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Posted: 05/09/2016

Why do we measure oil in barrels and price it in dollars?

Why do we measure oil in barrels and price it in dollars?

The fall in the price of crude oil over the past 18 months has been spectacular, diving from $115 (£80) a barrel in the Summer of 2014 to around $28 now, but how much is in a barrel, why do we use it as a unit of measurement, and why is it priced in dollars?

The modern oil industry began in the mid-19th Century, in Pennsylvania USA, with the discovery of the world’s first commercially viable oil well. Oil producers were so desperate for vessels to store and move oil from the well that they used all kinds of containers, including the most readily avaliable, empty barrels.

Titusville 1865

In August 1866 producers met in the oil production capital of Titusville to agree on a standard measure to enable the trade in oil between American and English merchants. Although the most commonly used container at the time was the 40 US gallon whiskey barrel, it was decided to base the measurement on the ‘tierce’, a unit for measuring wine in medieval England. The tierce was 35 imperial gallons, or 159 litres, and equated to 42 US gallons. This 42 US gallon barrel when filled with oil weighed 300lb, and it was found that this was just enough for one man to manually handle and manoeuvre on his own.

In 1872 the US Petroleum Producers Association adopted the 42-gallon barrel as the standard measure, and although oil is now shipped in tankers rather than barrels, it has remained the unit for measurement in pricing, tax, and in regulatory codes ever since.

Crude oil is priced in dollars because the U.S. Dollar $ is the world’s reserve currency, is widely avaliable across the globe, and is the standard currency of international trade. In fact 60 % of all currency reserves across the globe are held in U.S. Dollars.