Bella

Petroleum Economics
Summary of World Oil and Gas Supply and Demand
The article examines the world petroleum and gas supply and demand pattern.

Highest share of the world total oil is Middle East with the highest oil proven reserve.
Large proven gas reserves accounts in Middle East and Eastern Europe.
High oil prices induce more discoveries. Less discoveries in 2009-2011 is due to
exploration at challenging areas, environmental problems and government restrictions.
World oil demand has increased in developing countries due to rapid economic growth
and increasing population.
Leading gas suppliers are United States and Russia, with high demands from U.S., Russia
and Europe.
Current economic and technical conditions are taking into account in producing oil for
proven reserve.
The life of oil reserve is related to constant rate of production, stagnant oil demand and
no additional discoveries.
Rising oil price causes high investments in exploration and increases proven reserves.
Middle East emerged as important producing region, with 25% more than world output.
African production maintained 13% from 1970-2010.
Pattern of primary energy production changed because replacement by other forms of
energy.
Types of crude oil are based on density and sulfur contents. Light crude, less complex
refining process. U.S. and West Europe produce almost half of total world refined oil
product.
Refineries usually located near consuming areas except U.S. and West Europe. Refined
oil product supply gives world economic growth rate of 2% per year.
Even when consumption of other forms of energy increases, oil is still the most important
source of energy consumption.
Gasoline, middle distillates and fuel oil are major refined oil products. U.S., West Europe
and Japan consumption of refined oil product have increased.
Natural gas proven reserve increases but constrained by the capital cost and difficulty of
gas movement to market where it is produced. The production level reflects the supply
and consumption represents the demand; balance supply-demand reflects market price.
Middle East and Asia Pacific emerges as important suppliers of natural gas and the main
consumers are North America and Europe including Russia.

Summary of Structure of the Oil and Gas Industry

The article examines the operating and cost structure that gives market price.

In exploration and production, high price of exploration with new technologies, drilling
test wells and confirmation wells, with process of development that requires facilities. Oil
price is directly related to cost of development.
During production, oil pricing is based on oil supply and demand. Supply curve will be
based on production cost. Cost structure alone does not determine the market structure.
Oil production responds slowly to price changes.
The supply is considered elastic when price of supply is more than one; inelastic oil
supply is due to high fixed costs in production. Demand for refined oil products is
inelastic.
Oil producing countries took over most oil operations except refining which is under
national oil companies. Growth in oil demand, increases capacity utilization and
improves refining margin. Shortage of basic refining capacity in major consuming areas
improves the profitability of source-based refineries in producing countries.
Oil marketing includes wholesale market and retail market. Worlds equity crude
disappears due to nationalization of the assets. Oil traded on spot basis has increased. Oil
exchange markets allow the movement away from physical crude oil markets.
Heavy fuel price related to price of coal and natural gas. Oil product price depends on
crude oil price and quality of crude, and affected by degree of market competition,
method of trading in financial markets and government regulations.
Balancing the supply and demand by agreements are sometimes distorted,resulting
oligopoly market which gives differences between production cost and market price.
Deviation of oil prices from production cost gives integration and control of market from
exploration to market. Market power of the majors has reduced yet controlling 25% of
refining and 35% marketing.
Before World War, single basing-point price is used taking into account price of delivery.
After War, dual basing point is used based on f.o.b. price from Arabian Gulf. Posted price
by major oil companies are also for royalty and income tax of oil-producing government.
Market based pricing system developed by instruments of derivative. Trading oil method
is by paper markets or physical oil trading through spot market.
Consumption of natural gas has increased over the years. Since 2009, demand for natural
gas decreases but supply of natural gas increases, which led to LNG spot prices to be low.
In U.S. price of natural gas reflects interaction between supply and demand, which are
inelastic in short run. Spot price reflects market condition which price of contract based
on delivery to Henry Hub.
Outside U.S. natural gas price is linked to oil price through long term contract. In Europe,
gas based on oil product price, whereas in Asia, based on government regulation with
spot pricing of LNG.