Oil Markets


Lucas gusher

Prices Through 1973

Crude oil prices didn’t fluctuate much prior to 1973.

  • A set of U.S. oil companies held the price stable with production controls. These Seven Sisters, as they were known, were Anglo-Persian Oil (now BP), Gulf Oil, Jersey Standard Oil (now Exxon), Royal Dutch Shell, Standard Oil of California (now Chevron), Standard Oil of New York (Socony), and Texaco.

  • After the Yom Kippur war in 1973, control of crude oil prices transferred to the Organization of the Petroleum Exporting Countries (OPEC), an inter-governmental organization started in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Prices have since become more volatile.

Crude Oil Price Benchmarks

Today, three types of oil serve as global benchmarks for other oil prices:

  1. West Texas Intermediate (WTI): the U.S. price benchmark

  2. Brent North Sea: the European price benchmark

  3. Dubai: the Asian price benchmark

Crude Oil Grades

Crude oil is graded by density (light/heavy) and sulphur content (sweet/sour).

  • Low density (light) and low sulphur (sweet) is cheaper to refine than more heavy and sour crude oil.

  • For example, both WTI and Brent are light sweet crudes (but WTI is lighter and sweeter), whereas Dubai is medium sour.

  • For this reason, historically (that is, prior to 2010), WTI has traded at a premium to Brent. Since 2010, the difference in grade has been more than offset by the supply of crude from North Dakota and the western Canadian provinces.

Crude Oil Prices: WTI v. Brent

U.S. Crude Oil Production

The U.S. produces about 8 million barrels of crude per day.

  • U.S. production has increased since the introduction of technology to extract tight oil (oil from shale formations such as the Bakken formation in western North Dakota).


U.S. Crude Oil Production

U.S. Crude Oil Consumption

The U.S. consumes about 18 million barrels of crude oil per day.

  • Crude oil is primarily refined into gasoline, diesel fuel, and heating oil.

U.S. Crude Export Restrictions

Crude oil exports are restricted by the ‘Energy Policy and Conservation Act’ of 1975, which directs the President “to promulgate a rule prohibiting the export of crude oil” produced in the U.S. This act was passed after the OPEC embargo.

  • Given the recent production increase in the U.S., there is pressure for the President to allow increased exports.

Crude Oil and the Macroeconomy

In a study from the year 2000, the International Monetary Fund (IMF) estimated a $5 increase in crude oil prices reduces global economic growth by 0.3% in the following year.

Also, since crude oil is used in the transport and production of many goods, it is a prominent driver of inflation.

Accordingly, it is closely watched by the Federal Reserve when setting monetary policy.

Crude Oil and the Stock Market

Sharp increases in oil prices tend to lower stock prices.

  • Research has shown that market participants accurately estimate the effect of higher oil prices on firm cash flows, and so stock prices fall accordingly.

  • Other work has concluded that oil may even be able to predict future stock market returns.

Industry Resources

While not an exhaustive list of informative sources, the resources from the U.S. government’s Energy Information Administration provided below are commonly referenced by industry players and investors.

You might also be intersted in taking a look at the Baker Hughes rig count, which has been a standard industry resource since 1944.

Credits and Collaboration

Click the following links to see the codeline-by-line contributions to this presentation, and all the collaborators who have contributed to 5-Minute Finance via GitHub.

Learn more about how to contribute here.