Why Oil Price is going up?

July 5th, 2009 Posted in General Finance

Burning crude oil itself is of limited use.  To extract the maximum value from crude, it first needs to be refined into petroleum products such as gasoline, or petrol.

However, there are many other products that can be obtained when a barrel of crude oil is refined.  These include liquefied petroleum gas (LPG), naphtha, kerosene, gas oil and fuel oil.  

Other useful products which are not fuels can also be manufactured by refining crude oil, such as lubricants and asphalt (used in paving roads). A range of sub-items like perfumes and insecticides are also ultimately derived from crude oil.

Furthermore, several of the products listed above which are derived from crude oil, such as naphtha, gasoil, LPG and ethane, can themselves be used as inputs or feedstocks in the production of petrochemicals.

There are more than 4,000 different petrochemical products, but those which are considered as basic products include ethylene, propylene, butadiene, benzene, ammonia and methanol. The main groups of petrochemical end-products are plastics, synthetic fibres, synthetic rubbers, detergents and chemical fertilisers.

Considering the vast number of products that are derived from it, crude oil is a very versatile substance. Life as we know it today would be extremely difficult without crude oil and its by-products.

Is the economy really improving, therefore driving up consumption of oil? Tracking the share market will not give you the real answer. In fact, we know the global economy has yet to recover.

U.S. Dollar Drives Oil

Oil is priced in U.S. dollars. According to OPEC, the relationship between oil prices and the U.S. dollar is almost mechanical. When the U.S. dollar falls in value, oil prices have to go up in U.S. dollar terms to stay constant in euro terms. Oil producers receive their oil revenues in U.S. dollars and need to be compensated for the fluctuations of the dollar.

When oil price hit too high, consumers have to spend more for gasoline, petrol and etc despite that their income didn’t go up. That’s a high price to pay.

~Aaron Loh

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One Response to “Why Oil Price is going up?”

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