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Why Oil Prices Affect Us All

Petrol prices go up and up… and then down. Here's what's fuelling the changes.

Why Oil Prices Affect Us All

Start at the Beginning:

The price of oil affects all our daily lives, but few of us understand what’s involved. The effects of changing prices are more far-reaching than whether we pay less to fill up our cars.

Tell Me More:

Oil is a fossil fuel, created over millions of years as the remains of tiny oceanic plants and animals are covered by layers of silt and sand and subject to incredible pressure and heat, turning them into oil and gas. Crude oil found in reservoirs in the Earth’s crust is refined into petroleum (the name means “rock oil”), which is split into petrol (gasoline); diesel; kerosene; asphalt and more. Petroleum is used to make products as diverse as tyres, computers, antiseptics and dishwashing liquid.

What Would Happen Without It?

Right now we would pretty much grind to a halt. Even other energy sources (eg coal-powered electricity, solar and wind power) rely on oil to transport raw materials or for manufacturing equipment.

Who Profits?

Oil-producing nations. For decades the heavy-hitters have been the 12 members of OPEC (Organization of the Petroleum Exporting Countries). OPEC holds more than 80% of known oil reserves (mostly in the Middle East) and produces about 40% of global output, with Saudi Arabia having the lion’s share. Non-OPEC country Russia came next.

What Changed?

Last year the US overtook Saudi Arabia and Russia to become the world’s biggest oil producer, thanks to new technology allowing oil to be extracted from shale rock (“fracking”).

The US now imports much less oil, creating a lot of spare supply. Also, with the global economy sluggish, demand is lower and investors more wary. Then OPEC decided not to curb production as expected, but to rather try and maintain its market share. Oil prices nosedived.

Per-barrel spot price of Brent Crude oil:
  • Jan 1, 2014: US$108.12
  • Jan 1, 2015: US$55.27

Who Wins, Who Loses?

Drivers pay less to fill the tank and travellers save money if airlines pass on their fuel-cost savings. But Russia, Nigeria and Iran need a high oil price to stay afloat – they’ve been hit hard. Is that bad? Well, Iran’s oil money props up Syria’s repressive Assad regime; then again, Nigeria’s oil money finances its fight against Boko Haram extremists.

Jargon Buster

Light vs Heavy: Two factors determine what quality of petroleum you can get from crude oil; density is the first. Lower density, or “light”, is easier to refine and yields more.

Sweet vs Sour: The second factor is the amount of sulphur – the less the better. Low-sulphur oils are “sweet”, high-sulphurs are “sour”.

Brent Crude vs West Texas Intermediate: Various oil types are traded but these are two of the largest. Brent Crude is sold in Europe, Africa and the Middle East and West Texas Intermediate dominates in the US.



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