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The Story of Oil:
Top 10 questions about the history, development, and problems of oil

What is oil?

Designated fossil fuel in deference to its origins as organic matter, petroleum is a substance formed by the decomposition of tiny marine plants and animals. After they died, these sea life forms fell to the bottom of the ocean and were covered by layers of silt and sand. Eventually, heat and pressure over millions of years transformed them into crude oil. Because the geological conditions necessary to form oil are very specific, not all areas of the earth that were once covered by oceans contain petroleum. Thus, special technology is necessary to identify and extract oil from the ground.

The chemical and physical properties of crude oil vary. The oil industry uses a “gravity scale” to evaluate the quality of crude oil. Lighter, less dense crudes are easier to refine and contain fewer impurities. They are labeled “sweet.” By contrast, “sour” crude oil is lower in hydrocarbon content and contains more sulfur. The density of the crude oil is important because, in general, a lighter crude oil yields a higher percentage of high-value products such as gasoline, heating oil, diesel fuel and jet fuel.

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How did oil become a major fuel source?

In some areas, small quantities of oil naturally seep out of the ground. Human beings have long recognized the utility of the seeped oil and have employed it for a variety of purposes. For instance, Native Americans used tar pitch to waterproof their canoes and early Spanish settlers used it to seal their boots. Pioneers in Pennsylvania skimmed seeped kerosene from riverbeds to use as lamp fuel and machinery lubrication.

In response to the rising demand for kerosene in the 1800s, American investors hired Edwin Drake to drill at the source of a natural kerosene seep in 1859. The resulting oil well in Titusville, Pennsylvania was 69.5 feet deep and produced 15-20 barrels of oil per day. Originally, kerosene was the end-product and gasoline, the by-product, was discarded. However, as the automotive industry developed to run on gasoline-powered internal combustion engines, a permanent market for gasoline developed and kerosene became a minor product. Pennsylvania remained the world leader in oil production until 1901, when it was displaced by a well in Spindletop, Texas that gushed oil at a rate of 100,000 barrels per day initially. California, Oklahoma, and Alaskan oil wells also proved to be prolific sources of oil in the United States. By World War II, the United States was the world leader in oil exports and the entire transportation sector was dependent on oil as a fuel source.

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Where is the oil?

Several categories of oil sources exist today. According to the Congressional Research Service, proven oil reserves are deposits of crude oil in the ground that geological and engineering data have demonstrated with reasonable certainty could be extracted using existing technology. Oil exporting countries track their proven reserve capacities carefully; Saudi Arabia has the largest reserve capacity, followed by Iran, Iraq, Kuwait, and the United Arab Emirates. When estimates include oil sands, a type of viscous oil that will not flow unless heated or diluted, Canada ranks second in world-reserve holdings. Proven reserves differ from surplus oil production capacity, which is the amount that oil production could be increased without any additional investment. Worldwide, surplus capacity was estimated at 5.6 million barrels a day in 2002 but has fallen to slightly less than 2 million barrels per day in 2006.

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How is oil extracted from the ground?

Advanced scientific knowledge and technology enables oil prospectors to identify potential sites. Geologists take measurements in areas with the appropriate characteristics in order to determine whether the location might contain oil. If it seems likely, drilling begins. Drillers then construct a derrick to store the tools and machinery going into the oil well. Water or gas is pumped into the hole to propel the oil to the surface. Though the first oil wells were on land, today drilling can take place on the ocean floor as well.

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What is the process that turns crude oil into useable products?

Once oil is extracted from the ground, it is sent to a refinery to be developed into marketable products. Any given barrel of crude oil contains a mix of hydrocarbons that make them suitable for different uses. One barrel of crude oil (42 gallons) produces almost 45 gallons of other products. This expansion, called process gain, results from a reduction in the density of the crude oil during the refining. The refining process consists of three phases. The first phase, distillation, heats the crude oil and separates the heavier components from the lighter ones. The second phase, called conversion, further breaks up the hydrocarbon molecules to allow the refiner to produce a higher proportion of light products (like gasoline). Finally, the treatment phase removes impurities like sulfur from the lighter fuels. The products derived from crude oil include petroleum gas (such as butane or propane), gasoline, kerosene, diesel fuel, heating oil, machinery lubrication, heavy fuel oil, and a variety of residual products. For example, white petrolatum, the active ingredient in Chapstick, is made from petroleum distillation leftover in the still after the oil has been vaporized. Between 1975 and 2005, the United States consistently refined between 14 million and 18 million barrels of crude oil per day.

More than 40% of each barrel of crude oil in the United States is used to make gasoline. After refinement, gasoline is shipped via the 200,000 miles of pipelines to holding tanks in consumer areas. Then, it is loaded onto trucks for delivery to individual gas stations. Brand additives, used to differentiate commercial gasoline brands, and ethanol components are blended inside the fuel tankers while en route to their destinations. There are about 170,000 individual gas stations in the United States today.

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What are some of the factors that determine gasoline prices?

Gasoline prices fluctuate for a variety of reasons. The cost of crude oil on the world market plays a key role, of course, but the weather and season, refinery processing costs, federal and state gasoline taxes, environmental regulations, and marketing and transportation costs also affect prices at the pump. Hurricanes Katrina and Rita in September of 2005 demonstrated how natural events affect gas prices. Gas prices in August of 2005 averaged $2.53 per gallon; by September the average had risen to $2.95. In addition, seasonal demand for gasoline is naturally higher in the summer months when children are out of school and families take driving trips. Finally, new environmental regulations have forced oil companies to clean up the pollutants their products contain, and the companies often pass clean-up costs on to consumers.

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What percentage of US oil is imported?

Today, the United States uses 20.7 million barrels of oil per day. Its net imports number about 12.4 million barrels, or 60%. Nearly 98% of transportation vehicles in the United States depend on oil products. Oil is also used to heat homes and businesses, and as raw materials in manufacturing and industry, and (in small quantities) to produce electricity. In 2005, the top five suppliers to the United States in descending order were Canada, Mexico, Saudi Arabia, Venezuela, and Nigeria.

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What is the world oil market?

Oil is a product traded on commodity-markets across the world. It is generally measured in barrels of sweet light crude oil, and is denominated in dollars for both buying and selling. Oil prices are influenced by economic principles of supply and demand, which are affected by factors such as the rapid rate of economic expansion in developing countries (notably China and India), production and refining capabilities, OPEC policies, and expectations about future market conditions. In some countries, oil companies are state-run, while other countries host a number of private-sector multinational oil corporations. World oil consumption reached approximately 84 million barrels per day in 2005, and the United States made up about one quarter of that demand - 20.7 million barrels per day (bpd). If current consumption trends continue, world demand will reach 118 million bpd by 2030, while U.S. demand will approach 30 million bpd. U.S. oil companies can only supply about 40% of U.S. demand for oil. Thus, the United States has to import the other 60 %. For this reason, the United States will remain vulnerable to disruptions in the world oil market until it can supply its fuel consumption needs independently.

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What is OPEC?

The Organization of Petroleum Exporting Countries, or OPEC, is an institution comprised of oil-exporting countries. The organization formed in 1960 with five original members, Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Qatar, Indonesia, Libya, the United Arab Emirates, Algeria, and Nigeria joined between 1960 and 1975. Ecuador and Gabon participated for a time, but withdrew from membership in the 1990s. Together these eleven states control more than two thirds of the world’s proven oil reserves. OPEC’s organizational goal is to influence the price of oil on global markets by setting production quotas. By determining the amount of oil available on the world market, the group can influence the global price of oil. The economic law of supply and demand drives this calculation. If a finite supply of oil exists at a given time, importers will be unable to complain about prices for fear OPEC members will find alternative buyers. It is for this reason that OPEC is often described as a cartel. In practice however, transportation costs, refinery capabilities, and strategic petroleum reserves act to mitigate OPEC’s influence.

OPEC countries comprise approximately 40% of U.S. oil imports. Therefore, political and/or economic instability in these countries could result in fluctuations in the amount of oil produced and available for sale to the United States and on the global market.

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What is the Strategic Petroleum Reserve (SPR)?

The SPR is a federally-owned stockpile of crude oil maintained as a hedge against disruptions in the oil market. Congress mandated its creation in 1975 in response to the Arab Oil Embargo of 1973. The reserve is located in salt caverns along the coast of the Gulf of Mexico. Currently, the SPR contains close to 700 million barrels of oil, or enough for between one and two months at current consumption rates. However, Energy Policy Act of 2005 authorized expansion of the reserve to its full capacity, 1 billion barrels of oil, and the Department of Energy initiated the proceedings necessary to select additional sites earlier this year. In the event of an energy emergency, the President is authorized to withdraw crude oil and sell it in a competitive bidding process. This has happened twice since the construction of the facility, once during the Gulf War in 1991 and again in the wake of Hurricane Katrina in 2005. In addition, the Secretary of Energy announced that oil from the SPR would be available to augment U.S. oil production in the wake of the Prudhoe Bay supply disruption in Alaska.

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Source Information

Information for the Top Ten Oil Questions was derived primarily from the Energy Information Administration, the Department of Energy’s center for energy statistics, in particular the sections entitled, “Petroleum Basics 101” and “Country Analysis Brief: OPEC.” Further statistics are available at http://www.eia.doe.gov.

Other sources consulted for this report include: "The Prize: The Epic Quest for Oil, Money, and Power," by Daniel Yergin, published by Simon & Shuster in 1991; "How Stuff Works: Oil Refining," available at http://www.howstuffworks.com/oil-refining.htm; the Paleontological Research Institution, available at http://www.priweb.org/ed/pgws/index.html; CRS report RL31720 "Energy Policy: Conceptual Framework and Continuing Issues," published May 11, 2006; and GAO report GOA-06-668, "Issues Related to Potential Reductions in Venezuelan Oil Production," published in June 2006 and available at http://www.lugar.senate.gov/energy/venezuela/pdf/GAO_Report_Venezuela.pdf.

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