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Oil - Background

Brent Crude is a major trading classification of sweet light crude oil that serves as a major benchmark price for purchases of oil worldwide This grade is described as light because of its relatively low density and sweet because of its low sulfur content Brent Crude is extracted from the North Sea. West Texas Intermediate (WTI) also known as Texas Light Sweet, is a premium type of crude oil that is used as a benchmark in global oil pricing along with North Sea Brent Crude.

Since 1973 every upward spike in real oil prices has been followed by a jump in unemployment, or output gap. Some of these jumps seem much larger than can be accounted for by oil prices alone, and there appears not to be a symmetric macro response to downward oil price shocks. But this result is still impressive because most of these oil price shocks have been perceived as temporary. Presumably, the macroeconomic impact would have been even more powerful for price shocks that were perceived as permanent.

EIA's Annual Energy Outlook provides projections and analysis of domestic energy consumption, supply, prices, and energy-related carbon dioxide emissions. World oil prices are defined based on the average refiner acquisition cost of imported oil to the United States (IRAC). The IRAC price tends to be a few dollars less than the widely-cited West Texas Intermediate (WTI) spot price.

In November 1998 the Energy Information Administration released a forecast of World Oil Prices out to the year 2020. At that time, oil prices were some of the lowest since the early 1970's, and that even by 2020 we expect oil prices in real 1997 dollars to reach only $22.73. These projections are from the reference case of the Annual Energy Outlook 1999. The full document, including stand-alone and side cases, was released in mid-December. In current, or nominal, dollars (which include inflation) that $22.73 translates into $43.30 in 2020. All long-term forecasts are stated in terms on constant dollars, to depict trends across time. These prices are imported refiner acquisition costs, rather than West Texas Intermediate.

Domestic crude oil production was projected to continue its historic decline throughout the forecast, declining from 6.5 million barrels per day in 1997 to 5.0 million barrels per day in 2020. More than half of the decline is from falling Alaskan crude oil production. Alaska production is expected to decline rapidly--at 4.1 percent annually -- as Prudhoe Bay and most other oil fields decline. The general trend in world oil prices was up, but the EIA thought it most likely at a gradual rate at best. High stock levels worldwide were forecast to restrain prices from moving up sharply, especially if anticipated increases in winter demand fail to materialize.

The price of oil is of critical importance to today's world economy, given that oil is the largest internationally traded good, both in volume and value terms (creating what some analysts have called a "hydrocarbon economy"). In addition, the prices of energy-intensive goods and services are linked to energy prices, of which oil makes up the single most important share. Finally, the price of oil is linked to some extent to the price of other fuels (even though oil is not fully substitutable for natural gas, coal, and electricity, particularly in the transportation sector). For these reasons, abrupt changes in the price of oil have wide-ranging ramifications for both oil producing and consuming countries.

There is a great deal of uncertainty about the size and availability of crude oil resources, particularly conventional resources, the adequacy of investment capital, and geopolitical trends. This work i a multistep process that began with estimating the amount of oil in place, based on the area's geology, without reference to how much it might cost to remove this oil. The second step is estimating the amount of technically recoverable oil, which takes into account the industry's current state of technology for extracting oil, without accounting for the potential cost to accomplish this.

Finally, analysts overlay the technically-recoverable estimate with an economic analysis -- an estimate of economically recoverable oil. This analysis takes into account the quality and market value of oil, the costs of exploration and drilling, the financial costs of extracting and transporting the oil, and the financial rate of return expected at particular oil prices. The amount of economically recoverable oil resources depends strongly on the long-term market price of oil.

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