The New Global Oil Market: Understanding Energy Issues in the World Economy

By Siamack Shojai | Go to book overview

Chapter 20
Oil as a Strategic Commodity

Robert R. Copaken

Crude oil is perhaps the world's most strategic commodity. Modern societies, whether industrial or agricultural, cannot function without it. Wars have been fought over access to it. Oil producing countries have used its availability as a political weapon.

Oil is the world's largest cash commodity. In 1992 worldwide crude oil production totaled about 60.3 million barrels a day, which was worth about $370 billion on the free market. In the 20 years since the early 1970s, the oil market's volatility has pushed prices up by as much as 150 percent or pushed them down by 50 percent. Risk management has become a key consideration for the oil industry as well as for commercial and industrial end users. Back in 1978 the New York Mercantile Exchange (NYMEX) established an energy futures trading market in heating oil. In 1981 a gasoline futures contract was added, followed by crude oil futures in 1983, propane futures in 1987, and natural gas futures in 1990. The growth in NYMEX's energy futures trading volume and open interest levels underscores the market's important role in the reduction of the significant price risk inherent in the oil industry today. NYMEX has seen the establishment of other similar commodity exchanges in other trading and financial centers around the world, such as the International Petroleum Exchange (IPE) in London, the Singapore International Monetary Exchange (SIMEX), and even an Oil Exchange in Russia. Thus, the international oil market has become globalized as an element of the world economy, with traders and speculators able to buy and sell at a moment's notice, around the clock as well as around the world.

NYMEX futures prices are widely and rapidly disseminated worldwide, ensuring that the exchange's quotations reflect the real market value of oil--true price transparency. NYMEX ranks as the world's fifth largest futures exchange,

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