What Determines Oil Prices?

Posted by Tyler LaFleur on May 21, 2019

Stonewall what determines oil prices

If you’ve been a citizen of Louisiana or Texas for a couple of decades or more, then you’ve experienced, first-hand, how drastically the oilfield can affect the economy; and, most likely, your individual circumstances.

Yet, many oilfield families and locals feel in the dark when understanding influences upon oil prices or when interpreting trendy, oil news terminology. Fully grasping prices at the pump and interpreting oil and gas lingo can give you and yours an insightful edge.

Keep reading to discover aides in comprehending oil and gas price fluctuations.

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Our intention with this blog is not to speak to oil experts. The news and social media clearly don’t need more of those.

We are here to breakdown the nuts and bolts of the oil industry for the “average Joe”. And that isn't meant as a derogatory statement. If we begin with the basics, then we can comprehend the complicated.

Crude Oil

For starters, crude oil, the raw material that is pumped from the Earth, is usually priced by the barrel, so stay updated on the price per barrel (PPB) as opposed to simply watching gas prices.

Stonewall Oil Prices Crude Oil

And, speaking of gas pump prices … doesn’t the price of gas tell us what oil is doing?

But, how do gas prices correlate with crude oil prices?

Crude oil prices comprise roughly 70% of the price of gasoline at the pump. The remaining percentage depends upon refinery and distribution costs, corporate profit margins; and, of course, our federal taxes. These latter costs remain stable (or fixed), so the change in the price of gasoline accurately reflects oil price fluctuations.

For example, when oil is around $65-$75 PPB, this keeps the gas prices at the pump around $2.25 - $2.75 per gallon.

Yet, when the price per barrel falls between $30-$50 per barrel, the price at the pump usually drops to $1.50 - $2.00 per gallon.

While tempted to celebrate a cushy wallet at the pump, remember that this price drop weakens the economy for local oil cities and sectors, affecting oilfield families who rely on price per barrel numbers to drive their employers’ contracts in the field.

When price per barrel drops, it isn't worth the cost to drill for it in some locations.

For instance, if drilling a well in deep water off the coast of Louisiana is really costly, but the return on the well in regard to the price per barrel of crude oil at that time is low, then the profit isn’t worth the investment required to drill in this location, putting deep water rig employees out of a job.

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Oil Types

Another important knowledge nugget in understanding crude oil sectors includes familiarity with different types of oil, how these oils are characterized, and how they are currently priced.

There are three main types of crude oil:

Each year, big money is invested in the latest engineering technology with hopes to predict the financial future of oil and gas.

This doesn’t work.

While knowing this industry’s future may be impossible, understanding it today isn’t.

Recognizing the relationship between crude oil and pump prices, learning a little terminology and familiarizing yourself with crude oil sectors will help you keep your family on top.

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References

A great resource for a more in-depth dive and breakdown of the three main types of crude oil.

https://www.thebalance.com/crude-oil-prices-trends-and-impact-on-the-economy-and-you-3305738

Where to go to watch an accurate display of current oil prices and trends.

https://oilprice.com/Energy/Crude-Oil/Oil-Markets-Could-See-Deficit-In-2019.html

Written by Tyler LaFleur

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