Research Paper Example on Petroleum Economics

Introduction 3
Crude Oil 3
Importance 3
Classification 4
Price Volatility 4
Natural Gas 5
Importance 5
Classification 5
Price Volatility 6
Findings 6
Analysis and Discussion 8
Conclusion 10
References 11

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Petroleum Economics

Introduction

Petroleum economics is one of the fields that assist in expanding the knowledge relating to price shifts in the oil market. The performance of the two broad categories of the crude oil in line with the market price variability calls for the assessment of the contributing factors. Historical analysis reveals how the heavy oil has been associated with lower rates as compared to the light oil. The same global phenomenon applies to the United States oil energy sector. However, recent changes indicate that the difference between the prices is becoming insignificant with some unusual scenario showing how the price heavy oil increased above the light oil costs per barrel. This paper evaluates the relationship between the price of API 21 and API 42 as examples heavy and light oil respectively.

Crude Oil

Importance

Crude oil is used in several processes because of its unique composition that allows chemical recombination and saturation. Crude oil is used as a source of energy based on some carbon-hydrogen bonds. The breaking of the chemical bonds through combustion processes produce an enormous amount of energy to run powerful machines. Alternatively, crude oil is used directly as a raw material in production processes. The manufacture of insulating materials and interior of other devices depends on oil where the polymerization process allows the reduction in delocalized electrons. The clothing industries depend on petroleum-based products to enhance the color of fabrics as well as reduce the flammability of the hydrocarbon materials used to manufacture the clothes (Crumbley et. al., 2015). The foam used to make cushions and mattresses, and the wide range of plastics is a product of crude oil saturation.

Classification

Crude oil can be classified as heavy or light depending on the density factor based on the API gravity scale. Heavy oil has a higher density with API gravity between 10 and 21.5. Light oil has a relatively low density with API gravity index of 31.1 to 45. In most cases, oil from different regions differ regarding their density and composition; however, some cases have associated with various categories of crude oil from the same geographic location. Therefore, the use of the amount of the hydrocarbons and components of the original form has been included as a classification variable. In this case, crude oil contains additional hydrocarbons such as Naphthenes, Paraffin, Asphaltic, and Aromatics. The ratio of carbon to hydrogen composition assists in identifying the products in crude oil. The difference in density and boiling points is an important characteristic that supports fractional distillation. The heavy oil is used majorly in the industrial process while light oil is used in less-intensive production.

Price Volatility

The price of oil in the United States depends on internal and external factors associated with the industry. The availability of the underground oil and the cost of drilling contribute directly to the amount of oil available for supply. Limited supply with a high demand increases the market price. A similar scenario is also depicted when the analysis is extended to a global scale. External factors such as political instability have affected the price of oil in countries associated with the export ties with the United States. Direct government influence through taxation, extraction limits and policy reconstruction could alter the market price. The effect of each factor depends on the magnitude of the related impact. For example, government policy and political instability cause an instantaneous effect on the price of the product; however, the drilled amount has a steady influence over an extended period. The sudden changes in the cost of oil in the market create the price volatility effect.

Natural Gas

Importance

The primary use of natural gas is significant as a source of energy for domestic and light industrial activities. For example, natural gas is used in confectionaries as an artificial ripening agent for fruits. In the United States, the generation of electric energy partly uses natural gas to power turbines. Household energy comes from electricity supplies, but the natural gas also forms a significant percentage of the energy utilized in homes (Cleveland, 2017). Hydrogen is used in industries to solidify cooking fat while gasoline is an automobile fuel. Therefore, natural gas complements the availability of the crude oil in the market.

Classification

Natural gas is a mixture of different substances with high flammability and low density. The combustion of natural gas produces high energy that is used for various purposed as discussed earlier. The mole percentage is a metric used to classify natural gas. The additional components such as sulfur, air, and water can be used to categorize crude oil if the percentage composition of these compounds and elements can be determined. Nevertheless, the number of hydrocarbon bonds depicts the existence of different natural gas such as carbon dioxide, hydrogen, propane, and methane among others.

Price Volatility

The performance of natural gas in the market is subjected to factors that determine the price of products in the market. The effect of supply and demand to obtain an equilibrium price has contributed to the price volatility of natural gas. The drilling and supply firms depend on the availability of the product to satisfy the market demands. The cost of production contributes to the final market price. The effect of access to alternative sources of energy such as crude oil and electricity has affected the stability of natural gas prices in the market. The intensity of the regulations governing the extraction and distribution of natural gas can also influence the price of the product directly. Nevertheless, the need for stability in prices is key to the economy of the Unites States.

Findings

The collected data reveals that the price of the heavy oil (API 21) has been lower when compared to the price of the light oil (API 42). The margin between the price of the two categories on a monthly basis showed consistency; however, with time the gap reduced. The consideration of the trend associated with each type of crude oil depicts a general price increase in the high prices recorded from 1995. Looking at the cost variations shows that when the monthly cost for each type of oil in considered reveals the existence of external or internal factors with significant implication on market equilibrium. The graph of the monthly price for each oil category ascertains shifting relationship as shown below.

Figure 1: The Price of API 21 and API 42 (EIA, 2017 a-c)

On the other hand, when we calculated the delta differences for every month, which was the difference between the price per barrel of the heavy oil and the light oil, the figures revealed a shift from the negative difference to a positive value indicating a substantial change in the oil sector. The delta factor assists in decision making to ascertain the need for critical analysis of the contributing factors in the market. Social, economic, and political factors have a direct influence on the shifts depicted between the heavy and the light oil as discussed in the next section of this paper. The graph of the delta difference is shown below.

Figure 2: Delta Difference between API 21 and API 42 (EIA, 2017a-c)

Analysis and Discussion

The evaluation of the price factor associated with the heavy and light crude oils showed a significant trend. The two samples of crude oil categories related to this analysis depicted a steady increase in the dollar/barrel cost every month. Although instances of turbulence within the constant growth could not be avoided, the average annual price indicates that the price of oil has been increasing. However, in 1990 the United States witnessed the volatility of the oil prices when the market price rose unexpectedly. The same scenario occurred in 2008 where the prices rose and reduced again within few months. In 2014, the cost of both the heavy and light crude oil decreased significantly.

Moreover, considering the specific API gravity values indicates that the price of the heavy oil has been lower than the light oil, which gives the constant negative delta in the 19th century. The price difference gap remained significant over several decades with November 1990 recording the largest negative price difference. However, the difference between the price of heavy and light oil used in this evaluation started to narrow. By 1994 and 2010, the delta value was constant but insignificant.

The changing trends associated with the price of heavy and light oil can be traced back to social, economic, and political matters. The economy of the United States depends on the positive balance of payment and increase in savings. The nature of economic activities such as industrial production depends on supply and cost of crude oil for energy purposes and raw material (Tertzakian, 2014). Initially, the over dependence on light oil for industrial processes led to the increase in price as compared to the heavy oil. The essential composition such as gasoline was favorable for energy production. Most firms in the United States concentrated on the drilling and processing of light oil. The rise in barrels available in the market affected the equilibrium price. The gap between the cost of the heavy and the light oil significantly reduced.

On the other hand, the heavy oil supply in the market decreased because of the orientation of the industry, which was biased to light oil. The demand for the heavy oil could not match the supply, which resulted in the shift in market prices closer to the preferred alternative. The industrialization also increased the demand for heavy oil based on the abundance of bitumen, which can be used as a complimentary raw material in production. In fact, research evaluations have indicated the steady shift to heavy oil as an alternative source of energy (Santos et. al., 2014). Therefore, the effect of the identified socioeconomic orientations contributed to the recent positive delta values between January 2009 and December 2015.

Nevertheless, other factors such as legal and politic decision have a significant implication on the market price involving heavy and light oil. For example, the current economic target in the United States is to increase the capacity of imports, which is expected to increase the price of light oil in 2017. However, there is need to consider the exact metric effect of each factor, which was a limitation in this analysis. Moreover, access to historical data between 1970 and 1982 was a problem because of the privacy factors associated with the consulted databases. Therefore, a more advanced methodology should be considered in future studies to enhance the reliability and validity of the findings related to petroleum economics.

Conclusion

In conclusion, the price of oil in the market depends on social, political, and economic factors with different implication on the market. Initially, the price of heavy oil was reasonably cheap when compared to the light oil. However, a change in the economic performance, which depends on the nature of activities meant to increase income, has caused positive delta value....