Empowering you to understand your world

How Oil Works

Follow Kompulsa on Twitter

By Nicholas Brown.

Petroleum, otherwise known as crude oil, or simply oil, is a liquid hydrocarbon substance which was formed millions of years ago due to the fossilization and heating of prehistoric organic matter under pressure over an extended period of time.

  1. Uses of Petroleum
  2. Energy Content of Oil
  3. OPEC Details
  4. Top Oil Producing Countries (2009)
  5. Top Oil Consuming Countries (2009)
  6. Countries with Greatest Proven Oil Reserves
  7. Is Oil Sustainable?
  8. Oil Subsidies and Tax Breaks for Oil Companies
  9. Economic Impact of Drilling for Oil More Today (An Interesting Fact About Oil Prices)
  10. Difference Between Oil Supply and Reserves
  11. Is it Economically Wise to Keep Using Oil or is it Time for Hybrid Vehicles?
  12. Economic Importance of Fluctuating Oil Prices
  13. Hydraulic Fracturing
  14. Should Oil Companies Drill in the ANWR?
  15. When Will Oil Run Out?
  16. Strategic Petroleum Reserves
  17. Effects of Emissions Regulations
  18. Environmental Impact of Oil Usage

What Is Petroleum Used For?


A variety of fuels can be produced using petroleum, such as:

  • Gasoline.
  • Diesel.
  • Alcohols (especially Ethanol).
  • Hydrogen.
  • Kerosene.
  • Propane.

Energy Content

Oil: 1 barrel of oil (used in the United States, oil quality varies) contains 42 gallons of oil which is equal to 5,800,000 BTU of energy.

Gasoline: 1 gallon of gasoline contains 124,238 BTU of energy.

Diesel: 1 gallon of diesel contains 138,690 BTU of energy.


The cost, energy density, environmental impact, and other chemical properties of the fuels above varies significantly. Please note that some of the fuels above come from sources other than petroleum as well, including propane, hydrogen and alcohols. Gasoline and diesel are commonly used to fuel internal combustion engines.

Raw Materials

Petroleum is used to manufacture raw materials, some of which are plastics.


  • PVC (Polyvinyl Chloride).
  • PVDC (Polyvinylidene Chrloride).
  • Polypropelene.
  • Polyethylene.
  • Polystyrene.
  • Polyester.
  • Polyurethanes.
  • Polycarbonate.
  • Polyamides (Nylons).


The Organization of Petroleum Exporting Countries (OPEC) is an intergovernmental organization formed to co-ordinate and unify the policies of member countries, fix oil prices, and to help to economically protect member countries. It was created in the Baghdad conference on September 10-14 1960, by Iran, Iraq, Kuwait, Saudi Arabia, and Cuba. Then they were joined by 9 other countries: Quatar (1861), Indonesia (1962, and suspended its membership from January 2009), Socialist Peoples Libyan Arab Jamahiriya (1962), United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973, but suspended its membership from December 1992-October 2007), Angola (2007), and Gabon (1975-1994).

Share of World Petroleum Reserves in 2008: 79%. 1,023 billion barrels (according to OPEC).

The Rest of World Petroleum Reserves in 2008: 21%. 271 billion barrels (according to OPEC).

Total Reserves: 1,294 billion barrels.

Excluding any future oil reserve discoveries, and oil spills, and also assuming that the rate of oil consumption does not increase. This amount of oil would last 40.77 years starting from 2008.

Top Oil Producing Countries (2009)

  • 1 – Russia.
  • 2 – Saudi Arabia
  • 3 – United States.
  • 4 – Iran.
  • 5 – China.
  • 6 – Canada.
  • 7 – Mexico.
  • 8 – United Arab Emirates.
  • 9 – Brazil.
  • 10 – Kuwait.
  • 11 – Venezuela.
  • 12 – Iraq.
  • 13 – Norway.
  • 14 – Nigeria.
  • 15 – Algeria.


Please note that a country may have large oil reserves but that does not necessarily translate to comparably high oil production. In other words, the fact that a country does not produce much oil does not mean that it is not sitting on an enormous reserve.

Top Oil Consuming Countries (2009)

  • 1 – United States.
  • 2 – China.
  • 3 – Japan.
  • 4 – India.
  • 5 – Russia.
  • 6 – Brazil.
  • 7 – Germany.
  • 8 – Saudi Arabia.
  • 9 – South Korea.
  • 10 – Canada.
  • 11 – Mexico.
  • 12 – France.
  • 13 – Iran.
  • 14 – United Kingdom.
  • 15 – Italy.


Countries With Greatest Proven Oil Reserves

  • 1 – Saudi Arabia
  • 2 – Canada
  • 3 – Iran
  • 4 – Iraq
  • 5 – Kuwait
  • 6 – United Arab Emirates
  • 7 – Venezuela
  • 8 – Russia
  • 9 – Libya
  • 10 – Nigeria
  • 11 – Kazakhstan
  • 12 – Qatar
  • 13 – China
  • 14 – United States
  • 15 – Angola

Economic Characteristics of Petroleum

Information coming soon.

Oil Subsidies and Tax Breaks for Oil Companies

Oil Subsidy: An oil subsidy is a government policy in which the government pays a fraction of the cost of oil for whatever reason so that the consumer can pay less for oil up front.

Tax Break: A tax break is what the name implies: A suspension of taxation (such as tax exemption) or the reduction of the taxable percentage of a person or organization’s income. This can be done for any reason as well.

Some believe that oil subsidies or the provision of tax breaks to oil companies results in lower oil prices because of what is called a ‘trickle down’ effect. Others don’t. Whichever is true, keep in mind that if you provide oil companies with $2.1 billion of tax breaks (Source of figure) for example, then, assuming that the ‘trickle down’ effect I mentioned is real (I have yet to see any evidence supporting it), oil prices are not likely to decrease by any more than $2.1 billion overall.

This means that revoking the tax break would not provide any net increase of oil prices to taxpayers because with the tax breaks in place, they were paying the $2.1 billion anyway, but through the government.

In other words: Tax breaks only mean that people pay some of the cost of oil indirectly (through taxation). So the tax breaks save the economy no money. The same rule applies to subsidies. Subsidies are only to encourage the use of other sources of energy.

Economy And Employment: In the U.S., oil company tax breaks cost taxpayers $2.1 billion, and that is $2.1 billion less available to support the economy. The government can use that tax break money to support the economy by hiring people such as teachers, police officers, fire fighters, and more. It could also be used to fix dilapidated infrastructure such as bridges and roads. Since people have to be hired to repair that infrastructure, such an investment would provide some economic stimulation via job creation, and prevent unexpected collapses which kill people, and cost a great deal of money.

At least funding infrastructure repair with that money is something that you can be sure will create jobs and provide at least some economic benefit, and the creation of permanent jobs means that more people will have money to spend on products and services provided by local businesses, which leads to them hiring more people to tend to customers, assemble products, and more. Especially if they open new branches to meet increased demand.

Oil Drilling Activity: Some believe that oil companies will drill more if provided with tax breaks, but: Oil companies drill to compensate for supply shortfalls, they don’t just sink huge amounts of money into drilling if they don’t have to, because there needs to be a quick and ample ROI.

OPEC decides on oil supply anyway, and they keep it at the level which they can both sustain and which yields maximum profits. If supply is too high, oil prices will be too low for OPEC members (that is their opinion), and if supply is too low, oil will be too expensive and that will slash demand as it did in late 2008 when oil prices spiked to $147 per barrel, and then a plummet in demand reduced them to $35 per barrel, causing them to cut production to drive prices back up (as they announced they would).

Is Oil Sustainable?

Oil is crucial to the manufacturing of almost everything, including plastics, lubricants, moisturizers, gasoline, diesel, and even some biofuels. It needs to be used in a sustainable manner because of how crucial it is to so many industries and it will continue to be crucial, but using it as a fuel on a large scale is causing reserves to dwindle too quickly, making everything that relies on it less sustainable and more expensive because oil prices increase with demand.

An Interesting Fact About Oil Prices

You may already know that higher oil demand results in higher oil prices, and that higher oil prices inhibit increases in demand and can even lower it if they are high enough. You probably also believe that it is most economical to try to lower oil prices by drilling more hastily to keep prices low at the moment, but did you know that drilling for oil hastily only has a short-term benefit which will actually financially catch up with you in the long run?

This is because:

Lower oil prices result in higher demand, and higher demand means that oil reserves and hence supply will decrease faster than ever (explained in the next section below). Whether or not you drill for more oil now, it will always be there if necessary, but if you do not use it sparingly, you end up in the same situation with high oil prices in the future anyway.

Please keep in mind that it is not actual supply that decreases in situations in which oil production is at the maximum possible. It is often less than the maximum and it can be increased to lower prices and meet demand. It is supply capability that decreases with reserves, so the maximum amount of oil that can be extracted decreases with reserve size.

In other words, drilling more hastily now results in running out of affordable oil sooner with short-term oil price relief, but without long-term benefit. This is why energy conservation has the most positive immediate economic impact, it reduces the need for drilling and on top of that it saves money, lowers oil prices instantly and slows down oil price inflation.

Oil is like money, you have to save it, otherwise you will run into financial problems later. Don’t spend all of your money now otherwise you won’t have enough when you really need it later.

There is only a certain amount of oil that can be extracted from a given reserve per day, and that is the production capacity of the reserve.

One Simplified example:

If there are 10 reserves that each have a production capacity of 1,000 barrels per day, then the combined production capacity of the 10 is 10,000 barrels per day. As you consume oil and one of the reserves is depleted, this means that combined production has decreased to a maximum of 9,000 barrels per day because you are now left with 9 wells. This is not quite like reality, but the consequence mentioned of increased demand is real.

Difference Between Oil Supply and Reserves

Oil supply is the rate at which oil is produced or supplied and it needs to meet demand, otherwise there will be a shortage. Oil reserves are literally how much oil is stored within the earth, or even a man-made storage facility such as a strategic petroleum reserve, for example.

Is It Economically Wise To Keep Using Oil For Now Or Is It Time For Hybrid Vehicles?

As you know, hybrid vehicles can achieve efficiency 30% greater than that of their gasoline powered equivalents, but, they are very expensive to purchase, and the batteries are very expensive to replace. You should read the section above about oil supply and reserves and then return to this section.

As I said above, conservation has the most positive and quickest economic impact during a financial energy situation like the current one in Europe, the United States, and many other locations (early 2011). Hybrid-electric vehicles are one way to conserve a considerable amount of fuel which in turn slows oil price inflation and reduces the need for drilling as I explained above.

The economic impact of climate change is another factor to consider, but that is a very complicated topic.

Hydraulic Fracturing (HF)

Simplified: Hydraulic fracturing is the process of pumping a fluid into a hole drilled in a rock formation to increase the pressure in the formation so much that part of it breaks, creating a passageway for the oil leading to the well.

More detailed: Hydraulic fracturing is the process of pumping fluids consisting of water and chemical additives into holes in rock formations until the pressure of the fluid exceeds what the rock can withstand at some point in the formation, causing part of the rock to crack or fracture. The hole that I referred to in the beginning is actually a well which is drilled in the rock formation which the oil would flow into so that it can be extracted. Source.

Should Oil Companies Drill For Oil In The ANWR (Arctic National Wildlife Refuge)

Definition: The ANWR is, according to its home page, a place where unique wildlife is preserved.

Apart from that, read the department of energy’s analysis of ANWR crude oil production here.

They said that ANWR oil production would increase as time passes until 2030 and that it would only constitute 0.4% to 1.2% of world oil consumption which could not dent the cost of oil nor gasoline, it could reduce the cost of oil by up to $1.44 per barrel from an optimistic perspective. If it was capable of producing a significant amount of oil and lowered oil prices significantly, then OPEC would most likely cut oil production (like they have in the past) to drive oil price back up to the level that maximizes their profits.

When Will Oil Run Out?

I cannot tell you when petroleum reserves will be depleted, but, I can tell you that running out of oil is not the main problem with it, but the fact that oil prices will increase. Oil is not going to run out for a very long time, but, it will become far too costly to rely on much sooner than it would run out. As demand increases cost does as well, and oil reserves dwindle as they are drawn from.

This means that oil will eventually become so expensive, that demand will drop because people cannot afford it, and because they would switch to cheaper alternatives. Once demand decreases, oil lasts longer. Oil production can be decreased or increased to keep oil prices in the range that OPEC producers consider suitable, but oil prices will still follow a gradual upward trend (with fluctuations of course) as the content of oil reserves follows a downward trend.

Strategic Petroleum Reserves

A strategic petroleum reserve is a container of petroleum which is kept in case of an emergency such as a disruption of oil supply for whatever reason. One of the main motives is international conflict (war/embargoes).

The United States government maintains a 727 million barrel strategic oil reserve which some people think can be used to alleviate elevated oil prices, but it is for emergencies only and is too small to dent oil prices for extended time periods, but the government’s energy supply can be sustained with it for a while. If U.S. oil demand was what it was in 2009, then the reserve could only provide 38 days of oil.


Effects Of Emissions Regulations

Emissions regulations limiting the maximum emissions of petroleum-fired apparatus can have multiple effects such as:

  • Emissions regulations force the public to limit their emissions using methods such as fuel conservation or the use of emissions limiting devices such as catalytic converters, reducing demand for oil, hence reducing oil prices, because oil prices are set by demand and supply. Reductions in oil demand mean that the oil industry can last longer because oil would be practical for a longer time due to lower prices (caused by slowed price inflation, which is caused by reduced demand). This does not include the emissions control equipment built into automobiles.

Environmental Impact Of Oil Usage


Global warming is caused by excessive greenhouse gas production, the greenhouse gas produced in excess is carbon dioxide (CO2). A greenhouse gas is a thermal insulator which inhibits the transmission of infrared radiation (heat), it allows some solar radiation to pass through, and some of that radiation is reflected off the surface of the earth and into space.

Some of that reflected radiation is bounced back by carbon dioxide, and since it is a thermal insulator, that causes heat to accumulate on in the atmosphere, this is a process called global warming.

Effects of global warming:

  • It is causing glaciers (a glacier is a large and slow-moving mass of ice) and ice caps to melt.
  • It is causing permafrost (frozen soil) to melt.
  • It is destroying the habitat of polar bears.
  • It will cause an increase in the strength/number of hurricanes, tornadoes, and typhoons, because heat is the main fuel of those storms. Read more.
  • It is causing important rivers, lakes (example: Lake Chad), and other bodies of water to evaporate due to droughtsRead more.
  • It is expected to cause major flooding, and sea level increases.
  • It causes decreased soil moisture in some regions due to higher than normal atmospheric temperatures/droughts.


  • Excessive carbon dioxide levels in the atmosphere is causing ocean acidification. Which is the reduction of the pH of the earth’s oceans due to excessive carbon dioxide uptake from the atmosphere. In other words, the ocean is absorbing more carbon dioxide than it should and that causes it’s acidity to increase.


Petroleum combustion results in the emission of the following toxic substances which I am sure about (there are more that you can research on your own):

  • Carbon Monoxide (CO).
  • Sulfur Dioxide (SO2).
  • Tropospheric Ozone (O3).
  • Lead (Pb).
  • Peroxyacl Nitrates.
  • Volatile Organic Compounds.

Leave a Reply

Subscribe to our newsletter
Get notified when new content is published