Crude Oil: Draining Money For Over 175 Years.
Jake Bernstein ’29
The most widely used liquid is water;second being oil. On average,the global oil usage ranges from 102 to 105 million barrels of oil per day (one barrel is 42 US gallons), enough to fill the entire island of Manhattan, including all its buildings more than 3.6 times over. This consumption level does not come without a cost. At the time of this writing, the price of a barrel of crude oil cost an average of $101.99, meaning the world's oil consumption daily costs roughly 10.5 billion dollars. To put this in perspective, this is the amount of money Canadians spent in a year on Amazon. So how are these prices calculated, and why are they so high? The answer is complicated.
In the early morning of February 28th, the United States and Israel launched massive coordinated strikes at Iran targeting its leadership and military infrastructure. Among those killed was Ayatollah Ali Khamenei, whose death sent shockwaves of grief and anger throughout Iran and its supported organizations around the world. In response Iran fired missiles into Israel and U.S. military targets in the area, as well as attacking ships moving through the Strait of Hormuz.
The Strait of Hormuz is a narrow 2 mile wide waterway chokepoint serving as the only waterway access between the Persian Gulf, Gulf of Oman and the open ocean. Bordered by Iran to the North and Oman to the South, it provides access to over a dozen ports in 5 countries where 20% of the world's oil comes from. Closing it off would be catastrophic, and that is what has occurred. It is important to understand that Iran has not fully blockaded, ships that Iran claimed not to be associated with the U.S. or its allies including Israel have been allowed though and many others have risked it all to try. Since the conflict began three weeks ago, between 18 and 21 ships have reportedly been attacked by Iranian missiles and explosive-laden speedboats. The new increased likelihood of being attacked has increased the cost of insuring a ship by over 200%-300% since the conflict began, in some cases jumping to over 5% of the value of the ship. For example, a tanker that costs $100 million to build now costs $5 million to insure. This new premium has led to price increase to move and refine the gas in which the cost of which the company passes on to the consumer. Another reason oil prices have increased is the fact that even though there is less oil being moved to the consumer, the need for said oil is still as much or even more. With less of a just as or more need thing, the price of each bit of that thing (barrel of oil) has gone up, which will be explained more later on in this article.
According to the international energy administration (IEA), in the global oil market, there are two major benchmarks for the price of crude oil measured in price per barrel. West Texas Intermediate (WTI) is used for measuring domestic prices while Brent crude oil is used for measuring international prices, based in the US and England respectively. For the purposes of this article and to grasp the full extent of the issue, we will be using the Brent crude oil prices.
Brent crude is traded both as a commodity-like oranges and wheat- in the Dated Brent as well as in futures contracts on the intercontinental exchange (ICE) in London. Dated Brent tracks the physical transactions and movement of oil across the North Sea. This process is similar to trading stock, with barrels of oil instead of shares in a company. Across the ICE futures network, people are making deals to buy or sell oil based on the previous price. The cost per barrel is now the new price for the next person, which constantly changes as the day progresses. This is caused by the basic principles of supply and demand. More available oil means each barrel is worth less and vice versa. So when a major pathway for oil is cut off, in this case the Strait of Hormuz, there is less oil being traded which means that each barrel of oil is now more precious and costs more.
High oil prices are not new to U.S. customers. In 1973 and again in 1979, the Organization of Petroleum Exporting Countries (OPEC), a group of 12 oil rich nations that joined together to control oil supply, limited the access to their oil by U.S. and European countries due to the Yom Kippur War and the Islamic revolution in Iran. This decrease in the amount of oil coming into the market led to enormous price hikes with the cost of oil jumping from $3 to $12 a barrel. The U.S. insinuated gas rationing and many stations across the nation ran out of gas. These events and the crisis going on today are a reminder of the crippling effect foreign oil has on the country. Even as a net oil exporter (we produce more than we import) we still get 16% of our energy needs from foreign oil. This now makes cutting down on foreign oil a national security issue as well as an environmental one. In order to reduce our dependencies of foreign countries for energy, dependence that can be seen in dealings that undercut U.S. values, we must either increase our amount of drilling, destroying our environment, or invest in reusable energies.
Authors note: This article was written before the Iranian ceasefire and the opening and blockade of the Strait of Hormuz by the U.S. and Israel. In order to grasp the full seriousness of the issue at the height of the conflict, I have left the article mostly unchanged.