Crude oil is petroleum that is acquired directly from the ground. Crude oil was formed millions of years ago from the remains of tiny aquatic plants and animals that lived in ancient seas. Ancient societies such as the Persians, 10th century Sumatrans, and pre-Columbian Indians believed that crude oil had medicinal benefits. Around 4,000 BC in Mesopotamia, bitumen, a tarry crude, was used as caulking for ships, as a setting for jewels and mosaics, and as an adhesive to secure weapon handles. The walls of Babylon and the famed pyramids were held together with bitumen, and Egyptians used it for embalming. During the 19th century in America, an oil find was often met with dismay. Pioneers who dug wells to find water or brine, were disappointed when they struck oil. It wasn't until 1854, with the invention of the kerosene lamp, that the first large-scale demand for petroleum emerged. Crude oil is a relatively abundant commodity. The world has produced approximately 650 billion barrels of oil, but another trillion barrels of proved reserves have yet to be extracted. Crude oil was the world's first trillion-dollar industry and accounts for the single largest product in world trade.
Futures and options on crude oil trade at the New York Mercantile Exchange (Nymex) and at the International Petroleum Exchange in London (IPE). The Nymex trades two main types of crude oil: light sweet crude oil and Brent crude oil. The light sweet futures contract calls for the delivery of 1,000 barrels of crude oil in Cushing, Oklahoma. Light sweet crude is preferred by refiners because of its low sulfur content and relatively high yield of high-value products such as gasoline, diesel fuel, heating oil, and jet fuel. The Brent blend crude is based on a light, sweet North Sea crude oil. Brent blend crude production is approximately 500,000 barrels per day, and is shipped from Sullom Voe in the Shetland Islands.
Prices - NYMEX West-Texas Intermediate crude oil prices extended the 2009/2010 rally into early 2011 and reached a 3-year high of $113.89 per barrel in May 2011. That rally was driven by general strength in commodity prices caused by the Fed's second quantitative easing move from November 2010 to June 2011 totaling $600 billion. Crude oil prices were also boosted in early 2011 by the virtual shut-down of Libyan crude oil production due to the revolution that eventually ousted former Libyan leader Colonel Gaddafi. Libya's oil production plunged from normal levels of 1.58 million barrels per day in January 2011 to only 390,000 bpd in March 2011 and to virtually zero by August 2011. After the revolution was over, Libya production rose in late 2011 but still only reached 925,000 bpd in January 2012, about 60% of its normal level. After peaking in May 2011, oil prices then fell through October 2011 due to (1) increased production by Saudi Arabia and its Persian Gulf partners to offset the loss of Libyan crude oil production, (2) the European debt crisis and the mild European recession seen by Q4-2011, (3) reduced demand from China as its economy slowed during 2011, and (4) weak demand from the U.S. due to a weaker economy, record ethanol production, and energy conservation efforts. Crude oil prices then rallied sharply in the late 2011 and early 2012 as the U.S. economy strengthened and as tensions increased with Iran over its nuclear program.
Supply - World crude oil production in 2010 (latest data) rose +2.4% yr/yr to 74.098 million barrels per day, which was a new record high. The world's largest oil producers in 2010 were Russia (with 13.1%), Saudi Arabia (12.0%), the United States (7.4%), Iran (5.5%), China (5.5%), and Canada (3.7%). U.S. crude oil production in 2011 rose +3.5% yr/yr to 5.664 million barrels per day. Alaskan production in 2011 fell -6.8% yr/yr to 558,000 barrels per day, the lowest level since 1977 and only 34% of the peak level of 2.017 million barrels per day seen in 1988.
Demand - U.S. demand for crude oil in 2011 rose +0.6% yr/yr to 14.814 million barrels per day, below the 2004 record high of 15.475. Most of that demand went for U.S. refinery production of products such as gasoline fuel, diesel fuel, aviation fuel, heating oil, kerosene, asphalt, and lubricants.
Trade - The U.S. is highly dependent on imports of crude oil to meet its energy needs. U.S. imports in 2011 fell -3.2% yr/yr to 8.917 million barrels per day, down from the 2005 record high of 10.126. U.S. imports of petroleum products in 2011 fell -3.7% to 1.913 million barrels per day, imports of distillate fuel oil fell -22.8% yr/yr to 176,000 barrels per day, and imports of residual fuel oil fell -1.9% yr/yr to 359,000 barrels per day.