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.
PETROLEUM
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.
PRICING AT INTERNATIONAL PETROLEUM
EXCHANGES
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
A. OVER DEPENDENCE ON PETROLEUM ENERGY
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.
B. STATIC
SUPPLY
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.
C. EMERGING NEW ECONOMIES AND DEMAND FOR
OIL
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.
D. NON-OPEC
SUPPLY DETERMINATION
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.
E. TRANSPORTATION
BOTTLE NECKS
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.
F. INCREASING
COST OF PRODUCTION
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).
G. INSUFFICIENT
INVESTMENT IN THE SECTOR
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.
H. HUGE COST OF PRODUCTION LIMITING
PARTICIPATION
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.
I. DEMAND
UNCERTAINTY
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.
J. REGIONAL
SUPPLY IMBALANCE
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.
K. GEOPOLITICAL
TENSIONS
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.
L. SPECULATIONS
ON THE INTERNATIONAL MARKET
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.
Conclusion
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.