The true cost of oil

Discover how the price is influenced by geography and politics with this guide from The Times

What is moving oil prices?

The price of oil price ultimately comes down to supply and demand.

Oil prices hit $115 last June, when a military advance by Islamic militants in Iraq triggered fears that they would destroy the country’s huge oilfields and disrupt global supplies. However, Iraqi exports have remained largely unaffected and global oil supplies are growing due to growing US crude production, which has increased by more than 1 million barrels a day over the past 12 months.

This has happened alongside slowing demand caused by economic decline in major markets, such as Europe, and a slowdown in growth China.

As a result, the oil price has been regularly hitting fresh five-year lows, at times dipping below $50. However, that is still above historical levels.

Tap on the chart below to see how the spot price of Brent crude has moved since the 1980s

Which countries are worst affected by falling oil prices?

According to the International Energy Agency, most American shale oil projects need the commodity to be priced at $80 a barrel to be economic and drilling would be cut back if prices were to fall below this level.

By contrast, the world’s top oil exporter and the de facto leader of the 12-nation Opec cartel, Saudi Arabia, needs oil at $85 to break even, but the country can afford to run a deficit for several years.

But the falling price is draining Gulf states of their spending power — but hitting Russia and other producers harder still. Venezuela and Nigeria face bankruptcy, and there are fears that the collapse in the oil price could trigger a seismic shift in the global balance of power.

Saudi Arabia took $2 billion a week out of its foreign reserves between the end of September 2014 and June 2015, with King Salman, who came to power in January, unleashing an intensive military onslaught against Iranian-backed Houthi rebels in Yemen and funnelling arms to opponents of President Assad in Syria. Saudi Arabia’s monetary agency put its foreign reserves at $672 billion at the end of June, down from $746 billion in September 2014.

Many observers believe that Saudi Arabia has brought the oil crisis on itself by refusing to curb production to drown out competition from fracking by the US. As a result, the price has fallen from $104 a barrel a year ago to less than $50 now, and the effect is reverberating around the world — from the slums of Caracas to the battlefields of Syria and Iraq; from the Russian Arctic to the Pearl River Delta in China.

Shale companies need higher prices due to the large levels of debt they have taken on since 2010 to fuel the shale boom. These low oil prices do have the potential to cause defaults in the US high yield industry.

Shell is confident that its low levels of borrowing will ensure that it can withstand two years of low oil prices without having to cut its dividend.

In emerging markets, energy importers such as Turkey and India receive a boost from these low oil prices.

Who makes it all?

The map shows crude oil production for the world's 14 biggest producers.

Saudi Arabia versus the US

Why is there a price war between the Opec nations and the US shale industry?

When it comes to oil, Saudi Arabia has the United States in a difficult position.

Thanks to its shale boom, the US will soon overtake the Saudis as the world’s largest crude producer. Yet America will never be able to control the global market until it lifts its ban on crude exports, in place since Opec’s price wars of the 1970s.

Awash with crude from shale oil and oil sands projects, North American producers are unable to sell their crude to the highest bidder. Even transporting the oil to where it’s needed domestically is difficult. New pipeline capacity has not kept up with supply, resulting in huge bottlenecks and stranded stocks.

The result is that US oil, typically measured by the West Texas Intermediate (WTI) index, has been trading at a hefty discount to Brent.

Saudi Arabia’s recent move to cut the price it charges US customers, typically refiners on the southern states’ Gulf Coast, sent WTI prices falling even more steeply than Brent, widening the gap between the two.

America is a smaller market than Europe and Asia for the Saudis. For the 1990s and the following decade, US imports of Saudi crude were about 1.5 million barrels per day. As the shale oil boom took off, imports fell and in August fell they below a million barrels for the first time since the economic slowdown in 2009.

The chart below shows how Saudi Arabia has consistently outperformed the US in terms of oil production over the last 15 months. Although the gap has been closed recently, to under 1,000 barrels a day since August 2014, the Saudis still outstrip the US for crude oil production.

Unit: Thousand barrels per day (kb/d) Product: crude oil Balance: Production/Refinery output

Brent Crude or West Texas Intermediate?

Brent Crude is a light, sweet (low density and low sulphur content) oil from the North Sea region. Oil flowing west from Europe, Africa and the Middle East tends to be priced relative to this benchmark. In North America, the most commonly used benchmark is West Texas Intermediate (WTI), a slightly higher-quality crude than Brent that’s mostly stockpiled in Oklahoma. Traditionally, these two crude oils trade for very close to the same price, with WTI frequently bringing in a couple of dollars more than Brent because of its higher quality. But that’s been turned on its head in recent months, with WTI trading at a significant discount to Brent due to a glut in the American oil supply.

Tap on the chart below to compare Brent Crude and West Texas Intermediate oil prices over the last two years.

The Shaybah mega-project in Saudi Arabia is the first, and so far only, oilfield development in the vast al-Rub al-Khali desert | credit: Getty images

What does the falling price mean for the consumer?

The fall has resulted in lower pump prices for British motorists and could bring down household energy bills.

Supermarkets have entered in to a petrol price war and are regularly cutting 1 or 2p off the price at the pump. Many analysts expect that the price of petrol could dip below £1.

Alex Dryden, global market strategist at JPMorgan Asset Management, says the lower petrol prices mean that the world’s fuel costs have dropped by $1.8bn a day, “which is a big benefit to global growth”.

“Estimates of growth suggest that a $10 fall in oil prices means that oil-importing economies grow by an additional 0.5 per cent a year at the expense of oil-exporting economies,” he says.

The biggest winner, he adds, is the hard-pressed consumer in the US and Europe as lower petrol prices put more money back in their pocket.

Tap on '2040' below to see how world demand for oil will increase over the next 27 years.

Projected world oil demand

2013: 90 million barrels per day
2040: 110 million barrels per day

Each barrel represents one million barrels of oil.

Will producers cut production?

All eyes were on the Opec summit in Vienna in November in what was touted as the most important meeting in more than a decade for the oil cartel.

Some of the 12 members of Opec, which produces a third of the world’s oil, expressed concern about the falling price but the outcome from the meeting was that there would be not be a cut in production.

The decision marks a victory for the Saudis and a major setback for members who need oil at $100 to balance the books.

Oil production: top 23 countries

The chart shows production rates for the top 23 oil producing countries in the world over the last 16 months. Tap on the tab at the top to select a country and see their output.

Unit - Thousand Barrels per day (kb/d) Balance - Product refinery/output

Grangemouth oil refinery, near Edinburgh, is one of two refineries in Scotland and seven in the United Kingdom | Credit: Andrew O'Brien

Rebecca Clancy, Sam Joiner and Michael Simlett