How Much Does Oil Really Cost?

Focus: COMMODITIES

Elliott Gue Image Elliott Gue Editor and Publisher, Energy and Income Advisor and Capitalist Times

This isn't about the moral and extended implications of that question; it's simply the fact that there is no one price for crude oil, and if you know where the pricing is leveraged, you can make big money, notes Elliott Gue of Energy and Income Advisor.

There's no easy answer to the deceptively simple question, "What's the price of crude oil?"

Many US investors will tell you that oil fetches about $86 per barrel-the current price of near-month futures traded on the New York Mercantile Exchange (NYMEX). On the other hand, a European might tell you that oil goes for $108 per barrel. Both answers are partially correct, but neither quote truly encapsulates conditions in the global crude oil market.

Hundreds of different types of crude oil trade at various hubs throughout the world. The widely traded West Texas Intermediate (WTI) crude oil serves as the benchmark for US oil prices and underpins NYMEX-traded futures. A light-sweet crude oil, WTI has an American Petroleum Institute (API) gravity of 39 degrees, a sulfur content of 0.34%, and a pour point of minus-5 degrees Fahrenheit.

API gravity measures the density of crude oil relative to water. Oil with an API gravity of less than ten degrees exhibits a higher density than water; oil with an API gravity that's greater than ten is less dense than water. This metric enables the market to gauge the relative densities of various oil varietals, the majority of which range between API gravities of ten and 70 degrees.

Refining lighter oils into gasoline, diesel fuel, and other products requires less technical complexity and incurs lower costs than processing heavier varietals.