How is the price of oil actually determined? What are oil benchmarks like Brent, WTI, and others that are often mentioned? Why does it matter how “sweet” the oil is—and what is oil gravity?
How Is the Price of Oil Determined?
It all depends on global supply and demand. Today, oil prices are highly volatile, and even relatively minor crises can strongly impact them. Interestingly, oil prices were remarkably stable for nearly a century, from around the 1870s to the 1970s. But in the 1970s, the first major oil turbulence began due to crises in the Middle East—especially the Saudi oil embargo. One could say the world has since acted as though the oil market “remembers” those crises and still reacts anxiously to any hint of a new one.
In the oil industry, prices are usually expressed per barrel—referring to the barrels in which oil is stored and transported. It’s a somewhat archaic unit, with the word “barrel” deriving from the French baril, whose origins are unclear. Over time, the volume associated with a “barrel” varied, but today, it typically means about 159 liters of oil.
What Currency Is Oil Priced In?
Almost always in U.S. dollars, a standard that’s been in place for about half a century. After the U.S. abandoned the gold standard in the early 1970s—meaning the dollar was no longer backed by physical gold—a new global system was established: countries buying oil would do so in U.S. dollars, and oil-exporting countries would receive dollars in return. This system is called the petrodollar. It helped make the dollar the most powerful global currency, aided significantly by Saudi Arabia’s agreement to conduct oil transactions in dollars—in exchange for U.S. security guarantees.
But Surely You’ve Heard of Other Oil Prices, Right?
Yes, exactly. There’s no single “global oil price”—that wouldn’t make sense, since oil, while essential for all countries, isn’t the same everywhere. Location matters a lot and can significantly affect price (as we’ll soon see).
Raw crude oil, as it’s extracted from the ground, isn’t particularly “useful” in itself. To be of value, it needs to be refined. From crude oil, we derive various end products, most notably fuels that power our cars, airplanes, and machines.
Depending on where oil is drilled and found, its quality differs. Ideally, oil should be as “sweet” as possible. What does that mean? It refers to low sulfur content. Oil containing less than 1% sulfur is usually referred to as “sweet crude”, and it’s more valuable—because it’s easier and cheaper to refine into useful products.
Let’s take a look at a suitable map to help explain all this visually.
(You can ignore the price numbers shown on the map—they’re from 2014.) So, what do we see? The yellow color indicates the 10 largest oil producers in the world. But what are all those little labels like “Brent,” “WTI,” “Arab Heavy,” and so on?
These are known as crude oil benchmarks. Benchmarks are reference prices for buyers and sellers of crude oil. Why so many? Because oil comes from many parts of the world. More sources mean more benchmarks. Today, there are about 200 such benchmarks.
Don’t let this overwhelm you. Think of it like this: in Europe, there are many ceramic tile manufacturers. Their prices differ, and so does quality. One might speak of an “Italian benchmark” for tiles. It’s similar with oil.
Key Differences Between Benchmarks
These benchmarks differ in important ways. As already mentioned, sulfur content is one of them. For example, Brent oilhas a sulfur content of just 0.45%—very good. It’s a source of sweet crude. Now look at the Middle East, where various types of oil are extracted. Saudi Arabia alone has three benchmarks: Arab-X-Light, Arab Light, and Arab Heavy.
Take Arab Heavy—with 2.8% sulfur. That’s definitely not sweet; it’s sour crude, harder and more expensive to refine. This is reflected in the price too: Arab Heavy was around $6 cheaper (in 2014) than Brent crude.
You might also notice each benchmark has an API number listed. What is that?
What Is API Gravity?
API stands for American Petroleum Institute, but what matters is that the API number (in degrees) measures the “gravity” of oil—specifically whether the oil is heavy or light compared to water.
- If the API number is above 10, the oil is lighter than water and floats.
- If it’s below 10, the oil is heavier than water and sinks.
Ideally, API gravity should be between 15 and 45. A very high API number isn’t good either—it means the oil is too light and thin.
So, What Is “The Price of Oil” Then?
With so many benchmarks, how do we even know the “current oil price”? We don’t track all 200, of course—only the main ones. Which are:
- Brent (North Sea oil, Europe)
- WTI (West Texas Intermediate, USA)
Sometimes Dubai Crude (Middle East) is also considered.
These represent a comparison of U.S. and European oil, and they provide key insights into current economic (and crisis-related) conditions.
Usually, Brent and WTI prices rise and fall together, but sometimes they diverge—sometimes significantly. Why? Because of all the different factors that influence oil prices, which are numerous. Let’s now look at a chart of Brent and WTI prices to analyze them further.
What Do We See?
First and foremost, we see that at certain times, the price of oil in Europe becomes higher than in the U.S.—it “breaks” from synchronization. Why? It depends on the region, but usually there’s some crisis in the background. Take, for example, the significant rise in Brent prices compared to WTI after 2011. What was happening then? The Arab Spring, the war in Libya, the start of the war in Syria… Clearly, all these events have a greater political impact on Europe than on the U.S. (migration, unrest, terrorism…).
The largest divergence between Brent and WTI prices, however, is happening right now, unsurprisingly due to the war in Ukraine.
How Important Are Brent and WTI in Defining the “Global Oil Price”?
Extremely important. Brent is by far the most important benchmark—it determines the pricing of as much as two-thirds of all internationally traded crude oil. It’s often referred to as “London Brent”, since it’s traded on the London Stock Exchange.
Why is Brent so important? Because it represents a high-demand type of oil, and crude from the North Sea is particularly well-suited for refining into diesel and gasoline.
In the case of the U.S., we have West Texas Intermediate (WTI). Although the name refers to the state of Texas, any oil from the broader U.S. region can be classified as WTI—as long as it meets certain criteria (such as sulfur content, gravity, etc.). WTI oil is traded on the New York Mercantile Exchange (NYMEX).
Oil Is an Extremely Complex Resource
Hundreds of different types of crude oil are shipped every day to over 700 oil refineries around the world. The volume of oil trade surpasses all other resources and commodities.
Tracking oil prices is no easy task. But let’s recap the key points we’ve already discussed:
- Benchmarks matter. If someone asks you about the price of oil, the best answer is to look up the current prices of Brent and WTI.
- Ideal crude oil is sweet (low sulfur content) and relatively light.
- Refineries around the world are constantly monitoring what kinds of oil products are needed, and they try to source the appropriate crude accordingly.
Prices are constantly shifting, and the ideal oil for the next production cycle might be on the other side of the world—which is why the oceans are full of tankers. Oil is shipped to refineries not necessarily based on proximity or logistics (and certainly not based on environmental efficiency), but rather from where the best balance of price and quality can be found—and that could be anywhere.
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