Many steps are necessary to get oil to consumers around the world in forms that they can use. Products such as gasoline, diesel fuel, heating oil, and jet fuel, among others, all begin as crude oil in underground reservoirs. To get to consumers, oil needs to be pumped out of the ground, transported, refined, and delivered to consumers.
Identifying reservoirs requires a series of steps: locating potential reservoirs, testing the rock, and drilling wells. When a reservoir is found, geologists estimate the size of the reservoir and evaluate its commercial viability. If the news is good, companies build production wells and a distribution network of pipelines to extract the oil and to transport it to a hub for further shipment.[i] The identification, extraction and production of crude oil is referred to as "upstream" in oil and gas industry vernacular.
The majority of the world oil trade is in crude oil, although some oil is refined near the wellhead (either for local use or for trade in refined products, carried by "product tankers" rather than "crude carriers"). Crude oil can be transported via pipelines or tankers - often referred to as "midstream" activities. Pipelines are the preferred method for moving oil around on land, as they are relatively easy to maintain and are cheaper than alternatives for land-based transport such as rail, truck, or barge. However, pipelines are in a fixed location, so they are hard to adjust to changing supply and demand conditions, and when pipelines cross international borders, various governments get opportunities to tax or interrupt the flow of oil.[ii] Tankers can ship massive quantities of oil over long distances extremely cost efficiently. In general, tanker routing is extremely flexible, but some preferred routes (i.e., the quickest and therefore the cheapest) pass through chokepoints. Tankers can become useless if their passage through key areas is blocked: the Strait of Hormuz is one of these global chokepoints.
After the transportation step, refiners process crude oil into useable petroleum products. Referred to as "downstream" activities in the oil and gas industry, basic refining separates "the crude oil into its "˜fractions,' the broad categories of its component hydrocarbons."[iii] Some high-end products require still further processing (e.g., jet fuel). The quality of the crude oil input also plays a substantial role in the level of processing needed to get the desired end products (see oil streams).
Finally, pipelines and tanker trucks carry refined energy products to storage and, ultimately, consumers. Wholesale and retail companies maintain inventories, or stocks, so they can "deliver the right product to the right location at the right time."[iv]
[i] Energy Information Administration, Oil Market Basics: Supply. Online. Available: http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/supply_text.htm. Accessed: February 10, 2008.
[ii] Energy Information Administration, Oil Market Basics: Trade. Online. Available: http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/trade_text.htm. Accessed: February 10, 2008.
[iii] Energy Information Administration, Oil Market Basics: Refining. Online. Available: http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/refining_text.htm. Accessed: February 10, 2008.
[iv] Energy Information Administration, Oil Market Basics: Stocks. Online. Available: http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/stocks_text.htm. Accessed: February 10, 2008.