Crude Oil

Definition

Crude oil, also known as petroleum, is a naturally occurring, unrefined fossil fuel formed from ancient organic matter. It is primarily used as a source of energy, refined into various products such as gasoline, diesel fuels, and heating oils. Its price in the market is a key indicator in global economics, influencing both the energy sector and broader economy.

Phonetic

The phonetics of the keyword “Crude Oil” is /kruːd ɔɪl/.

Key Takeaways

1. Formation: Crude oil is a naturally occurring fossil fuel that forms from the remains of plants and animals that lived millions of years ago. It’s typically found underground or under the sea floor and is extracted through drilling.
2. Uses: Crude oil is a non-renewable resource that is primarily used as a source of energy. It is refined into various types of fuels, including petrol, diesel, jet fuel, heating oil, and kerosene. It’s also used to produce chemicals, lubricants, waxes, tars, and even plastics.
3. Environmental Impact: While crude oil is a crucial component of modern industry and transportation, its extraction, refining, and consumption contribute to environmental hazards. This includes air and water pollution, oil spills, and the emission of greenhouse gases, which contribute to climate change.

Importance

Crude oil is a significant term in business/finance as it represents one of the most traded commodities globally with a high impact on the world economy. It forms the basis for several key products such as gasoline, diesel, jet fuel, and numerous chemicals, directly influencing their costs. It serves as a critical revenue source for oil-producing countries and a significant expenditure for countries dependent on oil imports. The crude oil price also affects the inflation rate, exchange rates, stock market prices, and overall economic circumstances. Therefore, the role of crude oil in business/finance is significant, making it a crucial factor in global economic stability.

Explanation

Crude oil, often referred to as petroleum, is one of the most essential resources across the globe due to its plethora of uses. The primary purpose of crude oil is to source energy. It forms the basis for gasoline and diesel fuels used in transportation, heating oils used in homes, and other industrial fuel types. Around two-thirds of the world’s electricity is generated from power plants that run on fossil fuels, mainly coal and natural gas, and to a smaller extent, crude oil. Its versatility and high energy density have secured its position as a vital component for global energy demands. Beyond fuel, crude oil also plays a crucial role as a raw material in a multitude of products. Plastics, synthetic materials, pharmaceuticals, cosmetics, agricultural fertilizers, and a whole host of daily-use products have their origins in crude oil. Items such as compact discs, tires, and even sunglasses contain products derived from crude oil. Also, a fair amount of important industrial chemicals are produced from crude. It’s crucial to note that the worldwide economy, with its intricate supply chains and a variety of industries, is inextricably linked to crude oil and its by-products and derivatives.

Examples

1. Saudi Aramco’s IPO: Saudi Aramco, the Saudi Arabian state-owned oil company, went public in 2019. As one of the world’s largest companies in the crude oil industry, its IPO drew significant attention from investors and analysts alike. Their valuation relied heavily on the condition of the global crude oil market. 2. Oil Price Crash 2020: Due to the Covid-19 pandemic, the demand for crude oil plummeted as travel restrictions were imposed worldwide. Combined with a price war between top oil-producing countries, Saudi Arabia and Russia, this caused a drastic drop in the price of crude oil. It even went negative in the U.S for the first time in history which meant producers were paying buyers to take the oil off their hands due to storage limitations. 3. Exxon Mobil’s Shift to Green Energy: One of the largest oil companies globally, Exxon Mobil, facing increased pressure from investors, stakeholders, and legislative bodies, is beginning to invest more into green energy sources. Despite their heavy involvement in the crude oil industry, these external pressures have forced them to consider more sustainable alternatives, presenting a significant shift from traditional crude oil reliance.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Barrel of Oil Equivalent (BOE)
• Futures Contract
• OPEC (Organization of Petroleum Exporting Countries)
• Petroleum Inventory
• Spot Price

Sources for More Information

• Investopedia
• TheStreet
• Finra
• Forbes