A Primer on Supply and Demand of Oil
by Marjolein van der Veen
Which countries are the major consumers of the world’s oil?
The U.S. is the largest oil consuming country, consuming about 25% of the world’s oil (while the next largest consumer, China, consumed about 8.5% of the world’s oil). In 2009, the U.S. consumed about 20.6 million barrels per day (mbd). Next comes China, at about 7.3 mbd, Japan at 5.2 mbd, Russia at 2.9 and Germany at 2.7 mbd (2007 data). In the future, the largest growth of consumption is expected to come from China and India, which will account for 45% of the increase in primary energy demand by 2030.
Which countries are the major suppliers of the world’s oil?
The largest oil producing countries in 2007 were: Saudi Arabia, Russia, U.S., Iran, China, Mexico, Canada, the U.A.E., Venezuela, Norway, Kuwait, Nigeria, the U.K., and Iraq. Some of these oil producing countries are members of the Organization of Petroleum Exporting Countries (OPEC). The 11 OPEC members are: Saudi Arabia, Iran, Iraq, the U.A.E., Kuwait, Qatar, Algeria, Libya, Nigeria, Indonesia, and Venezuela. OPEC will control 51% of total global oil output by 2030.
For maps showing producer and consumer countries:
The biggest oil companies themselves also own sizable holdings of reserves. According to Juhasz, were six of the big oil companies one country, “Big Oil would rank among the top ten most oil-rich nations in the world.” (Juhasz, 2008, p. 131).
How much of its oil does the U.S. need to import, and where does it get it from?
While the U.S. consumes about 20.6 mbd, it produces only about 5.1 mbd (in 2009), and so it has to import about 60% of its oil. In 2007, U.S. oil imports came from Canada (about 20%), Mexico (12.5%), Saudi Arabia* (12.5%), Venezuela (11.7%), Nigeria (9.2%), and then Algeria, Iraq, Angola, Russia, and the U.K. (*In 2008, Saudi Arabia was the second largest source of imported oil to the U.S., overtaking Mexico:
For the latest statistics on oil production, consumption, reserves, and prices:
What determines the price of crude oil?
Before the 1970s, the seven major oil companies (the “Seven Sisters” comprised of Exxon, Mobil, Chevron, Gulf, Texaco, BP, and Shell) had in effect a cartel (and thus oligopolistic control) over the production and price of crude oil. By establishing production quotas, supporting governments friendly to the Big Oil companies, and playing oil producing countries off each other, they maintained considerable control over the price of crude oil. After the formation of OPEC, oil exporting countries obtained greater control over the price of oil by the 1970s, by standing together in their negotiations with the big oil companies, in many cases nationalizing their oil, and setting their own production targets. However, OPEC’s price-setting ability was destroyed by three factors: the decline in demand for oil after the 1970s oil price shocks; the increased production by non-OPEC countries; and the 1983 introduction of the futures market for oil at the New York Mercantile Exchange (Juhasz, 2008, pg. 132). Today, the oil futures market has largely replaced OPEC as the principal determinant of the price of crude oil. Much of this trading on the futures market was deregulated by Congress in 2000 (with the “Enron Loophole” in the Commodity Futures Modernization Act).
Other factors that affect supply and demand factors can influence the price of crude oil on a daily basis, such as: wars or conflicts, hurricanes and other weather events, refinery shutdowns and other production mishaps, etc., and changes in the value of the U.S. dollar.
What caused the run-up in oil prices, which peaked in the summer of 2008?
The price of crude oil climbed from $55 a barrel in 2007, peaking at almost $150 a barrel in July 2008. One of the causes of the run-up in oil prices is often said to be due to the forces of supply and demand, whereby the supply could not keep up with the rise in demand. But speculation and changes in the value of the U.S. dollar also played significant roles.
While some dismiss that speculation had anything to do with the price spike, others such as the economist Thomas Palley, argue otherwise. According to Palley, “the actual behavior of oil prices is consistent with speculation. In June, oil prices leapt by $11 in one day, and in July they fell back by $15 in three days. Such volatility does not fit a fundamentals-driven market.” (see ).
According to Juhasz, author of the book The Tyranny of Oil (2008), “The futures market has replaced OPEC as the principal determinant of the price of crude oil. It is largely unregulated and prone to excessive speculation and manipulation.” ( ).
And according to a 60 Minutes expose, “Last year, 27 barrels of crude were being traded every day on the New York Mercantile Exchange for every one barrel of oil that was actually being consumed in the United States.” (see “Did Speculation Fuel Oil Price Swings?” ). Much of the speculation is done by Wall Street investment banks, like Morgan Stanley and Goldman Sachs. “Over time, the big Wall Street banks were allowed to buy and sell as many oil contracts as they wanted for their clients, circumventing regulations intended to limit speculation. And in 2000, Congress effectively deregulated the futures market, granting exemptions for complicated derivative investments called oil swaps, as well as electronic trading on private exchanges.” ( , or see: 60 Minutes, “The Price of Oil,” (Jan. 11, 2009), 13 Minutes,
Why did oil prices suddenly fallen over the fall of 2008?
According to Michael Klare, oil prices fell over the fall of 2008 mostly due to the fall in global demand, with the global recession: “The contraction in international demand has indeed been stunning. After rising for much of last summer, demand plunged in the early fall by several hundred thousand barrels per day, producing a net decline for 2008 of 50,000 barrels per day. This year, the Department of Energy projects global demand to fall by a far more impressive 450,000 barrels per day -- "the first time in three decades that world consumption would decline in two consecutive years."” (see
Could the fall in oil prices also be due to changes in supply? In June (2008), the Saudis indicated they would increase production, but they were not expecting the significant fall in demand over the fall. In recent months (starting in September) 2008, OPEC has been slashing output, in an attempt to halt the fall in the price of oil, and only in January 2009 did the price of oil start rising again. (See )
However, according to the 60 Minutes program, “The oil bubble began to deflate early last fall when Congress threatened new regulations and federal agencies announced they were beginning major investigations. It finally popped with the bankruptcy of Lehman Brothers and the near collapse of AIG, who were both heavily invested in the oil markets. With hedge funds and investment houses facing margin calls, the speculators headed for the exits.” ( ) (Note: banks like JP Morgan Chase and Goldman Sachs are starting to look more and more like oil companies as they have purchased pipelines, storage fields, and their own oil fields. See Juhasz 2008, pg. 162.)
There is also the role of the value of the U.S. dollar. Oil futures are priced in U.S. dollars. As the dollar depreciates in value, the price of oil rises, and vice versa. The value of the U.S. dollar had been falling through the spring and summer of 2008, and then started rising again in July 2008. See:
(Note however, that from April 2007 to April 2008, the value of the dollar fell by about 10%, whereas oil prices rose by about 85%, suggesting factors other than the value of the dollar are also at play. See Juhasz, 2008, pg. 129.)
What determines the price of gasoline?
The price of gasoline is principally determined by the price of crude oil, but other determinants include the costs of refining and marketing of gasoline, as well as taxes. For every dollar spent on gasoline in 2007, about 52 cents went for the crude oil, 21 cents for the refining, 11 cents for the marketing, and 16 cents for taxes (Juhasz 2008, pg. 174).
Mergers and consolidation among refineries and gas stations have meant that these are largely controlled by the six largest oil companies: ExxonMobil, Chevron, ConocoPhillips, BP, Shell, and Valero (Juhasz 2008, pg. 171). By restricting the supply and availability of gasoline, they are more able to control its price. According to Juhasz, there has not been a single new refinery built in the U.S. since 1976 (2008, pg. 186). The refining and marketing of gasoline have become major profit areas for the big oil companies.
In the future, from where will the U.S. most likely get its oil?
Oil is a non-renewable fossil fuel, and the supplies of oil in many countries are dwindling. Many countries are reaching their peak, and are no longer able to produce as much as they consume. According to the latest 2009 report by the Energy Information Administration, the era of cheap and plentiful oil is drawing to a close (see: Klare’s
One region that has traditionally had a lot of the world’s oil reserves is the Middle East/Persian Gulf. The Persian Gulf countries hold 2/3 of global oil reserves, and the 13 members of the OPEC account for three-quarters of the world’s proven oil reserves. Indeed, the countries with the largest amounts of known oil reserves are: Saudi Arabia, Iraq, and Iran. The oil in this region is of good quality, and easily extractable at low cost. Elsewhere, for example where reserves are underwater on a deep-sea shelf, oil is very costly to extract.
However, the information on the levels of oil reserves tends to be unreliable. For instance, OPEC takes into account a country’s reserves when fixing production quotas, so the more oil a country has, the more they are allowed to sell, producing an incentive to inflate their stated reserves. Also, oil reserves can sometimes be used as collateral for loans. And in some countries, the figures for oil reserves are state secrets. Hence, the unreliability of the reserve data.
Most of the oil (95%) is conventional oil. However, the rest is unconventional oil, consisting of tar sands, shale oil, and oil not recoverable with today’s technology. If this unconventional oil is included, countries like Canada and Russia are considered to have significant sources of reserves.
What are the hidden costs of oil?
One of the hidden costs of oil is the amount spent by the U.S. military to defend access to oil. According to a report by the National Priorities Project, the U.S. is spending between $97 - $215 billion per year on military action to defend access to oil and natural gas reserves around the world. That is money that could have been spent developing renewable energy technology and other methods to wean ourselves off oil (see:
Should the U.S. be trying to increase supply by developing new sources of oil (such as tar sands in Canada, shale oil in the Midwestern states, or off-shore drilling in the U.S.)? Or should the U.S. pursue conservation and reduce its demand?
Tar Sands and Shale oil:
While the estimated amounts of tar sands and shale oil are significant, they are very expensive to turn into oil. Digging up and processing tar sands costs between $9 and $13, while Saudi Arabia only spends about $2 for a barrel of oil. (see: ). They are also far worse for the environment. Tar sands and shale oil is more greenhouse gas producing, compared to conventional oil production (almost three times more, in the case of tar sands). Getting to the tar sands often entails chopping down the boreal forest, and the energy used to extract and process the tar sands, all contribute to climate change. Both the production and refining of tar sands and shale oil also contributes to water, air and land pollution.
Off-shore Drilling:
It would take about a decade until the oil from off-shore drilling is out of the ground, and it would be of such little amount that it won’t significantly affect prices. According to the EIA, about 86 billion barrels may lie offshore, and of that, 18 billion are subject to the moratorium against offshore drilling (i.e. about 2.5 years worth of oil)… Thus, offshore drilling would increase production by only 0.2%, and only more than a decade down the road. (See:
These projects become feasible and profitable when the oil prices are high, but less so when the oil prices fall (especially when they fall below the cost of production). And here too, the cost to the environment (as well as the fishing and tourism industries) are huge. Drilling in water depths greater than 50 feet releases methane, a potent greenhouse gas.
Conservation and demand reduction:
Europe has been relatively successful with conservation. Europe’s gas consumption remains at 1970 levels: In part, gasoline in Europe is taxed heavily, and the high price of gasoline deters consumption. It has also provided tax revenues for investment in public transportation and other infrastructure to reduce the demand for gasoline. For data comparing gas prices around the world, see:
Sources -- and for more information:
Websites:
For the 1-year trend in oil prices:
For the 1-year trend in the value of the U.S. dollar:
Books:
Antonia Juhasz, The Tyranny of Oil (2008)
Michael Klare, Resource Wars (2001), and Blood and Oil (2004), and Rising Powers, Shrinking Planet: The New Geopolitics of Energy (2008)
Richard Heinberg, The Party’s Over (2003), and Powerdown (2004).
James Howard Kunstler, The Long Emergency (2005).
Jeremy Leggett, Half Gone (2006), and The Empty Tank (2005)
Articles:
Roger Lowenstein, “What’s Really Wrong With the Price of Oil,” New York Times, Oct. 17, 2008,
Michael Klare, “The Problem of Cheap Oil: Be Careful What You Wish For,” (Jan. 8, 2009),
Antonia Juhasz, “Big Oil’s Last Stand,” (Oct. 22, 2008)
60 Minutes, “Did Speculation Fuel Oil Price Swings?,” (Jan. 11, 2009),
Palley, “Beating the Oil Barrons,”
Palley, “Speculators at the Pump,”
“The oil crunch is coming,” Guardian Weekly, (Nov. 21, 2008, pg. 18).
Films:
Blood and Oil
A Crude Awakening: The oil crash
The End of Suburbia
Who Stole the Electric Car?
60 Minutes, “The Price of Oil,” (Jan. 11, 2009), 13 Minutes,
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