Reasons For Elasticity In Oil Prices

Lack of Substitutes: Consumers are limited in their ability to substitute between fuels . So, while consumers can substitute readily between food products when relative prices shift, most do not have that option in petrol in their vehicles.

Low Petroleum Inventory : To store huge stocks of Crude Oil is difficult and costlier. Most countries have Petroleum Stocks that last up to few weeks only.

Because of the above mentioned reasons , if there is any disruption in supply of crude oil, or even a speculation that oil supply may disrupt due to any reason , markets react strongly fearing sudden increase in oil prices and lack of supply. Petroleum is such a commodity that every country has to purchase , at whatever cost possible . If they don't buy crude oil today , they need to buy double quantity of oil tomorrow , and by then oil prices might have gone even higher.

Fundamental supply and demand factors provide the best explanation for the crude oil price swings.

When demand for a commodity like oil exceeds production capacity, the price will rise quite sharply because both demand and supply are fairly inelastic in the short run for oil.

Shifts in demand or supply, either up or down, will cause relatively larger swings in market price of crude oil.

How Is Petroleum (Crude Oil) Traded

The price of petroleum as quoted in news generally refers to the spot price of either WTI/Light Crude as traded on the New York Mercantile Exchange (NYMEX) .

The vast majority of oil is not traded on an exchange but on an over-the-counter basis .

The price of a barrel of crude oil is highly dependent on both its grade, determined by factors such as its specific gravity or API and its sulphur content, and its location.

Petroleum is marketed among other products in commodities markets. See above for details. Widely traded oil futures include:

• Nymex Crude Future
• Dated Brent Spot
• WTI Cushing Spot
• Nymex Heating Oil Future
• Nymex RBOB Gasoline Future

Major Components Of Petroleum Price

The cost to produce and deliver Petroleum to consumers includes the cost of crude oil to refiners, refinery processing costs, marketing and distribution costs, and finally the retail station costs and taxes.

• Extraction
• Transported to Oil Refineries
• Refined by Distillation
• Transported to different Places for use
• Taxes

The image compares the component of price of each of the processes in the final price of petroleum for two consecutive years , 2001 & 2002.

Uses Of Petroleum

To understand the fluctuating prices of petroleum, it's important to note where petroleum is being used . Petroleum products are used widely in our everyday lives. They are used to power automobiles produce containers and to keep us warm. Petroleum is mainly used as a fuel and as a raw material in the chemical industry.

As per trends till 2007 about 70% of petroleum was used for transportation (e.g. gasoline, diesel, jet fuel), 24% by industry (e.g. production of plastics), 5% for residential and commercial uses, and 2% for electricity production.

What Is Petroleum ( Crude Oil ) ?

Petroleum (petroleum, from Greek πετρέλαιον, lit. "rock oil") or crude oil is a naturally occurring, flammable liquid found in rock formations in the Earth consisting of a complex mixture of hydrocarbons of various molecular weights, plus other organic compounds.

The term "petroleum" was first used in the treatise De Natura Fossilium, published in 1546 by the German mineralogist Georg Bauer, also known as Georgius Agricola.

Petroleum has probably been formed by a slow decomposition of organic matter under the earth's surface. It is found in cavities and crevices, and through the substance of the rock. In mining for it a well 3 or 4 inches in diameter, and sometimes 700 or 800 feet deep, is bored by drills, generally by steam-power. When rock containing petroleum is being bored through, what is called "a show of oil" is found. The chips and water drawn up from the well show and smell of the oil, but, unless the drill strikes a cavity or crevice filled with oil, the well isn't productive. This uncertainty is the most unfortunate peculiarity of oilmining, and makes it, to a great extent, a lottery, for there are no surface indications by which these cavities can be discovered.

Petroleum is much lighter than water, of a dark green or black color, with a peculiar and, to most persons, unpleasant odor. It is commercially divided into two kinds, the heavy, or lubricating oil, and the light oil. The former is more dense, and sometimes of the consistence of thin molasses. It is used, without preparation, for lubricating machinery, for which it is admirably suited. The light oil, before it can be used, is submitted to several purifying processes, the most important of which is distillation.

Petroleum is found in many localities on this continent. Among these may be mentioned as the most important, Canada West, Pennsylvania, Ohio, Western Virginia, California, Kentucky, and Tennessee. The first four yield more than nine-tenths of all now obtained, but it is probable that other regions will yield equally well when as thoroughly explored.