How do oil prices work?

I don’t get how oil prices work. I know at one point oil is drilled up by oil companies, and then it gets to gas stations. The confusing thing to me is the oil futures market. How does that factor in? Do the oil companies not actually sell the oil directly to the gas stations? Please help me out here.

6 Responses to “How do oil prices work?”

  1. NC Says:

    There are several points at which oil is bought and sold. First, someone (a production company) must extract it from the ground. Then, it must be delivered to a major shipping point (Cushing, OK for NYMEX crude, Sallom Voe for Brent, etc.) Then it must be shipped to a refinery to be distilled into gasoline, heating oil, jet fuel, etc. The refiners then ship the products to wholesalers, who in turn ship them to retailers (gas stations).

    Some companies (usually called integrated or vertically-integrated) combine several stages of the process within the same entity. But even the integrated companies still buy a lot of crude oil from independent producers.

    As to the futures market, it is simply a device that allows a buyer to buy oil for delivery at a specific date (and a bunch of other people to speculate in oil without ever seeing a barrel of it).

  2. John J. Bannan Says:

    They are like a baloon – up up and away!

  3. rukidding Says:

    Oil companies want as much money as they can get and they don’t care that people have a hard time paying for gas. So, the companies jack up the prices and blame just about anything for the reason. Sounds like a liberal response, but I think it does come close. I realize that’s not the answer you want, but I couldn’t resist.

  4. GuardianCy Says:

    Bush farts, the prices go up!

  5. MikeD Says:

    Oil like every other commodity is sold in at an open auction. The price the price where the buyers won’t bid any higher and the sellers won’t go any lower.

    The futures market works the same way, but they are buying and selling oil to be delivered in the future. If you want to buy oil in the future you are said to be in the long position; if you want to sell oil in the future you are said to be in the short position. No money changes hands (usually some securities do have an upfront payment) until the month of delivery. The exchange will hold some money from the person in the long position in a margin account.

    Delivery is executed according to standard rules set out by the exchange. The exchange will match people in long and short up during the deliverer month. (Though each transaction involves a long and short all contracts are written with the exchange.)

    Oil must be refined before it can be used as gasoline. Oil impacts gasoline price because it is the largest ingredient.

  6. Chx Says:

    1. Crude Oil comes from the GROUND. The wells dig it up. Tar sands work well, also.
    2. Crude Oil is TRUCKED or FLOATED half-way across the world.
    3. Crude Oil is refined in over-crowded refineries (remember: in order not to spoil the environment, we cannot bulid any refineries, despite the fact that the world has GROWN since the 1970’s)
    4. Refined oil is separated into various formulas, from asphalt to methane.
    5. Additives are added to the gasoline (like stuff that prevents depsoits of oil-crystals forming inside your car engine)
    6. The oil is TRUCKED again, and distributed to the gasoline stations.
    7. The stations make sure you don’t blow yourself sky-high as you run across the carpet while wearing socks and smoking as you top off. (Your socks also have metal spurs on them that clink very nicely as you walk acorss the concrete/flint fueling floor)
    8. Gas goes into car.
    9. Car drives.

    Prices go up and down because of supply and demand. If the big oil exec. is sitting at his desk smoking cuban cigars and saying "Hahahaha… …I’ll raise the price of oil just so I can screw those poor bast****s over. I feel evil", then what will people do? They’ll drive 500 more feet across the street to the other station that is selling cheaper gas. If Exxon Mobil is selling gas to the stations at too high a price, then the stations will:

    a) Go out of bussiness and quit buying Exxon Mobil
    b) Buy from another company and quit buying Exxon Mobil

    Doesn’t look too good for Exxon Mobil if they raise prices above arket value. Supply and Demand. S&D.

    Oh and, by the way, if investors overreact to the so-called "crisis" in N. Korea and the Mid-East and buy too feverishly, eventually they”ll realize that the crisis is overblown an dthere’ll be a big bear market as they struggle to sell their oil :).