Crude oil is undoubtedly the most important commodity in the world, in both its production value and its importance to the global economy. It is the most traded non-financial commodity in the world today, supplying over 40% of the world’s total energy needs. Over the past decade, the importance of crude oil has only increased. Its importance stems from the fact that it’s the base product for a number of indispensable goods, including gasoline, jet fuel, and plastics.
Over the past few years, the fundamentals of the oil industry have changed dramatically. Oil prices are no longer controlled by cartels; instead, global demand and supply are left to balance through the price mechanism.
A systemic imbalance between vastly increased supply and moderate demand growth strongly influenced oil prices. The big drop, which began after the top at around $140 in the two oil benchmarks in June 2008 ended just six months later with oil prices around $40. New methods of extraction, like hydraulic fracking and horizontal drilling, the expansion of oil related infrastructure and the discovery of new reserves, especially of shale oil, had led to an oversupplied market. On the other hand, global economic weakness, driven by a slowdown in Chinese growth at the time specifically lowered oil demand and more generally, stricter fuel economy regulations and the development of more energy efficient engines dampened demand for oil in the long term.
According to the US Energy Information Administration, in 2014, the increase in the global supply of petroleum and other liquid fuels was approximately twice as much as the increase in consumption. In 2017, the total world production was the same with the total world consumption.
Oversupply and lower prices dominated after 2008 till 2017. With the oil market more balanced than the previous years, oil prices hover still hover not far from their lows. Fundamental changes in the market in 2017 are seen via the Brent/WTI spread with WTI trading close at $50 and Brent oil closer to $60.
It is true that over the past decades, industrial countries have allocated unprecedented resources to the research and development of alternative sources of energy, in an effort to substitute clean fuels for fossil fuels and build a sustainable future for the planet. Nevertheless, the shifting from an oil based economy to an economy based on new forms of energy has been much slower than originally anticipated. Petroleum products are still the dominant resource worldwide. In fact, to this day, more barrels of oil and liquid fuels are consumed daily (98 million barrels by 2017 figures) than any other commodity.
Oil is and will remain one of the most important sources of energy for decades to come.