Crude oil is the most important natural resource for industrialized countries, and will likely remain so for another decade. Most countries – whether exporters or importers, producers or consumers – are significantly affected by changes in crude oil prices. The history of crude oil prices shows a series of increases, decreases, collapses and sharp rises whereby so many factors drove this series. To consider this history, this article will illustrate crude oil prices since the 1900s.
Some economists argue that there was no world crude oil price before World War II. Oil production and consumption was mostly within the United States, however, there were few market transactions. Moreover, wartime devastation and the Soviet threat led to the Marshall Plan (also called the European Recovery Program) in 1948. That led to a competitive market price which sold out of the Persian Gulf to Europe. One of the requirements of this agreement was a Free On Board price so that all would pay the lowest price, even the most distant buyers in the U.S.A. Consequently, Europe and other buyers benefited from a very large cut in the price. From 1948 through to the end of the 1960s, crude oil prices ranged between $2.50 and $3.00. Thus prices were stable until 1970 when the price was $3.00 bbd. However, since the 1970s, there have been more fluctuations, such as an oil crisis in 1973 because of an Arab-Israel war called the Yom Kippur War, wherein OPEC members imposed an embargo against the USA and Holland. Consequently, OPEC countries decreased their oil production, which led to a rise in the overall oil price from $3.00 to $12.00.
Further on in history, the oil price became volatile again because of the revolution in Iran, which led to decreased oil production and, thus, decreased output from 1979 to 1980. Meanwhile, the members of OPEC, particularly Saudi Arabia, refused to increase their output to replace the lost Iranian production, so prices rose again. Iraq’s and Iran’s crude output fell during the Iran/Iraq War in the 1980s. This event resulted in more than doubling crude oil prices from $14 in 1978 to $35 bb in 1981. The price of crude oil dropped to around $12 bbd in the first half of 1986, back to the level of 1974.
The price of crude oil rose again in 1990 with lower output as a result of the Iraqi invasion of Kuwait. Later the Gulf War, which aimed to liberate Kuwait, led to a steady decline in crude oil prices. World oil consumption rose to nearly 6.2 million bbd while Asian consumption was around 300,000 bbd. The decline in Russian production, which was more than five million bbd, from 1990 to 1996 consequently contributed to the recovery of the price. The price increased rapidly and the reason was associated with the Asian economic crisis in 1997 and 1998, and OPEC’s decision to cut production. OPEC increased its quota production from 2.5 million bbd to 27.5 million bbd in 1998. Thus, the Asian economy which was growing rapidly came to a standstill and oil consumption in the Asian Pacific declined. This combination of consumption, decrease and increase in OPEC quota production caused the price to decrease. OPEC decreased its quota production from 1.25 million bbd in April and another 1.335 million in July, consequently prices began to get back in 1999.
Since 2000, international oil prices have been described by steep increases and a large amount of fluctuation. Russian output increases dominated non-OPEC output growth around 2000-2007. As a result of the September 11, 2001 terrorist attacks, the price of crude oil fell by a high rate. Spot prices for West Texas Intermediate (WTI) fell by 35% in the middle of November. OPEC reduced its production by 1.5 million bbd in January 2002, also Russia combined and reduced production to 462,500 barrels. The price of crude oil became $25 by March 2002. In 2003, Venezuelan oil production was beginning to return, the Iraqi invasion commenced and U.S. and Asian demand for crude oil was increasing. The loss of output capacity in Iraq and Venezuela is associated with the rise of OPEC output to match growing international demand which led to excess oil production capacity and erosion. In mid- 2002, excess production capacity was over 6 million bbd, however, this had fallen to under $2 million.
The price of crude oil reached $145.29 on July 3, 2008 as a result of the increase in European Central Bank interest rates by 25 basis points. Later, the price decreased to $40 bbd at the end of December 2008. OPEC cut its production to 4.2 million bbd in early 2009, meanwhile Asian demand was increasing, thus the price increased steadily. The Libyan civil war and Arab Spring forced the price to jump as a result of the loss of Libyan oil exports which was about 1.5 million bbd in 2011. Moreover, the Brent spot price rose to $15 bb from February 18 to March 2. Meanwhile, demand from emerging markets, particularly from China and the Middle East pushed crude oil prices higher in 2011. The Brent crude oil averaged $111.67 bb in 2012 which was slightly above the 2011 average which was $111.26. Increasing crude oil output by the United States contributed to comparatively steady global crude oil prices in 2013, for instance the Brent spot price averaged $109/bbl, a drop of 3% from 2012. The price of crude oil decreased sharply in the fourth quarter of 2014, the price of Brent and WTI collapsed to $62/bbl and $59/bbl in December, respectively.
This time economists have mentioned four reasons for the decrease in price. Firstly, there is low demand for oil globally because economic activity is weak, efficiency is increased and countries are using other fuels instead of oil. Secondly, unrest in Libya and Iraq as members of OPEC and two big oil producers produced $4 million bbd which has not affected their production. Thirdly, the USA has become the largest oil producer in the World. Regardless, it does not export crude oil and imports much less than before, however, it is creating a lot of spare supply. Finally, the Saudis and their Gulf allies dominated the OPEC conference on November 27th 2014 where they decided to keep up production and not to sacrifice their own market share to restore the price. If OPEC cut its production, the main benefits would go to Iran and Russia. The price of Brent was reduced by $2/bbl in March 2015 to a monthly average of $56/bbl. This decline followed a $10/bbl rise in February 2015, the first rise in eight months. Moreover, the price of Brent reached $65.37 and has obtained about $9 since March. This is because of the decrease of US shale oil output and the Yemen conflict which together are the key reasons for the rise in crude oil prices in April. Crude oil prices rose by more than 2 million bbd in April and early May despite high global supply. Moreover WTI was around $60.30/bbd on May 13 while it was about $58.94/bbd on May 7, however, Brent was about $66.30/bbd while it was $65.54/bbd on May 7.
There are many factors which drive crude oil prices such as oil supply and demand relationships, political conflict, war, OPEC production decisions, global economics and exporting/importing countries. When the prices increase, whether due to a deliberate production cut or a refusal to increase production, there is an economic slowdown in industrialized countries. However, Russia, as one of the largest oil producers in the world, was significantly affected by decreasing crude oil which lost about $2 billion in revenues for every dollar fall in the oil price in 2014.