Blockchain technology, which has been widely adopted over the last few years, could be used to radically change the flow of information in this highly-regulated and time-sensitive industry.
Blockchain is a peer-to-peer system for transferring value and exchanging digital assets (such as company stocks, real estate deeds, or private contracts) without a third party or central administrator that keeps track of every transaction – as banks or governments do now.
So, why is this all relevant to oil trading? To answer this question, it’s essential first to understand what happens during an oil trade, how it usually works today, and how it could work with blockchain. Also, learn some tips for Oil Trading.
By removing the middleman, blockchain brings costs down and speeds up transactions. It also enables the transfer of value without trust – the trust is built into the protocol itself.
It dramatically improves security, transparency, and accountability in supply chains.
Relevancy of blockchain and oil trading:
The transaction process for oil trading often involves many moving parts, including different exchange venues. In addition, brokers and banks are involved in processing documents and clearing payments.
Even though these transactions are complex and require excellent coordination between different participants, the process is often conducted via an email-based system. It means that most parties involved in the transaction will send emails back and forth for various permissions, confirmations, and receipts.
Unfortunately, this creates a less-than-optimal user experience and incurs significant time delays in processing documents across different jurisdictions.
Blockchain could eliminate these time delays and reduce the need for working capital by providing an irrefutable record of transactions. As every party involved in a blockchain-based supply chain has a copy of the ledger, they can instantly verify each party’s share at any time.
In addition, they would not have to wait for multiple business partners to send or receive information before possible transactions.
Potential Uses and Implications of blockchain in oil trading:
Blockchain has several potential uses in the oil and gas industry, ranging from payment settlement to contract management.
In addition, in disrupting efficiency and lowering the cost of transactions, blockchain could bring a lot of added value to many aspects of the business.
Payment Settlement: Blockchain could significantly improve the settlement process of international transactions by removing delays that occur during cross-border transaction settlements.
It is because payments made on the blockchain network are settled instantaneously, allowing for fast and secure global payments. For example, it typically takes up to 4 days for an international bank transfer to clear – with blockchain settling payments in seconds or minutes.
Contract Management: A new feature in blockchain technology called smart contracts allows for deploying complex legal agreements on a single platform without going through a central authority, lawyer, or intermediary. Instead, smart contracts are executed automatically; once completed, their terms can no longer have alteration.
It makes intelligent contracts highly effective in handling complex legal issues – such as land and property ownership, financial agreements, and even insurance claims.
Smart contracts could also improve the track record keeping of oil trading documentation by outlining all of the details of a supply chain in an immutable database.
Improving the transparency and accountability of oil trading:
It is important to note that blockchain is not just about eliminating intermediaries or speeding up transactions – it can also improve transparency and accountability and minimize fraud in supply chains by improving the visibility across different parties’ records so they can see everything exactly as it happens.
With blockchain technology being used to improve processes and reduce costs in several global industries, oil trading could also be next.
In addition, blockchain could increase the transparency of transactions and protect different stakeholders’ interests by eliminating the ‘trust gap’ during international transactions.
With blockchain being a global architecture, once oil trading is on it, there will be no need for intermediaries or brokers – which can significantly impact the cost structure in the industry. In this new world of global business, transparency rules.
Using blockchain to reduce cost and improve efficiency, oil trading could become more efficient than an email-based system. Blockchain can also help provide an immutable record of all transactions in the supply chain – creating certainty that no information will be lost.
While blockchain is still in its early stages and is often associated with the financial sector, the technology may also offer significant benefits to the oil industry.
Once the initial usage of this technology reaches trade volumes in the billions of barrels per day, oil companies will be able to benefit from lower costs, faster settlement times, and improved transparency across jurisdictional borders.
It has profound implications for oil trading – which could also serve as a pilot for other complex global supply chains.