What is Crude Oil?

Crude oil, a liquid treasure hidden beneath the Earth's surface, is a complex concoction of hydrocarbons formed over millions of years from the remnants of ancient marine life. To define crude in crude oil, it refers to the raw, unrefined state of the oil as it is extracted from the ground. As a primary source of energy, crude oil has a wide range of uses, providing the energy necessary for our daily lives. Its versatility extends beyond the fuel sector, with crude oil being the cornerstone for the production of various essential products. From gasoline and diesel to lubricants, plastics, and synthetic materials, the impact of crude oil resonates across multiple facets of our global economy.

Formation and Origin of Crude Oil

The formation of crude oil occurs over millions of years and involves several steps.

Organic Material Accumulation: The process begins with the accumulation of organic material, primarily the remains of marine plants and animals, on the ocean floor. This material includes plankton, algae, and other microscopic organisms.

Sedimentation: Over time, layers of sediment, such as mud and silt, cover the organic material. As more layers accumulate, the organic material becomes buried and isolated from the influence of oxygen, preventing its decay.

Compaction and Heat: The layers of sediment continue to accumulate, applying increasing pressure on the organic material beneath. The Earth's heat, generated from its core, also begins to affect the buried layers. This combination of pressure and heat initiates the transformation of organic material into hydrocarbons.

Thermal Decomposition: The organic material undergoes thermal decomposition, breaking down into simpler hydrocarbons. This process is crucial for the formation of crude oil. Hydrocarbons are compounds made up of carbon and hydrogen atoms.

Migration: The newly formed hydrocarbons, now in a liquid or semi-liquid state, start to migrate through porous rocks in search of reservoirs or traps where they can accumulate. This migration can occur over long distances within the Earth's crust.

Accumulation in Reservoirs: When migrating hydrocarbons encounter impermeable rocks or traps, they accumulate, forming reservoirs of crude oil. These reservoirs are often found in underground rock formations.

Formation of Oil Wells: Once a reservoir of oil or gas is discovered, an oil well is drilled to access the hydrocarbons. The well is typically drilled vertically into the reservoir, and sometimes horizontally, to maximize production.Oil wells can be found both on land and in the ocean, but drilling oil wells in the ocean can pose additional risks due to the marine environment. Offshore drilling operations are subject to strict regulations and safety measures to protect the marine ecosystem.

Composition of Crude Oil

Crude oil is a complex mixture primarily comprised of hydrocarbons—organic compounds consisting of carbon and hydrogen atoms. Beyond hydrocarbons, crude oil may contain impurities such as sulfur, nitrogen, oxygen, and trace metals. The presence of these elements influences the oil's characteristics and poses challenges during refining.

Hydrocarbon Diversity: The hydrocarbons in crude oil come in diverse forms, ranging from simple to highly complex structures. They include alkanes (saturated hydrocarbons), alkenes (unsaturated hydrocarbons with double bonds), and alkynes (unsaturated hydrocarbons with triple bonds). The combination of these hydrocarbons results in a spectrum of molecular structures within crude oil.

Variability Among Types and Grades: The composition of crude oil is not uniform; it varies significantly among different types and grades. Factors influencing this diversity include the oil's source, geological conditions, and the maturation processes it undergoes. Light crude oil, for instance, contains a higher proportion of smaller, simpler hydrocarbon molecules, making it preferable for certain refining processes. In contrast, heavy crude oil consists of larger, more complex hydrocarbons, requiring more sophisticated refining techniques.

Main Aspects of Oil Usage

Oil usage encompasses a wide range of applications across various sectors, including transportation, industry, agriculture, and residential areas.

Transportation: Oil is primarily used as a fuel for vehicles, including cars, trucks, ships, and airplanes. It provides the energy needed for propulsion and is crucial for the functioning of modern transportation systems.

Industrial Processes: Oil is used as a fuel in industrial processes such as manufacturing, heating, and powering machinery. It is also a key ingredient in the production of chemicals, plastics, and pharmaceuticals.

Electricity Generation: Oil is sometimes used to generate electricity in areas where other sources of energy are limited. However, its use for this purpose has declined in many parts of the world due to environmental concerns.

Heating: Oil is used as a heating fuel in residential, commercial, and industrial buildings. It is commonly used in furnaces and boilers to provide warmth during colder months.

Agriculture: Oil is used in agriculture as a fuel for tractors and other farm equipment. It is also a key ingredient in pesticides, herbicides, and fertilizers.

Other Uses: Oil is used in various other applications, such as in the production of asphalt for road construction, in lubricants for machinery, and in the manufacture of cosmetics and pharmaceuticals.

Global Reserves and Production of Crude Oil

Oil Barrel Quantity

Crude oil isn't evenly distributed across the globe. The world holds around 1.56 trillion barrels in proven crude oil reserves as of 2022. This excludes oil sands. Since 1960, there has been a marked increase in oil reserves, especially in the decade between 1960 and 1970.

Where Does Oil Come from in the World？Distribution of Reserves

• OPEC Dominance: The Organization of the Petroleum Exporting Countries (OPEC) holds 1,243.52 billion barrels, a staggering 79.5% of the world's proven oil reserves. Venezuela, Saudi Arabia, and IR lran sit atop the individual leaderboards.

• Middle Eastern Treasure Trove: The Middle East boasts the lion's share of OPEC reserves, accounting for 67.2% of the organization's total. Saudi Arabia, IR lran, Iraq, and Kuwait are key players in this region.

While OPEC reigns supreme, other significant reserves exist in North America (e.g., US shale oil), Russia, and select African nations.

Production Powerhouses

• The US Takes the Crown: Despite not having the largest reserves, the United States currently leads the pack in crude oil production, followed by Saudi Arabia and Russia.

• OPEC's Continued Influence: Despite not being the sole production leader, OPEC members collectively contribute over 40% of global oil production, solidifying their significant role in the energy market.

New players are emerging, with Brazil and Iraq experiencing significant production growth in recent years. This diversification could reshape the global oil production landscape in the future.

Products Refined from Crude Oil

Process of Refining

Crude oil, in its raw form, undergoes a sophisticated refining process to unlock its full potential and yield a diverse array of essential products.

Step 1: Distillation

It begins with distillation, where crude oil is heated in massive distillation towers. As the temperature rises, different hydrocarbons vaporize at distinct temperatures, allowing for the separation of crude oil into various components, such as gasoline, diesel, kerosene, and heavy fuel oils.

Step 2: Cracking

Cracking involves breaking down larger hydrocarbons into smaller, more valuable ones. This process enhances the production of high-demand products like gasoline. Techniques like fluid catalytic cracking (FCC) and hydrocracking are employed to achieve optimal results.

Step 3: Reforming

Reforming is a crucial step for enhancing the octane rating of gasoline. It involves rearranging the molecular structure of hydrocarbons to create more desirable compounds, improving the performance and efficiency of the final gasoline product.

Step 4: Treatment

Treatment processes, such as hydrodesulfurization, remove impurities like sulfur from the refined products, ensuring compliance with environmental regulations and enhancing the quality of the end products.

Step 5: Blending

Blending is the art of combining various refined components in precise proportions to create different grades of gasoline, diesel, and other products. This step allows refineries to tailor their output to meet specific market demands.

Major Product Categories

Common products derived from the refining process include the following.

• Gasoline: The quintessential fuel for internal combustion engines, used in automobiles worldwide.

• Diesel: A vital fuel for transportation and industrial applications, renowned for its energy density and efficiency.

• Kerosene: Used as jet fuel for aviation and as a component in heating oils.

• Heavy Fuel Oils: Employed in industrial processes, power generation, and marine engines.

• Petrochemicals: Crude oil serves as the raw material for a vast array of petrochemicals, essential in the production of plastics, synthetic materials, lubricants, and various everyday products.

• Lubricants: Derived from refined crude oil, lubricants play a critical role in reducing friction and enhancing the efficiency of machinery.

• Asphalt: Used in road construction and maintenance, asphalt is a byproduct of the refining process.

• Gas: A product derived from the refining process of crude oil, used in various industrial applications and as a fuel source. Natural gas and gas are particularly easy to scramble, though they are two entirely different fuels. Natural gas is a gaseous fossil fuel composed mainly of methane, usually found alongside crude oil deposits.

Price of Crude Oil

Crude oil is one of the most actively traded commodities in the global financial markets. The crude oil market is a vital component of the energy sector, and its price are influenced by various factors, including geopolitical events, economic indicators, supply and demand dynamics, and technological advancements.

Benchmark Crudes

Benchmark crudes are specific types of crude oil that serve as reference points or standards in the pricing and trading of other crude oils. WTI and Brent are two typical Benchmark crudes.

West Texas Intermediate (WTI)

WTI is a light, sweet crude oil, a high-quality crude oil that is primarily produced in the United States. The New York Mercantile Exchange (NYMEX) is a major platform for trading WTI futures contracts. WTI serves as a benchmark for crude oil prices in North America.

The price of WTI crude oil has shown a somewhat volatile trend in recent times, characterized by both periods of growth and decline.

• Current Price: As of February 6, 2024, WTI crude oil sits at $75.40 per barrel.

• Month-to-Date: Compared to the beginning of February, the price is down by approximately 2.1%.

• Past Year: In 2023, WTI prices fluctuated significantly, reaching a high of $95.03 in June and a low of $63.64 in December.

• Past 5 Years: Over the past five years, the price has exhibited a general upward trend, increasing by roughly 32%.

Brent Crude

Brent Crude is another major benchmark for global oil prices. It is sourced from several oil fields in the North Sea. Brent is also a light, sweet crude oil, but it typically has a slightly higher sulfur content compared to WTI. Brent Crude is traded on the Intercontinental Exchange (ICE) in London and is widely used as a reference for oil prices globally.

The price of Brent crude oil has exhibited a complex and dynamic trend in recent times, marked by periods of both growth and decline.

• Current Price: As of February 19, 2024, Brent oil sits at $77.05 per barrel.

• Month-to-Date: Compared to the beginning of February, the price is currently up by approximately 0.8%.

• Past Year: In 2023, Brent prices fluctuated significantly, reaching a high of $96.84 in June and a low of $67.53 in December.

• Past 5 Years: Over the past five years, the price has exhibited a general upward trend, increasing by roughly 33%.

Overall Situation of Crude Oil's Price

2023 peak: Early 2023 saw prices surging due to the Russia-Ukraine war disrupting supplies and global post-pandemic recovery boosting demand. Brent crude reached almost $140 per barrel, while WTI peaked near $130.

Moderation: However, concerns about a global economic slowdown and increased production from the US and OPEC+ led to a price slide. Currently, both Brent and WTI hover around $75-$80 per barrel.

Why are Oil Prices So High？

Oil prices have been fluctuating throughout 2023 and currently sit around $75-$80 per barrel, which is lower than the peaks reached earlier in the year but still higher than pre-pandemic levels. Here are some key factors contributing to these elevated prices.

• Reduced Supply

Geopolitical Tensions: The ongoing war in Ukraine has disrupted Russian oil exports, a major source of global supply. Additionally, sanctions imposed on Russia and voluntary boycotts have further limited available oil.

• OPEC+ Production Cuts

The Organization of the Petroleum Exporting Countries (OPEC) and its allies (OPEC+) have implemented production cuts to support prices, leading to tighter supply despite rising demand.

• Global Economic Recovery

The post-pandemic economic rebound has boosted energy demand, particularly in China and the United States.

• Shifting Travel Patterns

With increased travel and fewer restrictions, demand for gasoline and jet fuel has risen.

Popular Oil Shares

Oil shares refer to stocks or shares of companies involved in the oil and gas industry. These companies can be engaged in various aspects of the oil and gas sector, including exploration, production, refining, and distribution of oil and gas products. Investing in oil shares allows investors to participate in the performance of the oil and gas industry, which is influenced by factors such as oil prices, geopolitical events, and global energy demand. Here we introduce five popular categories of oil shares to you.

Supermajors

ExxonMobil (XOM): One of the largest oil and gas companies in the world, with a strong track record of profitability and dividends.

Chevron (CVX): Another major integrated oil and gas company, with a diversified portfolio of upstream, midstream, and downstream assets.

Shell (SHEL): A global leader in oil and gas production, refining, and marketing, with a strong presence in renewable energy.

BP (BP): A British multinational oil and gas company, with a focus on clean energy transition.

TotalEnergies (TTE): A French multinational oil and gas company, with a growing presence in renewable energy.

National Oil Companies (NOCs)

Saudi Aramco (2222): The world's largest oil producer by volume, with a strong financial position and a track record of growth.

Kuwait Petroleum Corporation (KPC): A state-owned oil company with a significant global presence.

China National Petroleum Corporation (CNPC): The largest oil and gas producer in China, with a diversified portfolio of assets.

Independent Oil and Gas Companies (E&Ps)

ConocoPhillips (COP): A large, independent E&P company with a focus on exploration and production in North America.

Devon Energy (DVN): A leading U.S. independent oil producer, with a focus on the Permian Basin.

Eni (ENI): An Italian multinational oil and gas company, with a strong presence in Africa and the Middle East.

Equinor (EQNR): A Norwegian multinational energy company, with a focus on clean energy transition.

Oilfield Services Companies

Schlumberger (SLB): The world's largest oilfield services company, providing a wide range of services to the oil and gas industry.

Halliburton (HAL): Another major oilfield services company, with a focus on drilling and completions.

Baker Hughes (BKR): A leading provider of oilfield services and technologies, with a focus on digitalization.

Oil and Gas ETFs

SPDR S&P Oil & Gas Exploration & Production ETF (XOP): Tracks the performance of U.S. oil and gas exploration and production companies.

Energy Select Sector SPDR Fund (XLE): Tracks the performance of a basket of large-cap energy companies, including oil and gas companies.

Impacts of Crude Oil

Economic Impacts

Crude oil, the lifeblood of modern economies, carries significant economic consequences, both positive and negative.

• Positive Impacts

Energy Production: Crude oil is a primary source of energy for various purposes, including electricity generation, heating, and transportation. Its availability and relatively high energy density make it a crucial fuel for powering economies, industries, and households, ensuring energy security and enabling economic growth.

Global Trade Engine: Oil fuels international trade, powering ships, planes, and vehicles that transport goods worldwide. This facilitates economic activity and connects markets, generating substantial revenue for the countries involved.

Industrial Backbone: Oil serves as a vital raw material for numerous industries like plastics, pharmaceuticals, fertilizers, and energy generation. It provides essential materials and fuels modern economies, creating jobs and contributing to GDP.

Government Revenue: Exporting oil is a major source of income for many countries, contributing significantly to government budgets. This allows for funding public services, infrastructure development, and social programs.

Job Creation: The oil and gas industry directly employs millions globally, while indirectly supporting numerous jobs in related sectors like transportation, engineering, and construction.

• Negative Impacts

Price Volatility: The price of oil is notoriously volatile, influenced by geopolitical events, supply and demand fluctuations, and speculation. This creates uncertainty and can negatively impact economies when prices spike, increasing production costs, transportation expenses, and inflation.

Resource Curse: Some oil-rich countries fall victim to the “resource curse,” where dependence on oil hinders economic diversification and development. Overreliance on a single resource can lead to neglect of other sectors and lack of investment in long-term economic growth.

Geopolitical Tensions: Control over oil reserves and trade routes can lead to geopolitical tensions and conflicts between nations, destabilizing regions and affecting global economic stability.

Environmental Impacts

Crude oil, while serving as a vital energy source, undeniably casts a long shadow on the environment.

• Greenhouse Gas Emissions

Burning oil releases carbon dioxide, a primary greenhouse gas, contributing significantly to climate change and global warming. This disrupts weather patterns, increases sea levels, and intensifies extreme weather events. Extraction and transportation activities also release methane, another potent greenhouse gas, further amplifying the problem.

• Pollution

Air pollution: Oil extraction, refining, and burning emit pollutants like nitrogen oxides, sulfur oxides, and particulate matter, causing respiratory problems, acid rain, and smog.

Water pollution: Oil spills and leaks contaminate water bodies, harming marine life and ecosystems. Additionally, wastewater from refineries can pollute rivers and groundwater.

Soil contamination: Spills and leaks can contaminate soil, impacting agricultural productivity and posing health risks.

• Biodiversity Loss

Habitat destruction: Oil exploration and development can fragment habitats, disrupt wildlife migration patterns, and contribute to deforestation, pushing some species towards extinction.

Oil spills: Directly harm marine life, killing animals and affecting food chains.

Challenges and Future Trends

The crude oil industry is facing a multitude of challenges and opportunities as it navigates a complex and evolving landscape.

Challenges

• Resource Depletion: Crude oil is unrenewable. Finite oil reserves present a long-term challenge, raising concerns about peak oil and potential supply disruptions.

• Geopolitical Instability: Oil-producing regions are often susceptible to political unrest and conflicts, which can disrupt production and drive price volatility.

• Climate Change: Growing environmental concerns and stricter regulations pressure the industry to reduce its carbon footprint and adapt to climate change impacts.

Trends

• Technological Advancements: Innovations in exploration, extraction, and refining technologies aim to improve efficiency, minimize environmental impact, and unlock new resources.

• Renewable Energy Rise: The rapid growth of renewable energy sources like solar and wind power is challenging oil's dominance and forcing industry adaptation.

Conclusion

Crude oil, a key driver of modern civilization, brings both benefits and drawbacks like emissions, environmental damage, and conflicts. Its future is pivotal, with technological advances offering cleaner extraction, while renewable energy challenges its dominance. Balancing crude oil's benefits and drawbacks requires a comprehensive and objective approach.