Better Understand Crude Oil Prices

By Sara Stone
Updated February 21, 2016
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Better Understand Crude Oil PricesThe further we move into the future, the more oil seems to play a significant part in defining the global economy. It's strange to think that in the beginning days of oil, finding the substance during a drill was considered annoying, based on the fact that most people were drilling for salt and water. It wasn't until 1857 that Romania drilled the very first commercial oil well. Only two years later, the petroleum industry of the United States emerged with the drilling for oil in Titusville, PA.

Most of the early oil demand was to fuel oil lamps and kerosene, and it wasn't until 1901 that a well capable of mass production was drilled in Texas, that can produce as much as 10,000 barrels of oil each day, which was more than all of the other wells for oil in the United States combined. Soon after this changed in the 1900s, oil began to define the modern era, and it's still used today in fuels across the globe. However, people often struggle when it comes to figuring out what contributes to crude oil prices.

Figuring Out Crude Oil Prices

It's easy to see that crude oil is valuable in today's economy, but many people struggle to understand its true value. The first thing to understand when determining crude oil prices, is that there are three different types of crude oil, and these are known as west Texas intermediate, Dubai crude, and Brent. Each oil differs on how hard it is to refine and the amount of sulfur it contains. Usually, Brent is used as the standard while other oil prices are decided relative to its cost.

The various types of crude oil are traded within a specific market known as the "Futures Exchange". In the United States, this exchange is typically located in New York, where purchasers and producers come together to place orders for a future date. When approaching the concept of value, both the sellers and buyers will have a price in mind depending on their needs and urgency, and this will affect their willingness to agree to a certain price. What's more, depending on the situations of supply and demand at that time, the price may vary.

Perhaps the best way to describe crude oil prices is that the traders involved in the market collectively guess on the total supply and demand of oil in the future.

What Alters Estimates

As with any other commodity, certain things can alter the estimate used to determine crude oil prices. For example, news on a new supply of oil could mean that prices will fall substantially, as there is more oil available on the market. On the other hand, if alternative energy sources become a more appropriate way to manage energy, such as solar or fuel cells, oil traders could quickly panic and dump all of their oil as fast as they can.

Finally, economic growth can also have an impact on oil prices. For instance, if one country suddenly shows a change in economic growth, the market traders would need to revise their projections for consumption in those areas.





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