Oil

What it is

Petroleum, a Latin word that combines “petrus” (rock) and “oleum” (oil), is the main power source used worldwide. It is a natural, flammable, and oily liquid, that is less dense than water and has a characteristic scent. It is a complex mixture of hydrocarbons, or organic substances formed solely of hydrogen and carbon. The hydrocarbons are predominantly aliphatic, alicyclic, and aromatic. Petroleum can also contain small amounts of nitrogen, oxygen, and sulfur and metal ions compounds, especially nickel and vanadium. The color may vary, from colorless to brown or black, including green and light brown.

Origin

According to the most widely accepted theory petroleum was formed through the decomposition of organic matter, predominantly algae, caused by low oxygenation and by the activity of bacteria that accumulated on the bottom of seas and lakes. After millions of years, the weight of the sediments that deposited over them caused the compaction and heating that transformed it into petroleum. The minimum temperature needed for this process is 49°C,and the maximum is 177°C. These temperatures occur in depths of 1,500 to 6,400 meters, respectively. If the temperature inside the earth is greater than 177°C, the organic matter transforms into gas or graphite. As its formation is extremely slow, petroleum is considered a non-renewable resource.   

Types of Petroleum

Petroleum can be found in nature with different chemical and physical characteristics, which impact its use and price. Petroleum is classified as light, medium, and heavy, depending on its characteristics. The terms “light” and “heavy” refer to the consistency of the oil, which can be more or less concentrated. Lighter oils can be used in the fabrication of higher quality products, such as the naphtha used in the petrochemical industry, as well as in gasoline and gas, and, therefore, dictate higher prices. The lighter the oil, the higher the price. More viscous petroleum is used in cheaper products, such as fuel oil, because refining it for nobler uses is more expensive. Oil’s viscosity is measured according to the API scale, created by the American Petroleum Institute (API). The higher the API, the better the petroleum quality.

Example of heavy oil

The global reference in quality oil is the Brent type, traded in London, Singapore, and Dubai, and the WTI, traded in New York. Both types are light and are used as a reference to calculate the price of petroleum in different reserves. Heavier oils than the Brent and WTI are priced at a discount, while lighter ones have goodwill.

It is important to highlight that Brent and WTI petroleum are crude oils that still haven’t gone through refinement processes. The former gets its name because it is produced in the North Sea, where it is extracted from the Brent and Ninian petroleum exploration systems. Light petroleum referes to  light oil which has no impurities since it has already pass through the refinement system. Light oil is used to produce gasoline, and, therefore, is the most valuable type of oil.

Other types of petroleum include oils extracted from sands containing bitumen and naphthenic petroleum, which contains a high level of naphthenic hydrocarbons. Another is paraffinic petroleum, which has a high concentration of paraffinic hydrocarbons. And finally,  aromatic petroleum, with a high concentration of aromatic hydrocarbons.  

Transportation

From the well, the petroleum is transported to a refinery or to another location, such as a port where it is loaded into a ship. In to transport it, pipes with diameters between 5 cm and 1.22 m, called oil pipelines, are used. For long distance transportation, such as over seas, the best option is to use large oil tankers.

Refinement

Crude oil, directly from the well, has no direct application. In order to be used, it must be fractioned into its different components, a process known as refinement or fractional distillation. The process starts with the elimination of the crude oil’s mineral salts. Then the oil is heated to 320°C in direct-fire furnaces. Then the oil is moved to fractionating units  where it goes through a three stage process producing: fuels, solvents, special gasoline, and several others. Natural gas, on the other hand, is ready for use following a relatively simple processing procedure.

Uses

About 90% of the petroleum consumed is applied to the generation of thermoelectric energy or for combustion purposes, for example in transportation or industrial furnaces. Products that supply industries are extracted from the remaining  10%. Approximately  60% of  raw materials in industries worldwide are petroleum based. The ensemble of petroleum-based products is endless, and, in addition to fuels, one of the most important is naphtha, the raw material that is the base for all the chain of production of plastic resins.

Petroleum-Based Products

Fuels Petrochemical
  • LP Gas
  • Benzene, Gasoline
  • Kerosene
  • Diesel
  • Fuel Oil
  • Lubricating oils and greases
  • Heavy petroleum or fuel oil
  • Basic petrochemicals: ethane, propene, benzene, and toluene
  • Petrochemical intermediates: cyclohexane and ammonium sulfate
  • Ethylene/ethane: PET and PVC
  • Plastic resins: toys, adhesives, water tanks, serum vials, caps and containers, footwear, tires, paints, plastic film, etc.

Historical Prices

The demand for petroleum is influenced by factors such as economic and income growth, industrialization, and the development of alternative energy sources, all of which have a fairly predictable behavior. Reserves are abundant enough to meet this demand, but it is the short-term factors impact the pricing dynamic.

During the last four decades, three sudden and lasting changes occurred to the price of oil, known as “oil price shocks”. The first was caused by the 1973 Arab Oil Embargo, with the formation of the Organization of the Petroleum Exporting Countries (OPEC). The second shock, which practically tripled the prices, was caused primarily by the 1980 Iran–Iraq War. The third oil price shock occurred between 1985 and 1986, when Saudi Arabia adopted a fixed-margin system for refineries, causing a steep decline in prices.  

Other substantial oscillations in oil price occurred in 1990, when Kuwait invaded Iraq; in 1998, due to the concomitant financial crisis in Asia and resumption of exports in Iraq; and in 1999, due to production cuts by OPEC. In the following years, there was a long period of price increases, which reached its peak in 2008, due to OPEC’s reduction in idle capacity. After that year’s financial crisis, there was a reduction in demand and in oil prices, which led OPEC to reduce production in order to stabilize the prices. In 2013, oil prices stabilized between US$100 and US$112 per barrel, and these prices were maintained until September 2014, when crude oil prices became extremely volatile, and the Brent reached prices bellow US$50 in January 2015.     

The main contributing factors to the present situation are: (i) the development and significant increase in shale gas in the United States, which has been reducing its petroleum importation since 1995 and becoming a net exporter; (ii) a decrease in global demand, due to the low growth of developed and developing countries, including China; (iii) OPEC’s unprecedented decision of not reducing production, led by Saudi Arabia’s strategy of recovering market share and “testing” the ceiling of production costs that would prevent and/or decrease the exploration and production of shale, oil sands, and deep-water offshore operations; (iv) strengthening of the dollar compared to other currencies in the international market. 

Last updated on 2015-04-29T18:33:45

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