Oil Production Secrets – From Dead Dinos to Your Car

crude_oilThe business of oil is a game of the giants that cuts across big words like geopolitics and climate change with, often, you at the receiving end.

Ever wonder where the gasoline that you pump into your car comes from? Why fuel prices go up? When they do, spare your neighborhood gas station the glaring eye.  If paying for gasoline is hard, selling it to you is even harder, according to a Forbes report. The retail margin is thin, if not in the red, and most gas stations are just community businesses under license to sell petroleum products. If someone is earning big time it is Big Oil, the ruling government of oil-producing countries in cahoots with the world’s few billion-dollar multinational companies that drill crude oil from the ground and process them into petroleum products including gasoline. It pays to understand the business of oil, so next time you feel blurting out an F-word upon hearing a fuel hike, it is aimed at the right party.

What drives you

Crude oil is so important, it is hard to think which part of your life is free from it. It doesn’t only make your car run, it runs your life. Medicines, plastics, clothing, furniture and energy to run industries including the Internet so you can read this piece are all dependent on petroleum, which is the overall term for crude oil and its byproducts. The bad news is the United States buys 45% of its oil from other countries, which means we are vulnerable to outside events.  The good news is, surprisingly, we get the imports mostly from our friendly northern neighbor, Canada.

sheikhBut we still buy 160 million barrels every year from Saudi Arabia, and some more from Mexico, Venezuela and Nigeria, countries we are not exactly on first-name basis. And even if we cut our imports by 10%—it is at 45%—the US will still be affected by a supply cutback, said Mark Zupan, Dean of the William E. Simon Graduate School of Business Administration at the University of Rochester, New York.

In short, our government may still need to kowtow with the oil sheikhs so you can turn up the heat or air-conditioning at home. Yes, a sheikh who spends ₤20,000 just to send his Lamborghini from Qatar to Heathrow for an oil check or carve his name in the sand for a fortune—it’s so huge that you can read it in space—still needs your tax money.  These billion-dollar Arabs own the world’s biggest petroleum reserves that run global industries. Heck, they own the world maybe.

Oil countries

oil_pumpOil is a limited resource even if the planet has hundreds of billions of barrels of it in reserves. That’s a lot of dead dinosaurs that will soon run out. Actually, oil is made mainly from microscopic plants and animals that died in the ocean millions of years ago before the dinosaurs and subjected to earth’s extreme heat and pressure. Saudi Arabia just happened to be sitting on the right spot. It has around 260 billion of barrels in oil reserves, the world’s biggest, while the US has about 20 billion, which is peanuts when you consider our energy consumption, the world’s highest.

Oil-exporting countries, mainly the Organization of Petroleum Exporting Countries or OPEC, own the reserves. Although Arab countries dominate the top eight biggest oil reserves, Venezuela and Canada come at second and third, respectively. The United States? A little far behind at thirteenth spot.

Read more:  10 Most Luxurious Jewelry Brands In The World

Expectedly, these countries have the biggest voice in the supply chain and the biggest factor for your diminishing wallet power. According to the US Department of Energy, 65% of the price you pay to fuel the car goes to the crude oil supplier, namely, the oil-exporting countries.

It’s tricky how these countries, mainly OPEC, can manipulate prices. In general, they can dictate how much barrels of oil to produce in a day. They can create an artificial low to drive up prices, or flood the market with oil to pull down the rates. But it’s not as simple as cutting on supply to increase demand to make more money.

Cutting down oil supply is risky even for OPEC. Cutbacks drive prices up in the short term, but it also attracts more investors—more money to be made with high prices—resulting in more drilling in non-OPEC countries. In the long run, oil prices may actually go down with too many barrels being churned out elsewhere.

But the reverse can happen, too, in favor of OPEC. Between 1985 and 1986, Saudi Arabia increased its production, driving prices to $10 per barrel. It was way below the $15-per-barrel cost to extract oil from the North Sea.  As a result, many investors withdrew from the North Sea, leaving OPEC with a bigger market but smaller margin. The business of oil is also governed by geopolitics especially in the Middle East, that hotbed of political and military strife. But it’s another matter best explained on another day.

Oil refineries

oil_refineryPetroleum is extracted from the ground by big companies that own the refineries, derisively called Big Oil because of their cartel tendencies. Oil refineries can be state-owned or publicly traded corporations, such as Exxon Mobil and Royal Dutch Shell. In the Middle East, most refineries have been nationalized because of geopolitics and they are run by oil sheikhs, the stereotype of an ultra-luxury life.

Saudi Aramco, the biggest in the world, can extract 12.5 million barrels per day. It is so big that it has its own fleet of oil tankers. Wholly owned by the Saudi government, interestingly, the company can trace its American roots when the Saudi royals, still emerging from their nomadic tents, granted Standard Oil of California a concession to explore the oil reserves in the 1930s. In fact, the “am” in Aramco is supposedly a contraction of American, while the “Ar” is Arabia.

Gasoline and more

Did you know that for every barrel of crude oil pumped from the ground, only half turns out as gasoline? The rest are processed into various petroleum byproducts, the “oil” that you see in grocery shelves or gas stations. The refineries can create these products at different levels of tinkering with crude oil.

First, crude oil is heated to emit different chemical chain vapors. Like a barista mixing different coffee blends, a refinery can mix and match the vapors to produce different results. Depending on the blend, refineries can come up with gasoline, kerosene, diesel and other fuel oils.

Second, the remaining oil that doesn’t vaporize is processed into lubricants. This can be engine oils that exhibit degrees of volume from light to very thick. Petroleum jelly is extracted at this stage.

Lastly, the solid residue is turned into paraffin wax, tar or asphalt, which you probably have seen in road pavements. Paraffin wax has numerous uses: from candle-making to sealants and rocket propellants. Tar, on the other hand, is used to seal roofs, ship hulls and as a binder for asphalt.

Read more:  Top 10 Richest Fashion Brands of All Time: Levi, Dior, H&M or Louis Vuitton?


Oil is the most important traded commodity and it reaches the world’s four corners via the ocean tankers, gigantic merchant ships registered and regulated by a largely different set of countries called flag states. To scale business, these tankers are often run, not by the oil company, but shipping magnates with easy access to major ports where the ships can be maintained more easily. Panama has the largest fleet with 528 tankers, with Liberia (464), Singapore (355) and China (252) not far behind.  In comparison, the US has 59 registered oil tankers. An exception is Saudi Aramco, which operates 25 oil tankers for the sheer volume its country produces daily.

An oil tanker called a VLCC or Very Large Crude Carrier costs around $100 million and can be run by just twenty-five people using state-of-the-art equipment. VLCC-class ship owners can make around $60,000 net profit a day depending on the daily oil supply and demand. But shipping oil is riskier than refining it. Many of the infamous oil-related environmental disasters were caused by a tanker spilling oil to the sea. This puts them in media spotlight more often than any other players in the supply chain. They are, rightly or wrongly, the “enemy giant” perceived by the public when oil and environment are in the same sentence.

Oil depots, gas stations

pump_stationRefined petroleum is shipped to regional oil depots owned by the Big Oil companies, where they are distributed by fuel trucks to your neighborhood gas station. Despite the “Shell” or “Chevron” or “Mobil” signs in these stations, only 2% are owned by the Big Oil companies. Most gas stations are just licensed to use the brands to sell their products. And most of these stations are community businesses that rely on the neighborhood to generate income. In fact, an NBC article reports that the margin is razor thin, by a few cents at most.

It’s no secret that the real business in gas stations is not the fuel you load into your car, but the food or coffee you load into yourself. Gasoline is a “loss leader,” a non-earning commodity that can pull in customers for, say, the station’s convenience store or the coffee house. It’s safe to say that gas station owners are not out to rip you off with fuel hikes. As for that 3-dollar cup of coffee, well, that’s another story.


Gasoline is passed down from the hands of oil sheikhs to Big Oil executives to the shipping magnate and to the neighborhood gas station owner and, lastly, into your car. It’s the world’s most important commodity, the big business that runs big businesses, the singular factor that increases almost everything that you pay for, and it’s fast running out. It’s easy to blame one sector for this greasy mud that we’re stuck in, but talk about shooting oneself in the foot, isn’t that your car at the tail-end of the supply chain?

It is believed that the world has reached peak oil, the apex from where our oil reserves drastically slide down to the last drop. It begs the question:


Category: Financial News

Leave a comment!

Add your comment below.

Be nice. Keep it clean. Stay on topic. No spam.

You can use these tags:
<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

This is a Gravatar-enabled weblog. To get your own globally-recognized-avatar, please register at Gravatar.

I agree to publishing my personal information provided in this comment.

Page last modified