World Petroleum Day: Learn the importance of this commodity for the world
Petroleum is one of the most critical natural resources on the planet. Find out how the use of this commodity has evolved over time, and why it´s still so relevant across the globe.
Petroleum or crude oil is a natural resource that’s formed over millions of years from the decomposition of organic matter, such as algae and plant residue. It’s a hydrocarbon, one of the most essential energy sources in the world, crucial in the global economy.
In the following text, you’ll get to know:
- What the origin of oil is.
- How its applications have evolved.
- What the main producing countries are.
- The importance of oil.
- The main impacts of oil price changes.
- What is the role of risk management in this market is.
We’ve invited Victor Arduin, Market Intelligence Analyst at hEDGEpoint Global Markets, to talk about the subject. Keep reading to find out more!
How did petroleum become so vital?
Petroleum’s emergence is a very long story. Just to give you an idea: the ancient Babylonian civilization called it rock oil, as it was extracted from the earth and applied as mortar to make waterproof constructions. The Egyptians used oil for medicinal purposes, and the Chinese for heating.
“Oil is a substance that has been around for a long time. But, the modern history of oil begins in the 19th century in the United States, as people there suspected that the substance could have other uses,” Victor Arduin explains.
Oil exploration began to develop with the first successful drilling of an oil well in the U.S. in the state of Pennsylvania in 1859. This marked the start of the modern oil industry.
As demand for oil grew, new extraction and drilling methods were perfected, making it possible to access ever deeper reserves.
What’s been the evolution of the use of oil?
Petroleum began to be used in public lighting in the U.S. It came from kerosene, obtained by distilling crude oil, and its production on an industrial scale began around 1859. The discovery affected the entire planet: “From the moment it was possible to increase city lighting by using kerosene on a large scale, many nations also wanted access to this resource,” Arduin elaborated.
The U.S. then became a major oil producer, exporting to markets in Europe and Asia. In the mid-19th century, the first significant oil extractions began in the Baku region of Azerbaijan, which at that time was part of the Russian Empire.
Given this scenario, it was no surprise that Russia revealed itself as a country with huge oil reserves, kicking off competition in producing regions to see who could dominate more markets.
With electricity becoming more widely available in the 20th century, kerosene lighting lost some of its relevance. However, petroleum and its derivatives were increasingly used in thermoelectric plants, and as fuels for aviation and internal combustion engines. Furthermore, it was seen as quite strategic and used in military conflicts.
These events in modern history marked the evolution in the use of oil and are strongly associated with both the economic and political power of nations.
What are the major oil-producing countries?
In recent years, the U.S. has experienced a transformation in its shale oil sector, which contributed greatly to the country becoming a net oil exporter. Between 2009 and 2014, a production increase of more than 60% following the discovery and ready access of shale reserves was vital for the former country to surpass Russia and Saudi Arabia, allowing it to become the world’s largest oil producer.
“The OPEC+ (Organization of Petroleum Exporting Countries) nations, such as Saudi Arabia and Russia, as well as being important suppliers in terms of meeting global demand, have revenues which are very dependent on the sale of oil,” Arduin explained.
After the invasion of Ukraine, the petroleum supply chain was reorganized due to the sanctions imposed on Russia, giving more relevance to the U.S. in world oil exports, mainly to Europe.
Speaking of imports, China is the largest importer on the planet, at around 2 million barrels per day. Thus, the country has invested in initiatives such as the support of electric cars and boosting the energy matrix’s diversification. India, in turn, is a growing oil consumer, and should be one of the key protagonists in terms of future demand.
Grasp the importance of oil in the globe’s macroeconomy
Oil is enormously important in the world for several reasons. After all, it’s one of our planet’s main energy sources, used to generate electricity, heat homes, move vehicles, and power machines and equipment.
The oil industry is also one of the largest in the world, generating billions in revenue, as well as countless direct and indirect jobs. Many countries are economically dependent on oil production, refining, and export, making it an engine of economic growth.
The U.S. and Russia are two examples of countries that benefited from the oil exploration that began in the 19th century. Years later, nations devoid of other resources in the Middle East showed themselves to be rich in oil reserves. “From that moment on, they were able to develop. Today, they use resources from oil exploration to diversify their economies. For example, look at tourism and sports projects, such as the recent moves of great athletes like Cristiano Ronaldo and Neymar to Saudi Arabia,” Arduin added.
Gasoline and diesel, both derived from petroleum, are widely used in cars, trucks, trains, ships, and planes. In additional, petroleum is used in the manufacture of a wide range of consumer products, including personal care items, synthetic clothing, and plastic packaging.
Due to its strategic importance, the control of oil reserves and international transportation routes continues to be a source of geopolitical tension and conflict in several locations. Access to petroleum resources is a vital aspect of international relations that influences the policies of many countries.
What’s the role of oil in the world’s energy transition?
According to Arduin, oil and its refined products have established a strong presence in the global energy matrix. Many nations have sought diversification through the use of renewable energy, given the need to reduce pollutant emissions into the environment, one of oil’s primary negative effects.
“Oil has always been part of the energy transitions in our modern history, and continues to be so, as we manage, through investments arising from this exploration, to complement the energy matrix with more sustainable sources,” Arduin continued.
Petroleum: What are its impacts on commodity markets?
Oil impacts commodity markets due to its importance as an energy source while providing the raw material for a wide range of products. Hence, variations in oil prices have significant repercussions on different sectors of the global economy.
Oil prices depend on international supply and demand, and directly affect energy costs for industries, companies, and consumers. When oil values increase, production and transportation costs tend to rise, resulting in higher prices for a variety of products and services.
Rising oil prices also contribute to inflation, as higher energy costs can increase the prices of goods and services in general. What’s the possible consequence? A reduction in consumer purchasing power and economic stability.
In general, changes in oil prices can cause volatility in global financial markets, affecting the shares of oil companies, the currencies of oil-producing countries, and many other financial assets related to the commodity.
hEDGEpoint: Risk management made for the oil market
The oil market is subject to variations in supply and demand due to events such as geopolitical conflicts, weather storms, and various economic factors. As a result, there are price fluctuations that affect the entire global chain.
hEDGEpoint deeply understands this sector and offers hedging instruments, such as the use of derivatives, to contribute to better risk management and protect against price fluctuations. We combine insight and data analysis, helping you make more informed decisions.
Talk to a hEDGEpoint professional today to find out more!
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