The Economist explains

What is Brent crude?

The world’s most widely used oil benchmark faces challenges from rivals

By B.F.

BRENT CRUDE is the benchmark against which the majority of the 100m barrels of crude oil traded every day are priced. At the start of October the price of Brent crude rose above $85 a barrel, its highest level in four years. But the black stuff that makes up the Brent benchmark comprises a tiny fraction of the world’s extracted oil. Why is it used to determine the value of 60% of oil on international markets?

The international oil trade is relatively new. It was not until 1861 that the first deal between two countries was recorded, when the Elizabeth Watts, a cargo ship, took a consignment of oil from Pennsylvania to London. Before the second world war, oil was mainly traded regionally. After the war the market became increasingly global as the number of producers expanded. Its price was largely set by oil companies, and later by the 15 countries that make up OPEC, the oil-producers’ cartel. It is only since the late 1980s that prices have been determined by international markets. As crude oil differs in quality and availability depending on where it comes from, producers and traders need a reliable benchmark against which to judge the correct price.

The most widely used benchmark is Brent crude, oil extracted in the North Sea. Brent makes such a good benchmark because it is easy to refine into products such as petrol, so demand is consistent. Because it comes from the sea, output can be raised as required and extra oil tankers can be chartered to ship the stuff. Supply of the more easily refined but landlocked West Texas Intermediate (WTI) crude, a benchmark commonly used in America, is constrained by pipeline capacity. When the Brent benchmark was first adopted for widespread use in 1985, the oil came from Shell’s Brent oil field. But as production diminished, crude oil from other fields in the North Sea was added into the blend that makes up the benchmark. Today, the price of a barrel of Brent crude is taken from the most competitive of five different types of crude, only one of which comes from the Brent field. This has maintained the security and volume of supply essential for a reliable benchmark.

Although Brent crude is well-established in the world’s markets, its continued importance is not assured. North Sea oil reserves are depleting. New sources of crude from outside the North Sea could help guard against supply-side price swings, but also affect Brent’s consistent quality. WTI, the second-most-common benchmark, has been gaining influence after the American government lifted a ban on oil exports three years ago. Earlier this year, China launched Shanghai crude futures, an attempt to create an Asian benchmark to rival the two Western incumbents. Many of the trades pegged to this benchmark use the yuan, which could make China’s currency more important in the global economy. Shanghai crude has had some early success, but it needs to attract more foreign interest to become a global alternative. Brent crude is still the most prevalent gauge of the price of oil, though competition could one day have it over a barrel.

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