How is the price of a barrel of oil set?

Crude oil prices are primarily determined by worldwide supply and demand. Additional factors contributing to crude oil prices include:

  • weather related events like hurricanes, which may affect producing areas like the Gulf of Mexico.
  • war and political unrest in some major oil producing regions.
  • Actions by OPEC (Organization of the Petroleum Exporting Countries) to limit or increase production; and,
  • the value of the U.S. dollar (the currency at which crude oil is traded globally).
Because gasoline is refined from oil, the price you pay at the pump generally follows the ups and downs of the oil market, although supply and demand, refining costs and taxes also play a significant part.
Crude oil commands different prices because it varies in quality.  The density of the oil and its chemical composition determines the various products that the oil can be transformed into by refining. The value of the oil is determined by the value of the refined products it can generate. The higher the percentage of the oil that can be made into products in high demand, like gasoline and diesel, the higher the price of the crude oil.

The benchmark price for oil is based on particular crude - West Texas Intermediate (WTI). WTI is a lighter type of crude that is excellent for extracting a larger portion of gasoline. As such, its price is higher than the price for most of the crude oil that Alberta produces.
Due to the heavier weight of our oil and the transportation costs, Alberta’s conventional oil is sold at a reduced rate.
During the last four years, Alberta’s non-heavy crude oil has been trading within a 86%-100% range of the West Texas Intermediate (WTI) benchmark crude price while our heavy crude oil has been trading within a range of 38%-83% of WTI due to the quality difference compared to lighter crudes. 
Alberta’s bitumen (the ultra heavy type of oil found in Alberta’s oil sands) has been trading within a range of 26%-80% of WTI during the same period.

The following chart is an example of the percentages of the primary products that can be extracted from a barrel of convention light crude oil and what can be extracted from a barrel of very heavy oil:

Products that can be extracted from oil 


 

Natural gas
Natural gas is a mixture of gases usually formed in deposits of oil. While natural gas is composed primarily of methane, it can also include ethane, propane, butane and pentane.

Coal
Coal is a mineral formed from the remains of land-based plants buried hundreds of millions of years ago and subjected to tremendous heat and pressure. Coal is a readily combustible black or brownish-black rock consisting of a complex range of materials and varies greatly in quality from deposit to deposit.

Coalbed methane (CBM)
CBM is natural gas extracted from an underground coal formation.


 

Last reviewed/revised: 2008-12-31