Pricing in the Oil Business - Research Paper Example

College Why pay $3 per gallon for gas? Introduction The oil industry is termed as an oligarchy indicating that it is quite difficult to get into the oil market. Not many individuals can come up with an oil company. There are over six super countries that have control over the oil market. These companies control the oil pricing in the industry. Oil is a necessity in life since it is a product that all human beings needs. Almost everything that human beings use in daily activities requires the use of either oil or gasoline (Data, 20). That is why people need to be aware of how the oil industry works and why they pay the amount they pay for their oil or gas. It is important to note that the oil prices are dependent on the six super major companies of oil and gas. These super majors are BP, Chevron, ExxonMobil, Royal Dutch Shell and Total. Oil exploration and drilling Oil accumulates between various layers of the porous rocks or other subsurface. Thus, the main idea is to locate the right convergence necessary in creating the required oil pool. Geologists find possible oil locations to explore through aerial photographs. Initially, oil wells were drilled at random locations or around other established oil wells. However, now oil is located using a vibrator to cause vibrations that geologists listen to and process data using computers into seismic lines. Once a location is found, then the explorers now undertake the drilling process. After drilling the oil well, a measuring device is then lowered into this oil hole and the information about the earth properties are gathered (Research, 214). This information includes such aspects as the density, type of rock that is present and the fluid contained in the rocks. After finding this information, if the hole is promising, then the drilling process is continued. If this hole is not a good location required, then the hole is filled up and the entire process begins all over again. Main sources of oil drills The world gets its daily ration of over 85 million oil barrels from over 4000 fields. Most of these are small with less than 20000 barrels each day. However, there are major oil giants that produce over 100000bpd. Then there is the category of the mega fields that produce over 1000000 bpd. These are recognized as the most important sources of oil in the world. The top most of these mega oil giants is the Ghawar in Saudi Arabia. It accounts for over 100 billion oil barrels. It is 160 miles long and 16 miles in width. The secret to the reservoirs longetivity is its water injection. From the 1960s. Saudi Armco commenced injecting water underneath the oil around the field’s outer borders. Today, water from this river floods millions of oil barrels everyday. The second best oil reservoir is west Qurna located in Iraq which houses 21 billion barrels of oil. The major joint ventures in this oil field are ExxonMobil and the Royal Dutch Shell. The next one is Majnoon in Iraq with over13 Billion Barrels. The name originated from its massive abundance of oil in the field. This oil field has not been developed in awhile due to its location. It is very close to the Iranian border (Kenneth, 2014). Another major oil reservoir is Rumaila field in Iraq with over 17 Billion barrels. It is located at the Kuwait border and it produces half of Iraq’s oil total production. Other main oil reservoirs include Bolivar Coastal Field which is the largest in South America. It is located in Venezuela and it is over 35 miles long. Another one is Cantarell Field is a super field in Mexico. It is one of the aging oil fields in Mexico discovered back in 1976. It is the largest oil production field in Mexico producing over 2.1 million oil barrels each day in the year 2013. Its oil production has however, declined since then to over 408000 barrels each day. The other reservoir is the sugar loaf field in the Atlantic Ocean off the Sao Paulo coast. This field is important since it is one of the emerging oil basins in the Santos basin. Process of converting oil into gas Crude oil is often very thick and dark but this is not comparable to the gas that is pumped into an individual’s car (Bret-Rouzaut & Babusiaux, 201). The gas is refined and all the impurities removed and the other products allowed to settle in. there are three main steps in the refining process. The first one is the distilling process, converting and treating. In distilling involves heating oil in large and tall towers. The high temperatures break down the available molecular carbon chains in this oil forming separate layers. Heavier elements sink to the bottom while lighter elements including propane gas float to the top. In the middle, there is the oil that will be made into gasoline and also jet fuel. As the layers of heavy to light oil products form, they are sent into varying pipes for a further processing. The next step involves the conversion process. This involves converting oils into heavier molecules of hydrocarbon into smaller and lighter molecules. This is made possible by causing a reaction between this oil and hydrogen under very high pressure and heat (Publications, 2011). This breaks seventy percent of petroleum into gasoline while the rest is converted into diesel and also jet fuel. The products are later blended with other products to form gasoline of different octane levels (Fyneface & Oladeji, 15). Conversion is then completed by re-arranging the formed oil. This involves the removal of hydrogen from the lower level octane gasoline. The next step involves treating to remove any available impurities including sulphur and nitrogen. These can as a result bring about air pollution. Nitrogen undergoes the process of water washing to transform it into ammonia which is turned into fertilizer for the farm. After the distillation, conversion and treating this crude oil, it is then blended to create more finished products that are available today. This blend of several products ensures that the gas or the fuel is the same every time that it is purchased in a petrol station. How the price of gasoline is determined The price of gasoline is the most important aspect of most car drivers. For instance, in America, majority of individuals own cars where there are approximately 240 million cars on the road. These cars rely on gasoline to continue their daily operations since most of these individuals rely on these cars to commute to work or even for general transportation. Whenever the gas prices increase, then it becomes an economic shock for many car drivers. There are various determinants of gasoline prices. One of them is the global supply and demand. Gasoline prices are often tied to oil prices. Oil is graded in terms of its velocity by the amount of impurities that it contains. The price of oil highly quoted is one for light crude. This oil is very high in demand due to the fewer impurities that it has that taking less time for refineries to process gasoline from it. As oil gets thicker, the amount of impurities increases thus requiring more processing to get the refined gasoline. Though this light or sweet crude oil was widely sought in the past, it has become harder to obtain nowadays. With constrained supply of this oil increases, then the overall prices of gasoline continues to rise. On the other hand, the demand for gasoline is set by the number of individuals using fuel for transportation. With increased demand, the prices of gasoline also increase. In addition, inflation and taxes also account for the increase in gasoline prices. Inflation is the rate at which the prices of goods and services increase. The level of inflation varies in every country calling for the influence in the oil prices. The taxes imposed by the federal government also determine the relative change in the gasoline prices. If the federal taxes are high, then this calls for an increase in the prices of crude oil. In addition, the value of the US dollar also determines the prices of gasoline. The reason is that oil is traded in the world market using the US dollar. If the dollar drops in comparison to other currencies, then the prices of gasoline increase to compensate for this. Another determinant factor is the interruption of the distribution network. Interruptions in the flow of the crude oil through the various distribution networks could increase the gasoline prices to increase (Burgess, 205). This includes natural disasters in oil reservoirs. Moreover, the speculation in the commodity markets for crude oil also increases the overall costs. The financial speculators make money based on the fluctuations occurring in prices of various commodities including oil by placing bets that these prices will increase. Production costs of acquiring crude oil The costs of acquiring oil ranges from $20 and $50 for each barrel. The current production costs are ranging at $50 per barrel. Conclusion The oil industry is termed as an oligarchy indicating that it is quite difficult to get into the oil market. Not many individuals can come up with an oil company. There are over six super countries that have control over the oil market. Crude oil undergoes various processes to ensure that it is refined to come up with gasoline used in vehicles (Aublinger, 215). This is through the process of exploration and refinery to remove any form of impurities to make the gasoline as safe to use as possible. The process of oil exploration is determined by the geologists who have to study the earth first to determine its viability for oil exploration and drilling. Gasoline prices are also determined by various factors that include inflation and taxation. The level of inflation and taxation may either increase or decrease the prices of gasoline. The value of the US dollar also determines the prices of gasoline considering that oil markets are mainly controlled by the US dollar. If the dollar is weak compared to other currencies, then this increases the gasoline prices to compensate for the weak dollar. In addition, the demand and supply of crude oil also affect the prices of gasoline in the market. Increased demand calls for the increase in the prices of gasoline and vice versa. Thus, considering all these factors and this issue of the current increase in the cost of production of oil, then this justifies the current purchase of a gallon of gas at $3 (Herman, 13). The current cost of production of oil is $50 per gallon calling for the increased prices for gasoline in the market. Works cited Aublinger, Christoph. How Much Does It Cost To Produce One Barrel Of Oil . 16 April 2015. . Bret-Rouzaut, Nadine and Denis Babusiaux. Oil and gas exploration and production : reserves, costs, contracts. Paris: Editions Technip, 2011. Burgess, James. In Gloomy Oil Market, $28 Production Costs win the Day. 04 February 2015. . Data, Global. "JX Nippon Oil & Gas Exploration Corporation - Oil & Gas." GlobalData (2013). Fyneface, Akani and Oladutire Oladeji. "Royalty interest management strategy and cost of oil." Journal of Accounting and Taxation (2015): 1-23. Herman, Christopher. "The Worlds Biggest Oil Companies, 2013." Forbes Magazine 11 November 2013. Kenneth, Sundberg. "Surface Geochemistry applications in oil and gas exploration." Oil $ Gas Journal (2014): 92-93. Publications, International Business. Qatar : oil, gas exploration laws and regulations handbook. Washington DC: International Business Publications, 2011. Research, First. "Oil & Gas Exploration & Production." First Research Journal (2014). "Whitepapers." Oil and Gas White Papers.N.p., n.d. Web. 28 Mar. 2015. Read More