Oil

Refined light crude oil can be refined into only a few products. The heavy crude oil holds more production potential and costs less so it is more desirable. This is why crude oil is the standard commodity that is used to set the world oil prices, not the refined products. The main market that sets the price for Canadian crude oil is the Chicago, Illinois area where Canadian, American, and international oil supplies compete. Edmonton per par pricing is determined by the price of competing crude oils in the Chicago market. The other key market for Canada is West Texas Intermediate (WTI), and is a major world crude oil that sets the prices for various grades of oil everywhere. The price of WTI reflects the supply and demand of North America and the world.

Crude oil prices vary all over the world due to transportation costs. Shipping on ocean oil tankers is the most inexpensive form of long-distance transportation with pipelines as the second lowest cost. If the price offered by one buyer is too low, the seller will go with the higher bid even if the transportation cost is also higher. The seller with do this with the hope that the increase in the bid will offset the costs to the seller. Pipeline tariffs also are higher because more energy is required to move the heavy crude. Price is also affected by the sulphur content. High-sulphur sour crude sells for less because more processing is needed than for the sweet crude. Syncrude sweet crude blend is then more expensive than the sour crude because the processing to remove much of the sulphur has already been done.

Political and economic changes in the world affect the marketing and prices of oil. For example, when the first major fighting in Iran-Iraq War began in 1982, crude oil prices sharply increased per barrel from thirty-five dollars per barrel to almost forty dollars per barrel in one year. Oil prices tripled between January 1999 and September 2000 due to strong world oil demand, OPEC oil production cutbacks, and other factors including weather and low oil stock levels. This was an example of how interconnected the world’s crude oil market is and the effects of political decisions.

Energy Information Administration: http://www.eia.doe.gov/emeu/cabs/chron.html