The price of oil as quoted in the media is the price of a commodity that's different from the fuel you fill your car with - it is in fact crude oil.
Crude oil is the raw fluid that is extracted from the well and this base material gets processed into a variety of products at oil refineries. So if the price of oil goes up, the price of fuel goes up. However, there are a number of other factors affecting the price of fuel and that's why the fuel price doesn't always fall with the price of oil.
Refining capacity can rise and fall. If a major refinery develops problems and has to shut down, then the global volume of products that can be refined will fall. The price of fuel rises because of shortages, but the price of crude oil will fall because of gluts.
Transport costs can also affect both the price of crude oil and the price of fuels as the oil needs to be taken to the refineries and then the fuels need to be distributed from the refineries to petrol stations. So if the price of transport rises significantly on any stage of this supply chain, the pump price of fuel will increase irrespective of what the price of crude is doing.
Western economies consume much more oil than they produce, so if some major oil producing countries unexpectedly withdraw their oil from the market as happened during the 1973 oil crisis, the economies of the developed world can suffer long-term damage. For this reason, the US Federal government created a vast oil storage facility called the Strategic Petroleum Reserve, or SPR. The US President can take the decision to release oil from this reserve to balance out any sudden drop in the supply of reasonably priced oil. Thus, the nation has a mechanism to protect against sudden spikes in the price of oil. To limit consumption, US state and Federal governments can increase the price of fuel by imposing taxes and levies on oil companies, refineries and petrol stations.
Oil refineries buy their crude oil by the barrel. Oil is transported in various ways, from direct delivery by pipeline to bulk quantities by sea in huge oil tankers to road and rail shipments by tanker or drum. A standard oil drum is larger in size than a barrel (55 gallons compared to 42 gallons in a barrel).
With reference to oil, a barrel is used as a unit of measure rather than a physical container. The price of oil is quoted per barrel, which is abbreviated to "bbl." A barrel of oil is the equivalent of 42 gallons, or 159 litres. Thus, if you read that the price of oil is $104, it is referring to a volume of 42 gallons/159 litres of crude oil.
Anyone can strike a deal and there is no law dictating the price. However, whenever you buy something, you want to know what the going rate for that item is, and the oil industry is no different. There are a number of published indices around the world that the oil industry uses. The first of these is the West Texas Intermediate price set at the New York Mercantile Exchange. The second is the Brent Crude Index, which is set at the Intercontinental Exchange in London and the third is the OPEC Basket, which is an average of the prices achieved in all OPEC countries and is managed from OPEC's headquarters in Vienna.
Each index rises and falls depending on how many people want to buy oil on that particular day. Many of the people who invest in oil at these exchanges never actually intend to take delivery. These people just want to buy a contract at a low price and then sell it on at a higher price. When speculation enters a market then many new factors enter the pricing structure. Political uncertainty in some part of the world could disrupt supply and so the price goes up. Trade figures of a major manufacturing nation, like China, might show that country is slipping into recession. That would reduce demand for oil, thus the price would fall on all the indices in the world.
Countries that produce more oil than they consume, like Saudi Arabia and Russia, like the price of oil to go up. Countries that produce little oil, like Japan and Italy, like the price of oil to go down. In the US, it would be in the general economy's interests for oil prices to be low, but a low oil price would damage large American corporations that have influence with national politicians through election fund contribution and targeted job creation. Thus, some countries may try to drag the price of oil down, while others may try to force the price up. Politics, then, plays a major role in the price of oil registered on these indices.
Other investor-related factors may also influence the price of crude oil. The banking crisis of 2008 saw savers looking for places to store their money when it looked like banks might go bust, so they poured money into commodities, including oil. Thus, the price of oil rose despite a general collapse in demand. Speculators like volatility because they then don't have to wait too long before they can sell on their investments at a higher price. Speculators, and the information providers that support them, over-react to world news to try to force dips and peaks so they can buy and sell. Thus, there are many non-oil related factors that can influence the price of oil set on the three main indices.
How does the Low Oil Price affect Scotland's Economy?
The following factors are easily identifiable contributors to the current oil price, but there are also many other factors, some small in their impact and some large. There are also political moves that go, for the most part, undetected. The same is true of large Corporate manipulations that are designed to enhance or protect their interests.
The unrest in Iraq and Syria has made a big contribution to the slump in the oil price. The complex political situation between the various groups and their allies has seen large movements of oil onto the world market as they strive to fund their military objectives.
OPEC countries in general are contributing to the low price by over producing their oil.
The Chinese economy is currently on a downturn. This lowers their demand for oil because of their reduced output and this adds to the pressure for oil prices to drop.
Russia has come under international scrutiny for various misdemeanours concerning the occupation of neighbouring territories and for funding sympathetic groups in others. This has resulted in trade embargoes and other punitive measures. The net result of these actions have had a big impact on the Russian economy. Despite the low global oil price, Russia has no option but to sell as much oil and gas as she can in order to offset some of the effects of the sanctions. This has only served to reduce the market price for oil even more. European countries (including the UK) source much of their oil and particularly their gas requirements from Russia. This is good news for them, as the price is now very low - and caused of course, by their trade restrictions. (politics are always behind the fortunes of oil).
In the US, the fracking of shale beds has produced a huge increase in their oil and natural gas production. So much so, that America has drastically reduced the need to buy foreign oil - which, as a consequence, contributes to the fall in global prices due to the lower demand.
As a major player in the supply of petroleum products to the UK and beyond, the current slump in price has hit the North Sea Oil industry hard. By virtue of 40 years of mismanagement by successive Westminster governments, there is no 'oil fund' to mitigate the periods when the oil price is low. Since the discovery of oil in the North Sea, the UK has spent every penny it generated - mostly to disguise the bad financial policies by every Chancellor over the period. Today, our National Debt is over £1.6 trillion and since the Conservatives came to power in 2010, it has increased from approximately £1.1 trillion to its current level. Despite healthy North Sea Oil revenues over most of this period, the Chancellor, George Osborne, has not been able to clear the UK financial deficit - not once, never mind reduce the National Debt. Now that oil prices have hit a very low value, his task is even greater (and it is doubtful the deficit problem will be resolved any time soon). There is however the bonus of cheap imported oil and gas, but this compounds the misfortunes of the North Sea oil industry.
For Scotland, this means more cuts to our overall budget from Westminster. Scotland's economy was appraised by Standard and Poor's in February 2014 - and WITHOUT oil revenue, they would have awarded an independent Scottish economy a triple A rating - (the highest level). This backs up the fact that Scotland's onshore economy is robust enough to stand on its own and doesn't need the additional oil revenue (although it is obviously a welcome bonus).
With full control of the oil revenue, we would be in extremely good shape, simply because 100% of the oil revenue for 5 million Scots is worth 10 times the present amount we receive from the UK.
Essentially, Scotland is 10% of the UK by population. If all the oil revenues go to the UK government, over 55 million people share the revenue (10% of the total coming back to Scotland). If Scotland controlled her own oil resources, around 90% of the total would belong to Scotland. Even at these low market prices, 90% of the tax from oil would be a very large sum indeed.
Lets assume a £5 billion oil revenue (this is just a ficticious amount to demonstrate the reality of independence and the control of assets). Currently, 1/10 of that amount will be part of Scotland's £30 billion allocation from the UK government (ie £0.5 billion)
With independence, and assuming Scotland had access to all the North Sea assets, that would mean the full £5 billion would go to the Scottish treasury. (perhaps we would lose 10% to rUK through a negotiated settlement of the North Sea assets, but that would still leave an extra £4.5 billion in revenue).
Depending on how you look at the figures, Scotland could fund her £30 billion running costs from her onshore resources and use the £4.5 billion as a welcome top-up, perhaps as a way to pay back some of the national debt Scotland would inherit. Alternatively, the £4.5 billion oil revenue would ease pressure on the onshore revenue and might be used to grow the economy by investing in business and infrastructure. Whatever way you look at the figures, there is no denying that even when the oil price is low, Scotland would see a ten fold increase in revenue from what it was allocated by the union. In the heady days of high oil prices, that would be a staggering amount - hence the conclusions recorded in the McCrone Report.
Sadly, this is not the case (so far) - and to add further insult, Unionist propaganda constantly maintains that an independent Scotland would be bankrupt in a very short time after independence. The preceding paragraphs show that this is simply not true.
Oil companies understand the short-termism of speculators and so oil price contracts tend to work on the average price over a certain period. Rather than striking a price at the Brent Crude Index price on the day of delivery minus $3, a contract is more likely to take the price from the index averaged across the week of delivery and then apply a premium or a discount. This avoids a buyer being hit by bad news on the day of delivery jacking up the Index for a few days.
Although the WTI index is based in America, the Brent Crude Index is based in Europe and the OPEC Basket is based mainly on oil prices in Arabia, contracts for oil do not have to rely on the price of the closest Index. Thus, American buyers may strike a price based on the Brent crude index, even though they are buying oil from Arabia.
All these factors boil down to oil price indices operating as "benchmarks" for the oil industry rather than a common price. The relative movements of the indices do affect the price oil companies charge for oil, but the actual price is a matter of individual contracts accounting for many different factors rather than a global standard price.
The index prices of crude oil are important throughout the oil industry. However, if you are interested in how much buyers actually pay, research the contract terms arrived at for individual deals. For example, the China National Petroleum Corporation recently signed a joint venture with the UAE's Abu Dhabi National Oil Company. This deal would undoubtedly grant cheaper oil prices to China than those listed for the OPEC Basket, of which Abu Dhabi's oil market is a constituent. Taxes, politics, transport networks, geography, economic expansion and the weather all play a part in the complex calculation of setting the level of oil price indices. However, deal-making, contract conditions, side benefits and commercial interests override all other factors when setting the price for individual oil supply contracts.