Crude Oil Price History Analysis Economics Essay

. A A Introduction

The monetary value of a barrel of oil is extremely dependent on both its class, determined by factors such as its specific gravitation or API and its sulfur content, and its location. The huge bulk of oil is non traded on an exchange but on an nonprescription basis.Other of import benchmarks include Dubai, Tapis, and the OPEC basket. The Energy Information Administration ( EIA ) uses the imported refiner acquisition cost, the leaden mean cost of all oil imported into the US, as its “ universe oil monetary value ” .

Crude oil monetary values behave much as any other trade good with broad monetary value swings in times of deficit or glut. The rough oil monetary value rhythm may widen over several old ages reacting to alterations in demand every bit good as OPEC and non-OPEC supply.

The U.S. crude oil industry ‘s monetary value was to a great extent regulated through production or monetary value controls throughout much of the 20th century. In the station World War II era U.S. oil monetary values at the wellspring averaged $ 26.64 per barrel adjusted for rising prices to 2008 dollars. In the absence of monetary value controls, the U.S. monetary value would hold tracked the universe monetary value averaging $ 28.68. Over the same station war period the median for the domestic and the adjusted universe monetary value of rough oil was $ 19.60 in 2008 monetary values. That means that merely 50 per centum of the clip from 1947 to 2008 hold oil monetary values exceeded $ 19.60 per barrel.A

Until the March 28, 2000 acceptance of the $ 22- $ 28 monetary value set for the OPEC basket of petroleum, oil monetary values merely exceeded $ 24.00 per barrel in response to war or struggle in the Middle East. With limited trim production capacity, OPEC abandoned its monetary value set in 2005 and was powerless to stem the rush in oil monetary values, which was reminiscent of the late seventiess.

A

Crude Oil Prices 1947 – August, 2009 C: UsersarpitDesktopUntitled.png

*World Price – The lone really long term monetary value series that exists is the U.S. mean wellspring or first purchase monetary value of petroleum. When discoursing long-run monetary value behaviour this presents a job since the U.S.A imposed monetary value controls on domestic production from late 1973 to January 1981. In order to show a consistent series and besides reflect the difference between international monetary values and U.S. monetary values we created a universe oil monetary value series that was consistent with the U.S. wellhead monetary value seting the wellhead monetary value by adding the difference between the refiners acquisition monetary value of imported petroleum and the refiners mean acquisition monetary value of domestic crude.A

The Very Long Term View

The really long-run position is much the same.A Since 1869, US crude oil monetary values adjusted for rising prices have averaged $ 22.52 per barrel in 2008 dollars compared to $ 23.42 for universe oil monetary values.

Fifty per centum of the clip monetary values U.S. and universe monetary values were below the average oil monetary value of $ 16.71 per barrel.

If long-run history is a usher, those in the upstream section of the rough oil industry should construction their concern to be able to run with a net income, below $ 17.65 per barrel half of the clip. The really long-run informations and the station World War II information suggest a “ normal ” monetary value far below the current monetary value.

Crude Oil Prices 1869-2009

Crude Oil Prices 1867-2007

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A

The consequences are dramatically different if merely post-1970 informations are used. In that instance, U.S. petroleum oil monetary values mean $ 32.36 per barrel and the more relevant universe oil monetary value norms $ 35.50 per barrel. The average oil monetary value for that period is $ 30.04 per barrel.

If oil monetary values revert to the mean this period is likely the most appropriate for today ‘s analyst. It follows the extremum in U.S. oil production extinguishing the effects of the Texas Railroad Commission and is a period when the Seven Sisters were no longer able to rule oil production and monetary values. It is an epoch of far more influence by OPEC oil manufacturers than they had in the yesteryear. As we will see in the inside informations below influence over oil monetary values is non tantamount to command.

Crude Oil Prices 1970-2008

Crude Oil Prices 1970-2007

Post World War II

Pre Embargo Period

Crude Oil monetary values ranged between $ 2.50 and $ 3.00 from 1948 through the terminal of the sixtiess. The monetary value oil rose from $ 2.50 in 1948 to about $ 3.00 in 1957. When viewed in 2008 dollars an wholly different narrative emerges with rough oil monetary values fluctuating between $ 17 and $ 19 during most of the period.A The evident 20 % monetary value addition in nominal monetary values merely kept up with inflation.A

From 1958 to 1970, monetary values were stable near $ 3.00 per barrel, but in existent footings the monetary value of rough oil declined from above $ 19 to $ 14 per barrel.A The diminution in the monetary value of petroleum when adjusted for rising prices for the international manufacturer suffered the extra consequence in 1971 and 1972 of a weaker US dollar.A

Established in 1960 OPEC, with five establishing members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, took over a decennary to set up its influence in the universe market.A Two of the representatives at the initial meetings had studied the the Texas Railroad Commission ‘s methods of influencing monetary value through restrictions on production. By the terminal of 1971, six other states had joined the group: Katar, Indonesia, Libya, United Arab Emirates, Algeria and Nigeria.A From the foundation of the Organization of Petroleum Exporting Countries through 1972 member states experienced steady diminution in the buying power of a barrel of oil.

Throughout the station war period exporting states found increasing demand for their rough oil but a 40 % diminution in the buying power of a barrel of oil.A In March 1971, the balance of power shifted.A That month the Texas Railroad Commission set proration at 100 per centum for the first time.A This meant that Texas manufacturers were no longer limited in the volume of oil that they could produce.A More significantly, it meant that the power to command rough oil monetary values shifted from the United States ( Texas, Oklahoma and Louisiana ) to OPEC.A Another manner to state it is that there was no more trim capacity in the U.S. and hence no tool to set an upper bound on monetary values. A small over two old ages subsequently OPEC, through the unintended effect of war, obtained a glance of the extent of its power to influence monetary values.

World Events and Crude Oil Prices 1947-1973

World Events and Crude Oil Prices 1947-1973

Middle East, OPEC and Oil Prices 1947-1973

Middle East, OPEC and Oil Prices 1947-1973

Middle East Supply Interruptions

Yom Kippur War – Arab Oil Embargo

In 1972, the monetary value of rough oil was about $ 3.00 per barrel.A By the terminal of 1974, the monetary value of oil had quadrupled to over $ 12.00. The Yom Kippur War started with an onslaught on Israel by Syria and Egypt on October 5, 1973. The United States and many states in the western universe showed support for Israel. Because of this support, several Arab exporting states and Iran imposed an trade stoppage on the states back uping Israel. While these states curtailed production by 5 million barrels per twenty-four hours other states were able to increase production by a million barrels. The net loss of 4 million barrels per twenty-four hours extended through March of 1974 and represented 7 per centum of the free universe production.A

Any uncertainty the ability to command rough oil monetary values had passed from the United States to OPEC was removed during the Arab Oil Embargo.A The utmost sensitiveness of monetary values to provide deficits became all excessively evident when monetary values increased 400 per centum in six short months.A

From 1974 to 1978, the universe petroleum oil monetary value was comparatively level runing from $ 12.21 per barrel to $ 13.55 per barrel.A When adjusted for rising prices universe oil monetary values were in a period of moderate diminution.

U.S. and World Events and Oil Prices 1973-1981

Middle East, OPEC and Crude Oil Prices 1947-1973

OPEC Oil Production 1973-2009

OPEC Production and Crude Oil Prices 1973-Present

Crisiss in Iran and Iraq

In 1979 and 1980, events in Iran and Iraq led to another unit of ammunition of rough oil monetary value additions. The Persian revolution resulted in the loss of 2 to 2.5 million barrels per twenty-four hours of oil production between November 1978 and June 1979.A At one point production about halted.

The Persian revolution was the proximate cause of what would go the highest monetary value in post-WWII history.A However, its impact on monetary values would hold been limited and of comparatively short continuance had it non been for subsequent events. Shortly after the revolution, production was up to 4 million barrels per twenty-four hours.

In September 1980, Iran already weakened by the revolution was invaded by Iraq. By November, the combined production of both states was merely a million barrels per twenty-four hours and 6.5 million barrels per twenty-four hours less than a twelvemonth earlier. Consequently world-wide petroleum oil production was 10 per centum lower than in 1979.

The combination of the Persian revolution and the Iraq-Iran War cause petroleum oil monetary values to more than double increasing from $ 14 in 1978 to $ 35 per barrel in 1981.

Three decennaries later Iran ‘s production is merely two-thirds of the degree reached under the authorities of Reza Pahlavi, the former Shah of Iran.

Iraq ‘s production remains a million barrels below its extremum before the Iraq-Iran War.

Iran Oil production 1973-2009

Middle East, OPEC and Crude Oil Prices 1947-1973 Iraq Oil production 1973-2009

Middle East, OPEC and Crude Oil Prices 1947-1973

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A

US Oil Price Controls – Bad Policy?

The rapid addition in rough monetary values from 1973 to 1981 would hold been much less were it non for United States energy policy during the station Embargo period. The US imposed monetary value controls on domestically produced oil.A The obvious consequence of the monetary value controls was that U.S. consumers of rough oil paid about 50 per centum more for imports than domestic production and U.S manufacturers received less than universe market monetary value. In consequence, the domestic crude oil industry was subsidising the U.S. consumer.

A

Did the policy achieve its end? In the short-run, the recession induced by the 1973-1974 petroleum oil monetary value spike was slightly less terrible because U.S. consumers faced lower monetary values than the remainder of the world.A However, it had other effects as well.A

In the absence of monetary value controls, U.S. geographic expedition and production would surely hold been significantly greater. Higher crude oil monetary values faced by consumers would hold resulted in lower rates of ingestion: cars would hold achieved higher stat mis per gallon Oklahoman, places and commercial edifices would hold has better insulated and betterments in industrial energy efficiency would hold been greater than they were during this period. Consequently, the United States would hold been less dependent on imports in 1979-1980 and the monetary value addition in response to Iranian and Iraqi supply breaks would hold been significantly less.

US Oil Price Controls 1973-1981

US Price Controls 1973-1981 Refiners Aquisition Cost of Crude Oil

Click on graph for larger position A OPEC Fails to Control Crude Oil Prices A A

OPEC has rarely been effectual at commanding monetary values. While frequently referred to as a trust, OPEC does non fulfill the definition. One of the primary demands is a mechanism to implement member quotas. The old gag went something like this. What is the difference between OPEC and the Texas Railroad Commission? OPEC does n’t hold any Texas Rangers! The lone enforcement mechanism that has of all time existed in OPEC was Saudi trim capacity.

With adequate trim capacity at times to be able to increase production sufficiently to countervail the impact of lower monetary values on its ain gross, Saudi Arabia could implement subject by endangering to increase production plenty to crash monetary values. In world even this was non an OPEC enforcement mechanism unless OPEC ‘s ends coincided with those of Saudi Arabia.

During the 1979-1980 period of quickly increasing monetary values, Saudi Arabia ‘s oil curate Ahmed Yamani repeatedly warned other members of OPEC that high monetary values would take to a decrease in demand. His warnings fell on deaf ears.A

Billowing monetary values caused several reactions among consumers: better insularity in new places, increased insularity in many older places, more energy efficiency in industrial procedures, and cars with higher efficiency. These factors along with a planetary recession caused a decrease in demand which led to falling rough prices.A Unfortunately for OPEC merely the planetary recession was impermanent. Cipher rushed to take insularity from their places or to replace energy efficient workss and equipment — much of the reaction to the oil monetary value addition of the terminal of the decennary was lasting and would ne’er react to take down monetary values with increased ingestion of oil.A

Higher monetary values besides resulted in increased geographic expedition and production outside of OPEC. From 1980 to 1986 non-OPEC production increased 10 million barrels per twenty-four hours. OPEC was faced with lower demand and higher supply from outside the organisation.

From 1982 to 1985, OPEC attempted to put production quotas low plenty to stabilise monetary values. These efforts met with perennial failure as assorted members of OPECA produced beyond their quotas. During most of this period Saudi Arabia acted as the swing manufacturer cutting its production in an effort to stem the free autumn in monetary values. In August of 1985, the Saudis tired of this role.A They linked their oil monetary value to the topographic point market for petroleum and by early 1986 increased production from 2 MMBPD to 5 MMBPD.A Crude oil monetary values plummeted below $ 10 per barrel by mid-1986. Despite the autumn in monetary values Saudi gross remained about the same with higher volumes counterbalancing for lower monetary values.

A December 1986 OPEC monetary value agreement set to aim $ 18 per barrel spot it was already interrupting down by January of 1987and monetary values remained weak.

The monetary value of rough oil spiked in 1990 with the lower production and uncertainness associated with the Iraqi invasion of Kuwait and the resulting Gulf War. The universe and peculiarly the Middle East had a much harsher position of Saddam Hussein occupying Arab Kuwait than they did Persian Iran. The propinquity to the universe ‘s largest oil manufacturer helped to determine the reaction.

Following what became known as the Gulf War to emancipate Kuwait petroleum oil monetary values entered a period of steady diminution until in 1994 rising prices adjusted monetary values attained their lowest degree since 1973.

The monetary value rhythm so turned up. The United States economic system was strong and the Asian Pacific part was dining. From 1990 to 1997 universe oil ingestion increased 6.2 million barrels per twenty-four hours. Asiatic ingestion accounted for all but 300,000 barrels per twenty-four hours of that addition and contributed to a monetary value recovery that extended into 1997. Worsening Russian production contributed to the monetary value recovery. Between 1990 and 1996 Russian production declined over 5 million barrels per twenty-four hours.

A A A

World Events and Crude Oil Prices 1981-1998

World Events and Crude Oil Prices 1981-1998

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U.S. Petroleum Consumption

U.S. Petroleum Consumption

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Non-OPEC Production & A ; Crude Oil Monetary values

Non-OPEC Production & A ; Crude Oil Monetary values

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OPEC Production & A ; Crude Oil Monetary values

OPEC Production & A ; Crude Oil Monetary values

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Russian Crude Oil Production

Russian Crude Oil Production

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A OPEC continued to hold assorted success in commanding monetary values. There were errors in timing of quota alterations every bit good as the usual jobs in keeping production subject among its member states.

The monetary value additions came to a rapid terminal in 1997 and 1998 when the impact of the economic crisis in Asia was either ignored or badly underestimated by OPEC.A In December, 1997 OPEC increased its quota by 2.5 million barrels per twenty-four hours ( 10 per centum ) to 27.5 MMBPD effectual January 1, 1998. The rapid growing in Asiatic economic systems had come to a arrest. In 1998 Asiatic Pacific oil ingestion declined for the first clip since 1982. The combination of lower ingestion and higher OPEC production sent monetary values into a downward spiral. A In response, OPEC cut quotas by 1.25 million b/d in April and another 1.335 million in July. Price continued down through December 1998.

Monetary values began to retrieve in early 1999 and OPEC reduced production another 1.719 million barrels in April. As usual non all of the quotas were observed but between early 1998 and the center of 1999 OPEC production dropped by about 3 million barrels per twenty-four hours and was sufficient to travel monetary values above $ 25 per barrel.

With minimum Y2K jobs and turning US and universe economies the monetary value continued to lift throughout 2000 to a station 1981 high. Between April and October, 2000 three consecutive OPEC quota additions numbering 3.2 million barrels per twenty-four hours were non able to stem the monetary value additions. Monetary values eventually started down following another quota addition of 500,000 effectual November 1, 2000.

A

World Events and Crude Oil Prices 1997-2003

World Events and Crude Oil Prices 1997-2003

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OPEC Production 1990-2007

OPEC Production 1990-2005

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A Russian production additions dominated non-OPEC production growing from 2000 forward and was responsible for most of the non-OPEC addition since the bend of the century.A

Once once more it appeared that OPEC overshot the grade. In 2001, a diminished US economic system and increases in non-OPEC production put downward force per unit area on prices.A In response OPEC one time once more entered into a series of decreases in member quotas cutting 3.5 million barrels by September 1, 2001. In the absence of the September 11, 2001 terrorist onslaught this would hold been sufficient to chair or even change by reversal the tendency.

In the aftermath of the onslaught petroleum oil monetary values plummeted. Topographic point monetary values for the U.S. benchmark West Texas Intermediate were down 35 per centum by the center of November. Under normal fortunes a bead in monetary value of this magnitude would hold resulted an another unit of ammunition of quota decreases but given the political clime OPEC delayed extra cuts until January 2002. It so reduced its quota by 1.5 million barrels per twenty-four hours and was joined by several non-OPEC manufacturers including Russia who promised combined production cuts of an extra 462,500 barrels. This had the coveted consequence with oil monetary values traveling into the $ 25 scope by March, 2002. By mid-year the non-OPEC members were reconstructing their production cuts but monetary values continued to lift and U.S. stock lists reached a 20-year low subsequently in the year.A

By twelvemonth terminal glut was non a job. Problems in Venezuela led to a work stoppage at PDVSA doing Venezuelan production to plump. In the aftermath of the work stoppage Venezuela was ne’er able to reconstruct capacity to its old degree and is still about 900,000 barrels per twenty-four hours below its peak capacity of 3.5 million barrels per day.A OPEC increased quotas by 2.8 million barrels per twenty-four hours in January and February, 2003.A

On March 19, 2003, merely as some Venezuelan production was get downing to return, military action commenced in Iraq. Meanwhile, stock lists remained low in the U.S. and other OECD states. With an bettering economic system U.S. demand was increasing and Asiatic demand for rough oil was turning at a rapid gait.

The loss of production capacity in Iraq and Venezuela combined with increased OPEC production to run into turning international demand led to the eroding of extra oil production capacity. In mid 2002, there was over 6 million barrels per twenty-four hours of extra production capacity and by mid-2003 the surplus was below 2 million. During much of 2004 and 2005 the trim capacity to bring forth oil was under a million barrels per twenty-four hours. A million barrels per twenty-four hours is non adequate trim capacity to cover an break of supply from most OPEC manufacturers.

In a universe that consumes over 80 million barrels per twenty-four hours of crude oil merchandises that added a important hazard premium to crude oil monetary value and is mostly responsible for monetary values in surplus of $ 40- $ 50 per barrel.

Other major factors lending to the current degree of monetary values include a weak dollar and the continued rapid growing in Asiatic economic systems and their crude oil consumption.A The 2005 hurricanes and U.S. refinery jobs associated with the transition from MTBE as an linear to ethanol hold contributed to higher monetary values.

World Events and Crude Oil Prices 2001-2007

World Events and Crude Oil Prices 2001-2005

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Russian Crude Oil Production

Russian Crude Oil Production

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Venezuelan Oil Production

Russian Crude Oil Production

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Excess Crude Oil Production Capacity

Excess Crude Oil Production Capacity

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A One of the most of import factors back uping a high monetary value is the degree of crude oil stock lists in the U.S. and other devouring states. Until trim capacity became an issue stock list degrees provided an first-class tool for short-run monetary value prognosiss. Although non good publicized OPEC has for several old ages depended on a policy that amounts to universe stock list direction. Its primary ground for cutting back on production in November, 2006 and once more in February, 2007 was concern about turning OECD stock lists. Their focal point is on entire crude oil stock lists including rough oil and crude oil merchandises, which are a better index of monetary values that oil stock lists entirely.

World Events and Crude Oil Prices 2004-2007A Impact of Monetary values on Industry Sections

Drilling and Exploration

A A Boom and Bust

The Rotary Rig Count is the mean figure of boring rigs actively researching for oil and gas. Boring an oil or gas good is a capital investing in the outlook of returns from the production and sale of rough oil or natural gas. Rig count is one of the primary steps of the wellness of the geographic expedition section of the oil and gas industry.A In a really existent sense it is a step of the oil and gas industry ‘s assurance in its ain future.A

AtA the terminal of the Arab Oil Embargo in 1974 rig count was below 1500. It rose steadily with regulated petroleum oil monetary values to over 2000 in 1979.A From 1978 to the beginning of 1981 domestic petroleum oil monetary values exploded from a combination of the the rapid growing in universe energy monetary values and deregulating of domestic monetary values. At that clip high monetary values and prognosiss of rough oil monetary values in surplus of $ 100 per barrel fueled a boring craze. By 1982 the figure of rotary rigs running had more than doubled.A

It is of import to observe that the extremum in boring occurred over a twelvemonth after oil monetary values had entered a steep diminution which continued until the 1986 monetary value prostration. The one twelvemonth slowdown between petroleum monetary values and rig count disappeared in the 1986 monetary value prostration. For the following few old ages the economic system of the towns and metropoliss in the oil spot was characterized by bankruptcy, bank failures and high unemployment.