Petroleum is the world’s major source of energy. It has become unceasingly relevant as the source of fuel in companies and homes contributing over 75% of world energy needs. The sustenance of world output in manufacturing agriculture, transportation and even by extension commerce is heavily dependent on ‘flow of petroleum” around the globe.

The demand for petroleum has been on the increase since its discovery as a source of energy to the world. However, its demand in recent times has become rather sky rocketing. Emergency of China and the Asian block as leading manufacturing economies has put so much preserve on the demand of petroleum in the world market, this is in addition to demand from north America and Europe which economies are largely dependent on petroleum as the main source of energy Global charges in climatic conditions that has could extremes in weather conditions (cold or hot) has added to the demand for fossil energy as a mean of regulating the extreme weather condition. 

The politics of petroleum pricing goes beyond individual homes and manufacturing concerns; Nations are involved became the wellbeing of any economy in this century is dependent on its ability to provide and the cost effectiveness of its source of energy. It therefore follow that pricing of petroleum in the international oil market is beyond simple business terms but also involves international politics and even regional (block) politics. This is understandable became the reason for government is the wellbeing of the people. To ensure stability in the economy, governments of countries get involved in the determination of price and quantities of petroleum available in the oil market. Reasons beyond price business are sometimes used in determining price of petroleum in the international oil market.

Depending on the side of the brain, countries have formed groups either as net exporter or  net importer with each group poring price and quality polices that best suits them. Again on the economic side, there is a general understanding that given the nature of the world economy today where all countries are interdependent on one another there is need for price stability in the energy market. An unnecessary price like by the producing nations will certainly income the cost of manufacturing in the “using” n nation which will be tranfound to the cost of flushed goods being consumed by the petroleum exporting accutives; if the price word interaction oil is abysmally low, it will lead to deconstruct in the sector which will in turn case reduction in production which will lead to shortage and eventual price like.

The sensitive nature of petroleum pricing has led to formation of groups to protect the interest of member nations. One of such originations is the origination of petroleum exporting countries (OPEC), which currently control about 43% of production of world crude petroleum and 60% of Exports.

Over the years, pricing of crude petrol by either the company producing or the country of origin has under gone several charges. These changes are reflections of peculiarities of times and advancement in technology and in some instructs to achieve a particular objective which could be outside “business”,

A look at the different methods, of pricing adopted in the industry since inception follows thus; however, the pricing method adopted that have combined to determine the method adopted, the factors are (1) cost of findings crude oil (2) relations among remain funds (3) technical development in reforming  (4) location of discovery  (5) quality of product of particular location (6) quality of commodity available for the market (7) widening use reformed products etc. each has varying impact on the price.

            Crude petroleum pricing has undergone many methods which include.
1.         The posted price: this was the first method adoted by oil companies. A involves oil companies post at their rigs the price at which they were willing to sell their crude to willing buyers.
            As solely  fixed by the producing company. This term was retained when oil companies became big companies but with a different meaning. At this point it means the price published by the companies at which they are willing to sell their crude oil or reformed products in cargo hots” to all comers at the tanker terminals around the world. Such prices are posted to
(a)       Notify the buyers of the price at which the producer is willing to sell the oil
(b)       Telling royalty owners the basis upon which royalty interest may be settled and
(c)       Information customer of oil merchants the terms on which crude oil may be inchaged.
2.         The gulf plus formular: This was adopted by limited state as the first country to export oil and highest supplier up to end world war. The price oil crude or reformed, was hutched to the level of American domestic quotation. The plats oil gram used to publish oil prices free on board (FOB) the gulf of Mexico and the cost, insurance and freight (CIF) at the major consumption centres in the world. The other exporters from other ports followed the system of equating the prices in the consuming centres to those of imports in the same centers from the Gulf of Mexico. This simply mean that for oil imported form other centres, consumers paid prices equal to that paid for oil imported from gulf of Mexico.
The dual Basing points formular:
The main texture of dual basing point formular was the elimination of phantom freight charges of oil imports form USA and muddle East. If made the price of oil form any middle East terminal regardless of its destination prices of oil from middle East and even USA because the same thing in Brifran based on insistence and negotiation.

The price shed formular:
            This price formular kept the price of the Gulf of Mexico and the middle East, but instead of having the same FOB, prices in the two areas, it led to the equalization if the CIF price sin the United Kingdom. Middle East price were to be determined y adding to the price FOB Gulf  of mexico, the freight cost to the United Kingdom, then subtracting freight cost form Ras Tanina to the United kingdom.

            In today’s complex global markets, the price of crude oil is set by movements on the three major international petroleum exchanges all of which have their own websites featuring information about oil prices. They are the new York Mercantile Exchange, the international petroleum exchange in cordon and the sugar pore international monetary exchange. People leg on to these websites to obtained deformation oil prices which is primarily determined by demand and supply.
            Having worked at the different pricing methods adopted over the years, its fruit  to look at causes of prices being what they are and the basic underling factors that determine the price of crude oil. These are the underlying factor in formulating crude oil price policies. They are global, that is every oil producer in buyer consider them in maiming at the price for which crude oil is sold in the international market.

(i)        Price stability
            Every producer of crude oil especially OPEC members its prices that will ensure price stability in the international oil market. OPEC has a policy not to allow a price fluctuation of more than 10%. This it maintain by tampering with output/supply so that it demand is increased, it will supply more and it demand is decreasing it will reduce output thereby maintaining price stability. However, there is a limit to which OPEC alone can maintain price stability become currently the organization ha sonly one million banal per day (bpd) as maxim excess it can supply. A demand above this excess capacity will over straight price be young OPEC capacity to stabilize.

(ii)       To allow for continued investment in the sector.
            Crude oil price policy is determined in such a way that there is sufficient margin for operators in the industry and investors so that there wills till be continued investment in the sector. Any price cut that leads to a disincentive to investment in the sector will come back in the future in the form of extreme shortages that will lead to energy crisis so in formulating crude oil re-price, allowance is made to allow for continued investment in this view cruel sector of today’s technological of divvied world investment in searching for, exploration of new fields and reserves must be considered in pricing policy.

(iii)       support increasing demand
            Maturely price of goods and services in free market economy is determined by demand and supply. In setting crude oil price, producers take into cognizance the ever incasing demand for the product and ever buyers adjust their offer in live with the ever increasing demand. Since supply at a point is static, price are set to reflect the increase in demand.

(iv)      Support Growth of Local Economy
            Production has a cost imputation or the natural resources deposit and environmental impact on the producing country. Prices are sometimes set to reflect the growth desires of the producing nations. Higher prices lead to more incomes which the producing nations need to support their economic growth polices. So long as there is demand for crude oil, the underlying pricing policy will be to earn more income for local growth of the country’s economy.

(v)       Cover the cost production
            For continued operations in the undercoating there is need for operators to cover at all tries then cost of production. The industry is a very capital intensive one, therefore all pricing policies most unsure that there is full recovery of production cost. It cost of production is fully recovered and may be with a margin, then production will be guaranteed. In recent this, most of the crude discoveries is offshore, and with the attendant cost of production. Pricing must be able to cover cost of production offshore, this has increased the price of oil at the international market substailnlity in recent times.

(vi)      Balance market share and price
            In setting policy on oil price, a producer or group of producers like OPEC, considers the impact of higher price on demand and the need for a very good market share. There is always a trade off between higher price and market share. Most often the higher price is forfeited for a bigger market share because a better market share ensures steady flow of income and maintain price stability in the international oil market.

(vii)    contending with alternative sources of energy
            The oil producing countries are mindful of the fat that the oil coursing nations are continuously in search for an alternation source of and cheaper energy. This peaked with the formation of international Energy Agency (IEA) with the mandated to discover alternative source of energy to crude oil
            Alternative sources have been discussed but are yet to be.  Commercialized because of cost of production. Alternative sources have been discoursed in warnium (nuclear energy) solar, water, lead, even ethanol but there usage has been restrained by availability and cost of production against the price of sale of crude oil. So in pricing policy of crude oil, producers condor the need to ensure that crude petroleum is still the cheapest, most available and risk source of energy. This becomes a dissentient to continue to search for alternative source of energy at least by business concerns.

(viii)   General growth in world Economy (rise in general price level).
            In setting oil price the producers and buyers are mindful of general mile in price level. Since industrial of 1970 led by USA, there is general rise in prices of goods and services world over the price of crude is set to reflect the price level in the market places. The prices et has to cover cost of production which is driver by cost of factors of production which is affected by the price lead in the market and inflationary tendencies cared by increase in employment of factors of production especially labour in the advanced economies occasioned by boom in manufacturing /industrialization. Industrialization itself put a lot a of pressure on the factors of production. There by increasing their prices. Oil price level is a reelection of general price level in the world today.

(ix)      Global Politics:
            Since the discovery of oil as the main source of energy in the world, it has been used for both pure business and in international politics. Pricing and allocation of crude to different geopolitical zones of the world has always been politically motivated. The allocation of oil was used as war tool against America’s support for Israel in the early 1970’s and has since continued to be weapon of war fair. Its either the supplier is restraining supply to a region or country or the buyer a placing  embargo on the purchase of oil of a particular country either situation affects the price of oil in a particular country by either coursing decrease in demand or excess unsold products or increase in demand which pushes up price in the country of alternative supply. In a not shell, the politics on supply oil, either embargo or restrain affect the quality of oil available in the international market and by extern air the pricing policy to be adopted.

(x)       Attitude of Non OPEC members
            There is this wrong impression that OPEC determine the price of crude oil all over the world. This is not really true as OPEC control about 43% of oil production and 60% of export. The actions/inactions of the Non OPEC members that control the balance of the 40% of export go a long way in determining the price of crude petroleum in the international community. While OPEC control supply to effect price stability, the non OPEC members have then different objectives in pricing their product. Since they do not have a common ground to be met, it is difficult to engage then in discussion on policies to ensure price/supply stability.
            While its difficult to set a standard policy on pricing of crude oil anust all the politics in the international crude pricing. There are some noted problems which have compounded the pricing policy formulation process and makes it more difficult. They include but not limited to;
a)         Over dependence on petroleum as source of energy – excess demand
b)        Static supply end.
c)         Emerging New Economies and the demand for petroleum.
d)        Non OPEC supply determination.
e)         Transportation bottle necks
f)         Increasing cost of production
g)         Insufficient investment in the sector
h)        Huge cost of production limiting participation.
i)         Demand uncertainty
j)         Regional supply imbalance
k)        Geopolitical tensions
l)         Speculations in the international market
There is countries pressure on petroleum as worlds’ source of energy. It is used to drive all economies of the world. The recent growth in the global output is driven by petroleum as science of energy. It is needed at homes of heating, in factories to drive and power machines, in power sector to power tubines, in automobiles for movement. In fact the world with its increasing production and technology run on petroleum as the science of energy.
Cost of production, availability, environmental impact and risk made petroleum the most preferred source of energy in the world now.

            While demand is on the increase steadily supply seems static. Supply is limited by many factors such as production cost, availability of resources, location of resources, production quota, cost of exploration and production and politics. A country with abundant crude reserve may not push so much into the market because of some other reasons as outlined above.

            in recent years, the Asia tiggers emerged as major manufacturing block in the world. The industries run on crude oil as source of energy to power them. While the economies emerged as manufacturing block with increased demand of petroleum, the world supply end with concentration in middle east has not increased too. Again, even when there is deliberate policy to increase exploration and production, it is dependent on some factors such as availability of resources which is beyond human ability, production capability and unwillingness of local government to increase production.

            While its easy to determine supply by OPEC member and as such each to be controlled its not easy to determine and control the production level of non OPEC members. Its much easy to plan with known quantities that will be supplied by OPEC members than that which will be supplied by Non OPEC members that cannot be determined. They may chose to increase or decrease supply without consultation and without notice. Their activities is over major science of cane of price volatility in the oil market.

            Transportation bottle necks have emerged recently as the changing geographical composition of demand has put pressures on tanker fleet. In addition, regional mismatches between the grade of oil supplied and demanded have seen premia on low sulphur oil rise. Transportation bottle necks on both transportation at international and local levels have caused delays in supply thereby causing panic buying which has led to price volatility in the price of petroleum products. Also increase in the tanker rates affects price of oil upwardly.

            There is increase in the world oil reserve which can be explored and produced. However, ingruity of the reserves of off shore making the cost of exploration and production to be very high. The on shore reserves are concentrated more in the middle east where exploration and production are regulated rather based on commercial viability. This has led most exploration and production in crude in recent time ot be at the high sea (off shore).

            Exploration and production of crude oil is capital intensive requiring a lot of capital and technology. However, the major hindrance to investment in the sector in governmental regulation. Most producing countries regulated the amount and type of investment that can go into the sector especially foreign investment. Resources are concentrated in a few OPEC countries where investment is not allowed to be allocated based on market force of demand and supply, but predetermined by government policy, investment in the crude oil exploration and production may not be enough.

The cost exploration and production of crude is very high. The capital intensive nature of the sector and the long gestation period to cover capital investment units participation in the sector.
Many wells end up without oil after huge financial commitment. Many companies do not venture into oil exploration and production because of the cost implications.

            In terms of the global composition of oil demand there is significant uncertainty about the likely path oil demand especially from the emerging economies like China, India etc. In recent time the demand of crude oil by China has overtaken that of America pushing the demand for crude very high. The demand is made more complex because some factories in the emerging economies run on diesel powered generators and there is no data existing on their consumption.

            Even when the global supply of oil is sufficient to meet global demand, there are often regional mismatches between the grade of oil supplied and the demand. A recent final product price volatility and widening premia on types of crude oil was a reflection of tightening regulations on fuel quality and short run constraints refinery capacity in the United States. This regulations made the available heavy high sulphur oil to be of relative little use for gasoline production thereby causing the premium on light, low sulphur.

            Geopolitical tensions and uncertainty, stemming from acts of sabotage on oil facilities in middle east, Nigeria and fears of disruptions in other oil producing countries have added an additional risk premium  to the oil price when Nigeria was producing 700,000 Pbd as against allocation of 2.2m bpd the price of crude in the international market was up by over $5 dollars as OPEC quota was fully stretched. The shortage in production was caused by the activities vandals called “Militants” who engage in disruption of oil production through many means including pipeline vandalization, abduction and kidnapping of expertrates etc. Their activities affected world oil output and price.

            One gauge of speculations pressure is the volume of oil futures and options contracts traded on the new york mercadile exchange.
            Speculator forecast possible price changes and commit investment in order to hedge against price fluctuations in the future. This drives prices up even when there is no tangible real shortage in supply or increase in demand. However, the effect of speculations on oil price is not significant.

            A cusory look at the intrigues that inter play in oil pricing, policies, and problems in international market show that many factors beyond the comprehension of one individual affect the price of oil in the international market. Many are controllable while some are not controllable, some are short term effect while others are of long term effect. One thing certain is that volatility in oil price in international market is to an extent certain and should be accommodated at least with the current production capacities and conditions.
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