How to calculate the average cost of oil
Oil is a critical commodity.
We rely on it to fuel our cars, power our homes and fuel our engines.
It’s also the fuel that gets us to the supermarket.
But with a price that fluctuates every day, and with global supplies constantly changing, what should we expect?
And how can we measure how much it costs?
That’s the challenge for the UK government, which has set out a blueprint for calculating the average price of oil.
What does the average oil price in the UK mean?
The price of Brent crude oil has fluctuated widely since the start of the oil crisis in the summer of 2014.
The price peaked at $US1.33 per barrel in mid-September last year, but then dropped to $US2.10 by early November, and then hit a low of $US3.25 in mid December.
It fell to around $US4.50 in January this year, and again to around £2.30 in February.
This is a dramatic fall from a peak of $CHF1.70 in mid 2014, and a drop of about 6 per cent in a month.
But what makes this price so volatile is the nature of oil itself.
There are four main components to the price of crude oil: the oil price (or price per barrel), the price for a barrel of oil (or oil price), the supply and demand for oil, and the supply of the key ingredients in oil: crude oil, condensate, and bitumen.
The first two are the same, but the demand for bitumen is much higher.
The demand for crude oil is high because the world’s oil production has surged, fuelled by China’s shale revolution.
But the demand is also much lower because the supply is also high.
To understand how the price has changed over the past few years, it’s important to understand how oil prices have changed over time.
The most important factor for the average US dollar price is the cost of refining.
A barrel of Brent oil, for example, costs around $CH$1.50, but a barrel from China produces around $$US4 a barrel, meaning that each barrel costs around 40 cents.
For the UK, it takes around £US4 to produce a barrel.
What this means is that if a barrel costs $US6 and a refinery costs $CH4, the price would be £CH$6.60 ($US6.25 to $CH5.25) for a full barrel of crude, and £CH4.70 ($US4-£4.25-£5.75) for the equivalent condensates and bituminous oil from the US.
This compares favourably with the price in other countries.
So if we look at the US as a whole, the UK’s average price for oil in 2015 was around $AU$2.20 per barrel, according to data from IHS, a global oil and gas services provider.
In 2018, the average UK price was around £AU$4.90 per barrel.
In 2019, it was around a third higher, around £AUD$6 per barrel ($AU$9 to $AU$.9) for an equivalent condense oil from China.
As the price falls, so does demand for this oil.
But as demand rises, so too does supply, and prices go up.
For example, in 2020, the US produced 1.1 million barrels of condensated oil per day.
But in 2021, that number dropped to 1.2 million barrels per day, according the Energy Information Administration.
This is because China’s fracking revolution is fuelling a boom in the production of bitumen, a more viscous form of oil than the crude oil that fuels the world economy.
Brent oil has a lot of demand from refineries, but this is offset by a huge supply of bitumin.
The amount of bitumens being produced in the US has increased by more than 80 per cent since 2005, according US Energy Information Agency data.
By contrast, the amount of condenates and other liquids that are being produced globally has fallen by nearly 20 per cent.
This means that the demand from oil refineries is not always enough to meet the demand.
As a result, oil prices are rising.
In 2020, Brent crude cost about $CHUS$8.70 per barrel to refine.
But this dropped to around the $CHCH$7.30-8.60 per barrel price in 2019, before rising again to $USD$7 per barrel this year.
Oil is a major fuel for modern cars, powering electric vehicles, electric buses, and planes.
But even though the price is rising, so are the supply costs.
For instance, the production costs for a single barrel of condense from China has risen by 40 per cent over the last five years.
And the demand has not been quite so abundant.
In fact, the supply has fallen