Upstream? Downstream? A Quick Guide to Oil Economics

From filling the car to acting as a source of political tension, oil economics seem to dominate our current world. For millions around the globe, crude oil isn’t simply something they hear about in the news. It is a significant income source.

Training and courses that help you understand oil economics can lead to a profitable career that you may enjoy for years. Whether you work in trading, refining, or transportation, understanding how the industry works is critical.

The DTN courses are ideal for anyone who wants to break into the oil industry or take their skills up a notch. Our instructors have decades of experience and expertise to guide you in your career. Contact us today to see which classes would be the right fit for you.

 

First, a Crude Oil Primer

Most consumers don’t enjoy a full understanding of the oil industry. They probably have grown up hearing terms like “crude oil,” “petroleum products,” or “fossil fuels” without learning what those words mean.

In simple terms, crude oil is a petroleum product that is in its natural state. It has not yet gone through a refining process to become usable. 

Because crude oil comes from fossils buried deep in the Earth, it is a nonrenewable resource. That is, the Earth cannot make more of it at the same rate that we consume it. However, exploration companies are finding more and more oil reserves that were previously unknown.

Through the refining process, crude oil becomes several different fuels. Gasoline, diesel, jet fuel, and kerosene are some of those products.

Despite how ubiquitous petroleum products are now, we didn’t discover crude oil until the beginning of the 19th century. Before that, coal ruled the energy sector for a long time.

So in the grand timeline of human history, we have not had it at our disposal for very long. And yet it revolutionized the world.  

 

What Are Upstream and Downstream?

To better understand oil economics, it is essential to get the basic definitions in place. Upstream, midstream, and downstream oil production refer to the company’s position in the supply chain. 

Upstream companies represent the start of the process. These are the businesses that identify, produce, and extract raw materials. In short, this is where oil starts its journey.

The upstream part of the oil economy employs scientists, geologists, rig operators, and more. Also known as exploration and production companies, upstream oil businesses include those that:

• Identify Crude Oil Deposits
• Drill Wells
• Complete Feasibility Studies
• Extracting Raw Materials

Downstream operations, on the other hand, work closer to the consumer or end-user level. These businesses are responsible for:

• Refining
• Marketing
• Distribution

Some companies are integrated, meaning they operate throughout the oil production and distribution economy. They take part in drilling, refining, and selling what you put in your vehicle at the pump

In between the upstream and downstream businesses is the midstream sector. Companies here link the other two ends of the industry and usually focus on fuel transportation and storage.

 

Where Do People Invest?

If you’re looking for oil and gas industry investment opportunities, there are plenty. Every sector of the energy market has places where you can make money and establish a great trading career.

Your preferred investment strategy will depend on your interests, the current state of the market, and your attitude to risk. 

Generally, upstream investments tend to carry higher profit margins but also a higher level of risk. There is never a guarantee of finding oil. This uncertainty means that the payoffs can be more significant if you strike the proverbial black gold. 

Costs are also higher in the upstream market. As production from existing wells depletes, producers need to invest significant capital in exploring and drilling elsewhere. This investment carries no promise of a return.

Downstream investments, on the other hand, are more dependent on supply and demand. Downstream companies purchase oil from producers and sell refined products to end-users. Clearly, the COVID-19 pandemic has created drastic changes in this situation. But in normal circumstances, demand for fuel typically holds steady or rises, making this a less risky investment choice. 

 

What Is The Future of Oil Economics?

Energy experts recognize the change in consumer perception and attitudes toward the oil industry. The push from some policy-makers to move away from fossil fuels has altered how the industry responds economically. 

Spencer Dale, Chief Economist at BP, has set out four so-called New Economics of Oil. These are as follows:

 

Oil Is Not That Limited

Contrary to some outlying analysts, we are highly unlikely to run out of crude oil in the immediate future. Before the COVID-19 pandemic, upstream companies were finding reserves at a rate that outpaced consumption. 

And many countries are incentivizing renewable energy sources. So the demand is unlikely to outpace the supply for the foreseeable future. We shouldn’t presume that prices will increase.

 

Shale Oil vs. Conventional Oil

The ability to access shale oil in the United States is changing our oil economy. Conventional oil can take years between investment and production, leaving it quite unresponsive to market changes. Once they’re actually producing, conventional drilling operations will last for many years.

Shale oil, however, can go from investment to production in just a few weeks. And it has a much shorter production life than conventional oil. These facts make shale more responsive to market fluctuations, lowering volatility, in theory. 

 

Direction of Flow

Traditionally, crude oil flowed globally from the east to the west. That is, it came from the Middle East to Europe and the United States. This dynamic has shifted completely.

Dropping demand combined with rising supply in North America has caused the oil economy to change directions. Products now flow from west to east, creating a vastly different geopolitical and financial market.

 

Ready to Learn More?

Fully understanding oil industry economics can be challenging, but there are resources and classes to help. 

At DTN, we offer a comprehensive course schedule that accommodates beginners to veterans in the crude oil market. Check out all the offerings and connect with an expert to choose the best fit for you.