How it all began
Despite ongoing efforts to reduce oil consumption and find alternative green energy sources, oil still plays an important role in the global economy. Initially, it was difficult to find oil in a well, as the desired treasures were usually water or salt. It was not until 1847 that the first commercial oil well was drilled on the Absheron Peninsula in Azerbaijan.
12 years later, in 1859, with deliberate drilling near Titusville, Pennsylvania, the petroleum industry was established in the United States.
While much of the early demand for oil was for paraffin and oil lamps, the first commercial well suitable for mass production was not drilled until 1901 at a site called Spindletop in southeast Texas. At this site, more than 100,000 barrels of oil were produced in one day, more than at all other oil wells in the United States combined.
Many believe that this day in 1901 marked the beginning of the modern petroleum age, as oil was soon to replace coal as the main source of fuel.
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The use of crude oil
Rapeseed, olives, and other plants provide edible oil. However, crude oil cannot be produced by humans at the moment because it forms in the deep layers of the earth and takes millions of years to emerge. Therefore, the supply is not limitless. Humans usually need a considerable amount of oil to produce fuel for cars and planes, for example. Almost everything made of plastic contains oil. Oil can even be found in lipsticks or nylon fibres. Because of the importance of oil to many businesses around the world, the price is closely watched. When the price of oil rises, many other goods also become more expensive, such as petrol at petrol stations.
How are oil prices determined?
The use of petroleum in fuels remains the most important factor making it a commodity in demand worldwide, but how are prices determined?
The fundamental problems behind this unusual, technical, and historical price anomaly are indeed present. The price, as with any commodity, is determined by supply and demand. Oil demand is a very good indicator of global economic activity, and there is currently talk of “demand destruction” as planes are grounded, cities are cleared of cars, and factories are mothballed.
As COVID-19 spread around the world, the oil price war between Saudi Arabia and Russia did not improve the situation.
Since then, major oil producers have cut production. However, they cannot cut production fast enough because demand has plummeted so much, and the price of the more global measure, for example, hit a 20-year low of $16 in 2020; for comparison, in 2019, around the same time, the price was $70.
Just as high oil prices can cause recessions, low oil prices can promote recovery. A massive reduction in the price of oil is like a global tax cut for businesses large and small. Airlines could set low prices for fuel, their single biggest expense, which in turn is beneficial for the traveller.
The end user will also benefit from lower transportation costs, as will haulers, florists, and supermarkets. Regular commodity market trends can also play a role in price determination.
Regardless of how the price is ultimately set, it seems that oil will continue to be in high demand for the foreseeable future due to its use in fuels and many consumer goods. This means that the focus will continue to be strongly on the price of oil.
