So What's The Deal With Fuel? (Part 2)

• How does a barrel of oil from Saudi Arabia or Iran determine how expensive our diesel or petrol is?
• Crude Oil Pricing & Supply
• Crude Oil Futures

They say a little knowledge is a dangerous thing, but it's not one half so bad as a lot of ignorance. So, if you are involved in a business that spends a lot of money on fuel, it makes sense to know where the supply comes from, who prices it, and how that translates into what you pay at the pump.

With a basic understanding of the oil and gas business in general, businesses can better understand the fundamentals of fuel pricing, current trends and future risks. Knowledge is value, so read on.

How does a barrel of oil from Saudi Arabia or Iran determine how expensive our diesel or petrol is?

A barrel is a part of the crude oil market, which has a major effect on gas prices. Crude oil is the "black stuff" that comes out of the ground, also known as petroleum. It's made up of a variety of elements like carbon, hydrogen and sulfur, and originates from the remains of animals and plants that existed millions of years ago -- hence the term "fossil fuel."

However, crude oil in its purest form is of little use to anyone. People must refine it in order to produce energy, a process that creates gasoline, diesel fuel, kerosene and other products. The completed petroleum products later end up in petrol stations.

But what causes the price of oil to go up and down? Why doesn't the cost of petrol and diesel stay at a constant level? That's because crude oil is a "commodity," a product that is generally the same no matter who or what produces it. Other commodities include copper, gold, electricity, beef, coffee beans, orange juice and natural gas.

The prices of commodities are always up and down because they depend on worldwide supply and demand. A drought in Brazil can drive up the price of coffee beans, which in turn affects what you pay in Starbucks. When ethanol fuel started becoming a popular alternative fuel option in vehicles, the price of corn -- from which ethanol can be produced -- spiked. Likewise, an oil refinery explosion where a supply of crude oil is compromised will cause the price of oil to increase.

Crude Oil Pricing

When U.S. gas prices hit their peak in 2008, and everyone was paying around $4 per gallon (about $1.05 per litre) at the pump, the price of a barrel of oil spiked to $145. Yet by the end of 2009, it had lowered to around $69. And when UK fuel prices hit a peak in 2012, and everyone was paying around 141.9p per liter at the pump, the price of a barrel of oil spiked to $111.67, but it took two years to sink to those 2009 prices again.

But what exactly is a barrel of crude oil, anyway, and what does it really mean for gas prices?

There are 159 litres of oil in a barrel. And approximately 3.8 liters of crude oil can be made into between 1.78 and 2.54 litres of fuel, depending on the refiner and the quality of the crude oil, among other factors. While the contents and size of a barrel of oil remain constant, the price it commands on the international market can change quite often. Four major factors help determine the price of oil: supply, consumption, financial markets and government policies.

Basic economics teaches us that a high supply of oil means demand is low, which means that the prices will be low, too; the opposite is also true - a low supply increases demand and raises prices. However, oil pricing goes far beyond just supply and demand. The way oil is traded on the financial market has a massive influence on its price. Speculators invest in oil futures, essentially bets on how much oil will cost at a later date, and this in turn affects how other people think oil should be priced. It also affects how much oil the petroleum companies will release to the market.

Crude Oil Supply

We really depend on crude oil in modern society, but where exactly does it come from? Oil is made of compressed hydrocarbons, the remains of prehistoric animals and plants placed under extreme pressures and temperatures in the Earth's crust. Hydrocarbons take many forms, including coal, natural gas, crude oil and even diamonds

We can find oil supplies just about everywhere in the world, but some areas are more abundant than others. Countries in the Middle East, including Saudi Arabia, Iraq, Iran and others, have massive supplies of oil and are the world's leading oil exporters.

Other countries have strong supplies, including Russia, Venezuela and even the United States. Groups like OPEC -- the Organization of the Petroleum Exporting Countries -- monitor their oil supply and can ration it out as they see fit, which sways the supply and price of oil.

Geopolitical crisis', especially in volatile places like the Middle East, can have a big effect on gas prices in the UK. Another thing to remember about crude oil and fossil fuels is that they are a non-renewable source of energy. This means that the world is slowly but surely running out of its supply of oil, and once it's gone, it's gone.

While it's tough to know just how much oil is left in the world, more and more governments and businesses are looking into sources of renewable energy. And as our crude oil supplies dwindle, we know the short supply will make the demand increase -- and the cost will go along with it.

Crude Oil Futures

Similar to the stock market, which involves trading investments in various companies, people also trade in commodities at financial markets. They purchase "futures" -- a sort of bet on whether a commodity will increase in price at a later date. Once locked into a futures contract, the buyer will get his or her commodity at that price, regardless of whether the market price has changed or not later down the line.

Commodity futures have a surprising effect on crude oil prices -- speculators who buy large amounts of futures can swing the price one way or another. Here's an example: A speculator who buys oil futures at higher than the current market price can cause oil producers to horde their oil supply so they can sell it later at the new, higher "future" price. This cuts the current supply of oil on the market and drives up both present and future prices.

Click here to find out how Navman Wireless can help you control fuel costs.