Crude oil: History

4.1

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As of now, you’ve only been briefly introduced to the commodities market. Throughout this entire module, however, we’ll be focusing completely on commodity trading and will be taking an in-depth look at some of the other commodities as well.

If there’s one commodity that’s capable of impacting multiple sectors at once, then that’s definitely ‘crude oil.’ Considering the fact that the entire world currently runs on fossil fuels, crude oil is as valuable as it can get. As a matter of fact, crude oil is so valuable that it is sometimes even referred to as ‘black gold’ or even ‘liquid gold.’

Looking back, crude oil history is fascinating and exciting; and this is exactly what we will be looking into in this chapter.

What is crude oil: An introduction

What is crude oil? Let’s start there. Crude oil is a yellowish black liquid that is found under the earth’s crust. This liquid consists of hydrocarbons and other organic compounds. Crude oil, in its unrefined form, is sticky and is completely unusable, making the refinement process a necessity in order to be able to use it.

Perhaps you recall from your high school science, that when crude oil undergoes a refinement process, it separates into multiple petrochemical products, which are then used as fuels and for lubrication. Petrol, diesel, kerosene, and lubricating oil are a few of the by-products of the crude oil refinement process. That sounds like an extensive range of oft-used products, isn’t it? Without crude oil, the entire world as we know it would no doubt come to standstill. It’s no exaggeration to say then, that crude oil keeps the world going.

Crude oil history

While it may seem that the discovery of crude oil is exclusive to modern civilization, it’s quite far from the truth. Many ancient civilizations relied on oil as a resource. Head back to 3,000 B.C. and take the ancient people of the Middle East, for instance. Crude oil, which is found inside the earth, often bubbled to the surface. And the Babylonians were among the first few ancient civilizations to use this oil for their varying requirements. They used the oil as mortar in construction activities, and as a waterproof coating for their boats.

Fast forward to the 1850s, which is when the modern oil industry was born. The industrial revolution is what led to the eventual discovery of crude oil around this time. Emerging technology helped scientists perfect the art of refining ‘black gold’ into multiple fuels, which were then used to power various machines. Crude oil played a huge role in bringing about a revolution in the way that we work.

Since the oil is under the earth’s surface, a process called drilling is employed to extract the commodity. This process also leads to the extraction of another major commodity - natural gas - which we will be touching upon in the forthcoming chapters of this module.

Ever since the discovery of crude oil in the 19th century, the United States of America had consistently been one of the top most producers of the commodity till the mid 20th century. However, here’s where things changed. All of a sudden, the USA’s crude oil production fell drastically, forcing it to import oil from other suppliers such as OPEC.

Crude oil: An overview of the supply chain

Formed in the 1960s, the Organization of the Petroleum Exporting Countries (OPEC) is the largest supplier of crude oil, accounting for more than 80% of the entire world’s oil reserves. OPEC initially started off with just 5 member countries - Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Currently, the OPEC consists of 15 members and includes African and other middle eastern countries like Kuwait, Saudi Arabia, and the UAE.

In addition to the members of the OPEC, there are several other countries that also produce oil. These include Brazil, Canada, Russia, Mexico, and Norway, among others. These countries are commonly referred to as Non-OPEC countries.

Here’s a fun fact for you. Both the OPEC and the non-OPEC countries combined produce around 90 to 100 million barrels of crude oil in a day!

Crude oil: Price crash of 2020

In view of the COVID-19 pandemic during the year 2020 and the ensuing lockdowns enforced by multiple nations, the demand for crude oil took a deep plunge. At around the same time, a crude oil price war was raging between two of the largest crude oil producers - Russia and Saudi Arabia.

Both of these situations led to a situation where the supply of crude oil significantly overshot the demand. Since there was little to no disruption in the supply and very little demand, the crude oil prices crashed and went deep into the negative territory.

The futures contract price of West Texas Intermediate (WTI) came down heavily from around $17 to around -$35 per barrel. Similarly, the Brent Crude oil prices also took a hit and plummeted down from around $70 to around $9. Since then, however, the crude oil prices have bounced back up to around $60.

Crude oil: Impact on India

Crude oil has a major impact on India and its economy. Unlike the oil producing countries, India is, unfortunately, not bestowed with deep oil reserves. And so, we’re forced to import crude oil from other nations. As a matter of fact, more than two-thirds of our oil requirement comes from imports.

This takes a huge toll on our economy and contributes to the country’s fiscal deficit. And so, a rise in the crude oil price would effectively increase the adverse impact on our fiscal deficit, whereas a fall in the price of crude oil would ease our fiscal deficit. Therefore, a fall in crude oil prices tends to be beneficial for the nation’s economy.

Wrapping up

Well, that’s all there is to know about crude oil, as an overview. The crude oil business is well-established today, and there are many vital entities that keep the industry running. In the next chapter, we’ll take an indepth look at all the key players involved in the crude oil business.

A quick recap

  • Crude oil is a yellowish black liquid that is found under the earth’s crust. This liquid consists of hydrocarbons and other organic compounds. 
  • Petrol, diesel, kerosene, and lubricating oil are a few of the by-products of the crude oil refinement process. 
  • Many ancient civilizations relied on oil as a resource.
  • Fast forward to the 1850s, which is when the modern oil industry was born. The industrial revolution is what led to the eventual discovery of crude oil around this time.
  • Ever since the discovery of crude oil in the 19th century, the United States of America had consistently been one of the top most producers of the commodity till the mid 20th century. 
  • But then, all of a sudden, the USA’s crude oil production fell drastically, forcing it to import oil from other suppliers such as OPEC. 
  • Formed in the 1960s, the Organization of the Petroleum Exporting Countries (OPEC) is the largest supplier of crude oil, accounting for more than 80% of the entire world’s oil reserves. 
  • More than two-thirds of India’s oil requirement comes from imports.
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