Crude Oil Output and Pricing

In this article is analyzed of how Alberta, Canada's largest oil producing province determined
the prices for crude oil, which are the factors that influence the price and how supply, demand and also
competition are directly correlated to the price. Is proved that it is the effectiveness of competition in
the market that determines whether prices and output are determined by demand and supply. Many
‘crude oil’ companies are both producers of crude oil and purchasers (as oil refiners) and most of the
large oil refineries have crude oil production facilities of their own. In such circumstances, the major
buyers of crude oil (even if an oligopsony) might prefer higher prices for crude oil, particularly if high
crude oil prices help to serve as a barrier to entry to ‘independent’ refiners (those without their own
crude oil).
Regarding the competitive pricing patterns for crude oil, for example, to satisfy United States
deliveres price, Alberta producers would have to lower their wellhead price. As still more reserves were
discovered, Alberta output would continue to expand, absorbing all Saskatchewan demand, then
moving into Manitoba. A lower Alberta price would be necessitated with each eastward extension of
the market area in order to keep the oil competitive with imported oil into the new market. Under
competition, this would become the price at which all Alberta crude oil would be sold, regardless of
destination. At each step, sellers would, of course, like to maintain the previous higher price level.
However, if individual companies tried to hold the price up, producers without contracts would bid
down the price of all oil to the new, lower level. Under competition, this process would continue until
the Alberta wellhead price fell to the long-run incremental cost of supply.
When it comes to monopolistic pricing patterns, producers would have continued supplying
Alberta at the original Alberta wellhead price, while supplying Saskatchewan at a lower wellhead price,
and Manitoba at a still lower price, reflecting higher transportation costs. The incremental benefit of
each market expansion step would be greater for producers than in the competitive case: even though
the netback on new, more distant sales would be lower, prices would be maintained at previous levels
in nearer markets. Price on at least some of the sales would be in excess of the long-run incremental
supply cost of the crude oil. Although producers would clearly prefer to keep price higher in markets
adjacent to the supply region and only cut it for the new markets, a monopolistic result might occur
without price discrimination, but with price in excess of incremental costs. That is, a uniform wellhead
price could emerge but be held above long-run marginal cost by restricting output.
Similarly as with the level of government direction, the scope of raw petroleum costs since the
finish of World War II has been huge. Ostensible costs have been as low as $2.00/b and as high as over
$130/b, and have, particularly since 1970, fluctuated impressively inside a generally brief timeframe.
With deregulation of the crude oil market in 1985, and high U.S. demand for imported crude oil,
Alberta production was once again facing a relatively unregulated market in which it had to meet
competition from other sources in the world. The welcome reception of non-OPEC oil in the U.S.
market (so long as competitively priced) meant that the market for Alberta crude oil was large; after
1989, market-demand prorationing no longer constrained production. The main new government
regulations in this later period were the two free trade agreements. Their impact was not to constrain
Alberta oil production or prices but to offer some certainty to the private industry that the Canadian
government was committed to the relatively unimpeded operation of a free market for crude oil.

MACFADYEN, A., & WATKINS, G. (2014). Crude Oil Output and Pricing. In Petropolitics: Petroleum
Development, Markets and Regulations, Alberta as an Illustrative History (pp. 103-140). Canada: University of
Calgary Press. Retrieved from http://www.jstor.org/stable/j.ctv5rf5q2.13
INTRODUCTION

Factors driving up the price of crude oil

The price of oil has hit its highest level since November 2014, reaching $80 per barrel, as
geopolitical fears cause concerns to rise over potential disruption to supplies.
Brent crude futures, the international benchmark, have risen by around half in the past year.
The new highs have prompted warnings that drivers face soaring petrol and diesel costs . Prices are at
levels that will eat into appetite for oil and forecasters have revised downwards their expectations for
demand growth this year.
Experts said the rises would pose a challenge for central banks already coping with high inflation. “The
biggest test may come in countries that are already seeing target or above-target inflation like the UK,”
Craig Erlam, the senior market analyst at Oanda trading group, said.

Donald Trump: The US president’s decision to unilaterally exit the nuclear deal with Iran
caused markets to price in the impact of Iranian crude exports falling. Iran produces around 4% of
global oil supplies, or about 2.4m barrels a day (mb/d).
The Middle Eastern producer’s exports fell by around 1.2mb/d when sanctions were last imposed in
2012. This time around will be different as the European Union has said it is determined to keep alive
the deal and will not be forcing sanctions on Tehran.

Globally, the economy is strong, with the IMF forecasting 3.9% growth this year. Healthy
economic activity had been been an important factor in rising oil prices so far but observers are
warning that crude is so expensive it will begin to dent demand for oil.

CONCLUSION

Oil is an important part of daily life in Canada and all over the world.
This powerful source of energy moves us, heats our homes and creates jobs – and makes up an important
component of everyday consumer products.
All forms of energy are needed to support a growing world population and improve quality of life. Canada’s oil sands
will play an important role in meeting these needs.

Around the world oil prices are on the rise, except in Alberta where a barrel is worth less than
half of what it would fetch in the United States.
Global prices are climbing as some key, oil-producing countries are in trouble —whether it's Iran
facing new sanctions or Venezuela creeping closer to an economic implosion. Even in the United
States, oil production growth is showing signs of a slow down. That's why prices are spiking just about
everywhere.

The Brent oil price, considered the global benchmark, has surged above $85 US per barrel. In
the U.S., West Texas Intermediate cruised past $75 US. But in Alberta, Western Canada Select is stuck
at $35 US per barrel.

The divide between WCS and WTI as never been larger, according to Martin King,
commodities analyst with Calgary's GMP FirstEnergy. The steep discount in Canadian oil prices
compared to American prices could cost Alberta oil producers billions this year in foregone revenues.

The main problem is a backlog of oil in Alberta. Here are the three reasons why that's happened:
Rafinery outages, Pipelines full and New marine fuel standards.