Petro oil, derived from crude oil, has seen a dramatic rise in price over the past few years. This has had major impacts on consumers and industries worldwide that rely on petroleum and petroleum-based products. There are several key factors that explain why Petro oil is becoming increasingly more expensive.
Reasons For Petro Oil Being So Expensive
- Supply and Demand Imbalance
One of the most basic economic principles is that prices are driven by supply and demand. When demand is greater than supply, prices tend to rise. When supply is greater than demand, prices tend to fall.
In the case of Petro oil, global demand has been steadily rising, especially from large developing countries like China and India. At the same time, oil supply has struggled to keep up for several reasons:
- OPEC oil production cuts – The Organization of the Petroleum Exporting Countries (OPEC) controls a large portion of the world’s oil reserves. OPEC has intentionally cut oil production in order to prop up prices.
- Lack of investment in new reserves – Finding and tapping new oil reserves has become more difficult and expensive. Oil companies have been hesitant to invest in large new extraction projects.
- Geopolitical instability – Political instability in key oil producing regions like the Middle East has disrupted supply over the years.
With supply lagging behind demand, an imbalance has formed leading to rising oil prices.
- High Extraction Costs
Extracting crude oil and turning it into usable petroleum products has become more complex and expensive. Most of the easy-to-access oil reserves have already been tapped. Remaining reserves are often located in hard-to-reach places like deep ocean waters or the arctic.
It takes advanced drilling and extraction technology to access oil in these locations. The costs of building and operating rigs, pipelines, and storage facilities in remote areas can be astronomical. These high extraction costs get built into the price of oil.
Some methods like shale oil fracking, tar sands mining, and biofuels also require massive capital investment. These unconventional sources help boost supply, but at a very high break-even cost.
- Processing and Refining Bottlenecks
Once crude oil is extracted, it needs to be transported, processed, and refined into usable products like gasoline, diesel, jet fuel, heating oil, asphalt, and petrochemical feedstocks. There are only a limited number of oil refineries globally.
Many refineries are operating at max capacity already. Building new refineries is also hugely capital intensive. This puts constraints on how much crude can be processed at any given time.
Bottlenecks in refining capacity lead to higher prices as buyers compete for limited supplies of refined products.
- Taxes and Regulations
Governments implement taxes on oil and petroleum products as a revenue source and to promote conservation.
Gasoline and diesel taxes can be as high as $1 per gallon in parts of Europe.
Carbon taxes aimed at reducing greenhouse gas emissions are also becoming more common.
Environmental regulations also add costs for oil companies to comply with standards on spill prevention, emissions controls, site remediation, and more. These taxes and compliance costs get passed on to consumers.
- Transportation Costs
Oil markets are global, so petroleum products need to be transported long distances by tanker ships and pipelines. This requires investments in fleets, terminals, storage facilities and transportation infrastructure.
The costs of moving oil from the Middle East to Europe, for example, can be significant.
As oil prices rise, it becomes economical to ship oil longer distances. But transportation still adds a premium over local prices. Landlocked regions without direct oil pipeline access often face the highest prices due to added shipping costs.
- Speculation and Uncertainty
Oil prices are closely tied to futures contracts traded on exchanges like NYMEX and ICE. Speculators essentially bet on where oil prices will head in the future.
When markets are volatile, speculative trading activity can exacerbate price swings. Investors flocking to oil futures as a hedge against risks in other assets can inflate prices also.
Geopolitical events like wars, sanctions, and tensions in the Middle East add uncertainty over future supply. This fuels speculative buying further driving up prices.
Oil markets therefore frequently react to perceptions about future shortages rather than just current supply and demand fundamentals.
- The Role of the U.S. Dollar
Oil contracts are priced in U.S. dollars around the world. This means oil prices often rise when the dollar declines in foreign exchange markets.
OPEC nations take the dollar’s strength into account when setting production quotas. Weakness in the dollar makes oil relatively cheaper for importing nations. To prop up prices, OPEC then needs to restrict supply.
The dollar spiked in 2022 amidst aggressive Fed interest rate hikes. This contributed to falling oil prices late in the year, though the downturn was short-lived.
- Limited Substitutes
Petroleum powers the vast majority of transportation globally. It’s also essential for electricity, plastics, fertilizers, clothing, cosmetics, and many other products. Viable substitutes are still limited despite progress on renewables.
This inelastic demand means that consumers cannot easily switch to alternatives when oil prices rise. People may drive a bit less, but they cannot abandon gas-powered cars or stop flying on jet fuel-powered planes.
Industries are also hampered by huge investments in equipment and processes optimized for petroleum. Shifting to other energy sources will take decades.
Lack of substitutes forces continued reliance on petrol regardless of price. Oil producers leverage this dependence to keep prices high.
How Petro Oil Compares To Other Fuels?
1. WTI Crude Oil
- WTI (West Texas Intermediate) is a light sweet crude oil blend that serves as a key global oil pricing benchmark.
- Petro oil prices tend to track closely with WTI prices, though Petro trades at a slight premium due to higher quality standards and transportation costs to reach consumers.
- Both WTI and Petro are light crudes ideal for gasoline production. This results in tight price correlation between the two. Changes in WTI futures quickly flow through to Petro oil as well.
2. Brent Crude Oil
- Brent crude is a light sweet crude produced in the North Sea that serves as the other main global oil pricing benchmark along with WTI.
- As a waterborne crude, Brent pricing reflects costs of seaborne oil transportation. Brent has historically traded at a premium to WTI.
- Brent has a slightly higher sulfur content than Petro oil. Petro also faces added transportation costs to reach inland consumers compared to coastal Brent. This leads to a typical $2-$5 per barrel premium for Petro over Brent.
3. Heating Oil
- Heating oil is a refined product derived from crude oil, mainly used for powering furnaces and boilers in homes and businesses.
- It is essentially the same product as road diesel, just taxed differently for commercial/industrial use rather than motor vehicle use.
- Heating oil prices follow diesel prices very closely, with seasonal spikes during high winter demand. Petro oil prices also influence heating oil but with a lag as it takes time to refine crude into products.
4. Propane
- Propane is a popular fuel for heating, cooking and engines. It is produced as a by-product of natural gas processing and oil refining.
- Propane competes with heating oil as a fuel for boilers and furnaces. It burns cleaner but requires a tank and delivery infrastructure similar to heating oil.
- Propane prices tend to be less volatile than heating oil, fluctuating based on seasonal demand changes rather than global oil markets.
5. Ethanol
- Ethanol is increasingly added to gasoline as an oxygenating additive and renewable component. It now makes up 10% of most automobile fuel.
- Most ethanol is produced domestically from corn and other agricultural feedstocks. This insulates it somewhat from global oil price swings.
- However, rising oil prices make ethanol more competitive. High Petro oil prices usually translate into higher wholesale ethanol prices as it gets blended into gasoline at higher levels.
Frequently Asked Questions (FAQ)
Also Read: Why Is The Price of Take 5 Oil Change So High?
Oil prices are rising today due to recovering demand post-COVID, OPEC supply cuts, the Russia-Ukraine war, a weak US dollar, and overall tight inventories. These factors combine to drive perceptions of inadequate supply.
Some heating oil companies offer monthly payment plans that allow you to pay for your oil deliveries in installments instead of full upfront payment each time. This can help spread the cost out over time. Locking in a fixed price contract when prices are lower can also help manage budgeting.
Heating oil typically costs more than natural gas for equivalent amounts of energy. But in some areas, natural gas is not available. The type of heating system also matters – a high-efficiency oil boiler may be cheaper to operate than an outdated gas furnace. Maintenance costs tend to be higher for oil systems as well.
There are a few reasons why oil is more expensive than natural gas:
1. Oil is globally traded and tied to international supply and demand. Gas prices depend more on regional markets.
2. Transporting and storing oil is more complex than pipeline gas. Refining oil into products like gasoline is also costly.
3. Oil is used primarily for transportation which is less price sensitive. Gas is used for heating/power where demand drops sharply if prices are high.
4. OPEC has greater control over oil prices while gas production is rising quickly, especially US shale. This keeps gas prices in check.
So oil’s global nature, high production costs, and inelastic demand allow it to be priced higher than regional natural gas markets.
Final Thoughts
So while other fuels have their own unique attributes, Petro oil retains strong pricing influence over its top competitors and substitutes. The industry has built up a century of infrastructure that will take decades to transition away from.
This underlying reliance keeps Petro firmly at the top of the liquid fuels market.
