Background
The size, scope, and complexity of the global oil market is unique among physical commodities. With more than $60 billion per year in physical transactions, encompassing scores of different crude oil grades going to hundreds of refineries all over the world, it overshadows all other physical commodity markets, and as a commodity will continue to remain in a league of its own. Its inherent complexity, the political and macroeconomic importance that it bears, and the lack of ready substitutes for liquid fuels in key applications such as transportation and petrochemicals ensure that oil will be of vital importance for many more years to come.
Continued Dynamism
The global oil market’s transformation from the stable, controlled supply systems of the international majors in the 1960s to the volatile, freewheeling market since the turn of the century underscores another crucial aspect of the oil business: its continued dynamism. Not only are prices volatile, but virtually all aspects of the global oil market have been in a constant process of transformation. Even up until the late 1970s, the international oil market was considered to be a comfortable club with membership drawn mainly from the ranks of major oil companies and heavily dominated by them.
With enhanced price volatility, the surge in non-OPEC supply sources, including new producers among the former Soviet Republics, the rising importance of national oil companies and a host of other changes, commerce in oil has become more diverse, complex, and competitive. In contrast to the state of flux that has now become the norm for global oil markets, the physical characteristics of crude oil have always conspired to create a special degree of complexity that makes it unusual among commodities. Each crude oil from each field is unique in quality, and significant variations can occur in the quality of a single field’s output over time. This means that individual crude oils can present special challenges in handling and refining and, therefore, in their valuations in the marketplace.
