Black Gold: Supply and Demand at Work

May 7, 2008

Crude oil was at an all-time high of $122.00 US per barrel this week. There are two simple reasons for this, supply and demand. This article is not an argument for or against oil company profits, nor is it an environmental rant. It is an attempt to explain the reasons in laymen’s terms. Firstly, I have been employed in the oil and gas business for over 30 years, so although I don’t claim to be an expert, I have a deep understanding of the industry.

1. The Organization of Petroleum Exporting Countries (OPEC) is the source of more than a third of the world’s crude oil supply. They reduced output in late 2006 to stem a fall in prices. They refuse to increase production because they say there is enough crude in the market.

2. Refinery problems in the United States have contributed. Unexpected outages have drained inventories. The United States is the world’s top gasoline guzzler, so this is a major issue.

3. Nigeria, the world’s eighth largest exporter of crude, is troubled with militant attacks on its oil industry. It has been forced to cut exports as a result. At the present time about one million barrels of oil per day (bpd) are shut-in because of militant attacks and sabotage.

4. It’s getter harder and more expensive every year to find new sources of oil. Environmental regulations and exploration costs make it more difficult to develop and produce new sources. This is not a knock on environmental concerns, just a fact of life.

1. Top consumers of crude oil such as the United States and China, are the main drivers of demand. Rapidly developing countries such as India are also contributing.

2. Demand for crude oil is at an all-time high and growing every year.

Things to Note:
– North Americans are addicted to our gas guzzling cars, SUVs, and trucks.
– Gasoline and jet fuels are derived from crude oil, as are many other products.
– Most consumer goods and foodstuffs are transported to market today by the trucking industry. Increased fuel costs to truckers logically trickle down to consumers of those goods.

Top Ten Oil Producing Nations
(in order of largest amount produced)
Saudi Arabia
United Arab Emirates (UAE)

Of these ten Iran and Venezuela are downright unfriendly nations towards the West. Two more, Saudi Arabia and UAE, are in a very unstable part of the world. Russia and China are also large consumers of crude oil, so exports may decrease over the coming years. Most of Norway’s production goes to European markets. That leaves Mexico, Canada, and domestic US crude production as reliable suppliers to the North American market. The United States uses far more crude oil than is produces so is dependent on foreign oil. 

Author’s Disclaimer:
I am employed in the petroleum industry, but remember I also like to drive, travel, and heat my home. Energy prices affect me too.

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