapped with the delicate balance of consumer choice or lack of choice. A brief research about petroleum (aka crude oil) shows that it is the most actively traded commodity in global exchanges (the largest exchange markets in: London, New York, and Singapore.) There are benchmarks used in the industry to determine the quality of the oil based upon 1. specific gravity and 2. sulphur content (which is influenced by where the oil is pumped from.) "Because there are so many different varieties and grades of crude oil, buyers and sellers have found it easier to refer to a limited number of reference, or benchmark crude oils. Other varieties are then priced at a discount or premium according to their quality." (source: BBC news analysis)

Different benchmarks are predominant in certain exchanges. For example, Brent is common in Europe (and in fact is considered a world benchmark where it's used to price two thirds of the world's internationally traded petroleum supplies.) In the US the benchmark is based on West Texas Intermediate (WTI.) "This means that crude oil sales into the US are usually priced in relation to WTI." (source: BBC news analysis)

It was surprising to read one analyst's observation that geopolitical events aren't the strongest influencing factors affecting the cost of oil. For example: Upcoming economies of China and India is expected to raise the demand for oil consumption; the assassination on December 27th, 2007 of Benazi Bhutto brought up the price to $115 per barrel on April 16, 2008.

Apparently, a trader's whim can affect the price of oil when on January 2, 2008," a single trade was made at $100 per barrel in view of the combined effect of violence in Nigeria, Algeria, and Pakistan, the weak US dollar and the threat of cold weather. The trader who paid $100 almost immediately sold the contract for less than $100, and took a loss. Therefore, this one $100 trade for oil remains in question, as some believe this trader might have had other motives for the purchase and subsequent loss." (source: Wikipedia)

Another take on this event by a different analyst was "...financial factors may be at work, such as a hedge fund having to sell a particular oil contract so it does not end up receiving a tanker-load of oil - or a trader deciding it would be fun to be the first to trade oil above $100 a barrel." (source: BBC news analysis)

The future outlook is not rosy for consumers at the gas stations. The chief economist of the International Energy Agency, Fatih Birol, expressed his thoughts in October 2007 that oil prices will remain high for the reason of the booming economies of India and China. In addition the result of a meeting in December 2007 by OPEC members has decided to maintain high "but" stable prices, which would guarantee a high income for oil producing states, but would also prevent a depression of the economies dependent upon oil.

I'm slowly conditioning myself to use my car less and less by taking the Metro, so that when gas prices soar to over $5.00 per gallon I won't be suffering a heart attack.


Note: Perhaps if the Reagan administration didn't cut down the funding in 1981 of the "Biomass Energy and Alcohol Fuels Act" (1977) from $600 million to $460 which eventually shriveled down to nothing then we would be more advanced in the development of the technology (in cars and fuels) that is not reliant on oil.)

-Analyn Revilla

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