How Is Crude Oil Formed

Crude oil formed millions of years ago when environmental and geological conditions combined to create an item that could be converted into various forms of energy, resulting in a billion-dollar business. Learning how crude oil formed and understanding the variations of crude oil can lead to a better understanding of how crude oil commodities drive the oil industry.

Ancient History
Ocean plants and animals that lived millions of years ago settled on the bottom of the sea when they died. Their bodies were covered with sediment over time, and they were compressed by intense heat and pressure. Over the years, the remains turned into a yellowish-black substance known as crude oil. The same process also created the natural gas that is used today.

The only way to reach these pockets of crude oil is by drilling deep into the earth. Oil rigs called derricks drill down into the earth's crust and open up access to the crude oil. Pumps, pipes and other mechanical means bring the crude oil to the surface, where it is sent to refineries to separate the crude oil from other elements.

Chemical Composition
Depending on the types of plants and animals that created the crude oil pocket, the crude oil contains a different chemical makeup. Primarily, crude oil is made up of hydrocarbons, plus a variety of other chemical compounds, depending on the region. For example, some crude oil contains lots of sulfur and it is termed "sour," while crude oil with very little sulfur is called "sweet crude." Crude oil can also be thicker or thinner, depending on its location. Crude oil is made into gasoline, airplane fuel, diesel fuel and other petroleum products depending on its chemical makeup. Crude oil also provides the basis for plastics.

Since crude oil is in limited supply, it is big business for the countries that have access to it. Saudi Arabia is the world's leading crude oil producer, followed by Russia, the United States, Iran and China. Within the United States, Alaska and Texas are the top states to produce crude oil. California, Oklahoma and Louisiana are also major producers, as are the offshore drilling sites in the Gulf of Mexico.

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Crude oil refining relies on extracting impurities and heating up the oil, which results in different types of fuel, including gasoline and kerosene.

Interested in knowing how to invest in oil? You can try oil futures trading, or you could invest in an ETF that spreads investment money among several oil companies.

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