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Crude Oil
Updated 19:00 IST 24 Apr 2015

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Know Crude Oil

Crude oil is the most widely used energy material in the world. Crude oil is a mixture of hydrocarbons that exists in a liquid phase in natural underground reservoirs. Oil and gas account for about 60 per cent of the total world's primary energy consumption.

Crude oil - as petroleum directly out of the ground is called - is a remarkably varied substance, both in its use and composition. Crude oil is formed from the preserved remains of prehistoric zooplankton and algae, which have been settled to the sea (or lake) bottom in large quantities under anoxic conditions. It was formed over millions of years from the remains of tiny aquatic plants and animals that lived in ancient seas due to compression and heating of ancient organic materials over geological time. The oldest oil-bearing rocks date back to more than 600 million years, the youngest being as old as about 1 million years.

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Although various types of hydrocarbons - molecules made of hydrogen and carbon atoms - form the basis of all crude oils, they differ in their configurations. The chemical structure of petroleum is composed of hydrocarbon chains of different lengths. Because of this, petroleum may be taken to oil refineries and the hydrocarbon chemicals separated by distillation and treated by other chemical processes, to be used for a variety of purposes. It can be a straw-colored liquid or tar-black solid. Red, green and brown hues are not uncommon.

Burning crude oil itself is of limited use. To extract the maximum value from crude, it first needs to be refined into petroleum products. The best-known of these is gasoline, or petrol. However, there are many other products that can be obtained when a barrel of crude oil is refined. These include liquefied petroleum gas (LPG), naphtha, kerosene, gasoil and fuel oil. Other useful products which are not fuels can also be manufactured by refining crude oil, such as lubricants and asphalt (used in paving roads). A range of sub-items like perfumes and insecticides are also ultimately derived from crude oil.

Furthermore, several of the products listed above which are derived from crude oil, such as naphtha, gasoil, LPG and ethane, can themselves be used as inputs or feedstocks in the production of petrochemicals. There are more than 4,000 different petrochemical products, but those which are considered as basic products include ethylene, propylene, butadiene, benzene, ammonia and methanol. The main groups of petrochemical end-products are plastics, synthetic fibres, synthetic rubbers, detergents and chemical fertilisers.

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Considering the vast number of products that are derived from it, crude oil is a very versatile substance. Life as we know it today would be extremely difficult without crude oil and its by-products.

The edifice modern industrial economy as well as agriculture depends upon crude oil in way or the other. Crude oil is also a key variable in global financial markets as the largest traded commodity in the world. Broadly crude oil is categorized into three groups – Brent Crude, West Texas Intermediate and OPEC Crude.

Brent crude is the standard benchmark of crude oil in Europe. Refined mainly in Northwest Europe North Sea coast is the main source of Brent Crude. Priced slightly above the reference price of Organization of Petroleum Exporting Countries Brent crude however is on average lower by U.S. $1-2 per barrel lower compared with West Texas Intermediate.

West Texan Intermediate known as WTI in trade parlance is considered as of very high quality due to very lower sulphur content. WTI normally commands a premium of $ 2-4 dollar per barrel compared with OPEC basket price and 1-2 with Brent Crude.

OPEC, the organization formed in mid 1960s by some of the major oil producing countries, is a powerful cartel in shaping global oil prices. Besides countries in West Asian region other key members in the cartel are Venezuela, Algeria and Nigeria.

Crude oil accounts for nearly 40% of the global energy demand. Global consumption of crude oil is estimated at 80 million barrels per day. The U.S. with 20 million is the leading consumer followed by China, Japan and European Union. Members of OPEC provide around 55% of global crude oil exports.

India, rated as one of the 10 top oil consumers in the world, depends on import for nearly 70% of its crude oil requirements. India’s consumption estimated at 2.5 million barrels per day is expected to rise further due to rapid pace of economic development. Domestic production of crude with less than 1 million barrels per day India depends heavily on imports. Indian imports are mainly from OPEC members.

Crude oil prices are highly sensitive to global political and economic developments. Oil prices surged ahead during the past three years from less than $30 per barrel to over $140 per barrel. Currently hovering around over $ 50 per barrel crude oil prices would play a crucial role in shaping the fortunes global economic developments as well as financial markets for a long time to come.