38- www. world- petroleum. org 3.4- Supply and markets OPEC, the IEA and prices Crude oil is the world's most actively traded commodity. Much of the money changes hands in the busy futures markets of London, New York and Singapore. And the oil price is not just relevant to oil: it dic-tates the cost of other forms of energy, in-cluding natural gas, and the cost of produc-ing many other materials, such as steel. Oil prices are referenced against bench-mark crudes ( see box), trading at a premium or a discount to them, depending on their quality: those that yield a greater volume of high- value products - such as gasoline - are more expensive than those that produce greater quantities of lower- value products, such as fuel oil. Brent is used to price around two- thirds of the world's internationally traded crude oil - even though produced volumes of North Sea Brent crude are now very small. The Organization of the Petroleum Exporting Countries ( OPEC) - a group of producing countries that includes many of the world's biggest oil- supplying nations - also has its own reference price, the OPEC basket. What is OPEC? OPEC is a prime force in influencing global oil prices: when it cuts output, there is less oil available to the world and prices gener-ally rise; when it boosts supply, prices gener-ally fall. OPEC, headquartered in Vienna and now made up of 12 member countries, was formed in 1960 by Saudi Arabia, Iran, Iraq, Kuwait and Venezuela, which remain mem-bers. The other seven, joining the group at various stages, are: Qatar, Libya, the UAE, Nigeria, Algeria, Ecuador and Angola. It wasn't until the early 1970s that OPEC be-came a global powerhouse. Until then, the oil market was dominated by seven large firms, known as the Seven Sisters, which produced more than 90% of Middle East oil. But the outbreak of war between Israel and the Arab states in 1973 resulted in a big shift in the bal-ance of power. OPEC's Arab members halted oil supplies to countries supporting Israel - the US and western Europe. Oil prices quad-rupled. Since then, the group has generally been able to act as a swing producer, varying output according to the market's need for oil or its own view of where prices should be - largely thanks to the extremely large capac-ity of one country, Saudi Arabia, which alone is theoretically capable of supplying around 12% of world oil demand. Only where global growth has slowed rapidly, such as between 1998 and 2001, has the OPEC proved unsuc-cessful in manipulating oil prices. The consumer response OPEC's view of what prices should be usu-ally clashes with the view of the International Energy Agency ( IEA), set up in 1974 by de-veloped consumer countries in response to the oil crisis. Its purpose was to co- ordinate the consumer response to oil- supply emer-gencies and to counter OPEC's growing power. The IEA ´ s most important act was to tell member countries to store three months' worth of oil, in case of a supply stoppage. The IEA still tries to influence the geopoli-tics of oil to the advantage of its members - countries in the Organisation for Economic Co- operation and Development - by, for ex-ample, urging producers to sell more oil or in-vest more in developing their reserves to en-sure steady flows of oil in the future. And it of-ten disagrees with OPEC: where OPEC gen-erally wants to get more for its oil, the IEA gen-erally wants energy to be more affordable. ?? Benchmark crudes The main benchmark crude oils are: Brent, a combination of crude oil from 15 North Sea fields, with an associated futures contract traded at London's ICE Futures exchange; and West Texas Intermediate ( WTI), pro-duced in the US, with an associated futures contract trading on the New York Mercantile Exchange. In the Mideast Gulf, Dubai crude is used as a benchmark to price sales of other regional crudes to Asia. ??
39- www. energy- future. com Industry facts Source - Opec ( based on 2007 data). * fob = free on board $ a litre Germany 0.00.250.500.751.001.251.501.75 US Canada Japan France Italy UK Crude oil fob* price Industry profit margin Tax The true cost of gasoline Who gets what from a litre of oil? Newspapers often blame oil producers if the price of gasoline is perceived to be too high. But a large component of the final cost of pump products is taxation levied by the government of the country where the oil is being consumed. This is the principal reason why gasoline prices vary substantially from country to country. According to the Organization of the Petroleum Exporting Countries ( OPEC), the amount of money the UK government receives from taxing oil products is around 1.6 times the amount OPEC members get from the sale of their crude oil. Between 2003 and 2007, says OPEC, the G7 nations ( Canada, France, Germany, Italy, Japan, the UK and the US) made $ 2,585 billion from oil taxation - slightly more than the $ 2,539 billion OPEC generated from oil sales in the same period. But, argues OPEC, the producers' net take is substantially lower than that of the consuming economies: whereas the G7' s tax revenue is " pure profit", the producers had to meet the cost of finding, producing and transporting their oil from their $ 2,539 billion.