How world events have affected oil prices

by Krista Reisdorf

Oil prices currently are an inconstant thing—up one day, down the next. But this is nothing new. In the past, oil prices often have fluctuated, and various events throughout history have caused those changes.

After World War II, crude oil prices rose from $2.50 per barrel in 1948 to about $3 per barrel by the end of the 1960s (this was an equivalent of fluctuating between $17 and $18, respectively, in 2006 dollars), according to www.wtrg.com. Although this early increase reflects moderate stability, it preceded events that have changed oil production and prices forever.

Following are some events that have since affected the price and production of oil.

The Organization of Petroleum Exporting Countries (OPEC)

OPEC was formed in 1960 by oil-producing companies Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The organization's purpose is to unify and coordinate its members' petroleum policies so fair and stable prices would be secured for petroleum producers and supply to consumers would be efficient and economical. Qatar, Indonesia, Libya, United Arab Emirates, Algeria and Nigeria joined OPEC by the end of 1971 and were accompanied by a decline in the purchasing power of a barrel of oil. The power to control oil prices shifted from the U.S. to OPEC in March 1971 when Texas oil producers had no limit to the amount of oil they could produce.

The Yom Kippur War

Syria and Egypt attacked Israel Oct. 5, 1973, marking the start of the Yom Kippur War. When the U.S. and other countries supported Israel, several Arab exporting countries imposed an embargo on the countries supporting Israel. This led to a net loss in production of 4 million barrels of oil per day through March 1974, and during that six-month period, prices increased 400 percent.

The Iranian revolution/Iran-Iraq War

The Iranian revolution began in January 1978 and involved transforming Iran from a monarchy under Shah Mohammad Reza Pahlavi to an Islamic republic under Ayatollah Ruhollah Khomeini. Two million to 2.5 million barrels of oil were lost per day between November 1978 and June 1979, and production almost halted. After the revolution, production seemed to recover with up to 4 million barrels per day.

However, in September 1980, Iraq invaded a weakened Iran. By November 1980, the two countries were producing a combined total of 1 million barrels of oil per day—6.5 million barrels per day less than the previous year. Worldwide crude oil production was 10 percent lower than in 1979. During this time, crude oil prices increased from $14 per barrel in 1978 to $35 per barrel in 1981.

U.S. price controls

In response to the 1973-74 price increase, the U.S. imposed price controls on domestically produced oil, which led to U.S. consumers paying about 50 percent more for imported oil than domestic oil and U.S. oil producers receiving less than world market price. Although in the short term the recession in the U.S. was softened by the price controls, it is said that without the price controls, U.S. exploration and production would have been significantly greater; the U.S. would have been less dependent on imports in 1979-80; and the U.S. would have been significantly less affected by the price increases caused by the interruption in Iranian and Iraqi production.

The Gulf War

On Aug. 2, 1990, Saddam Hussein launched the Iraqi invasion of Kuwait, starting the Gulf War. This led to lower oil production, causing a spike in crude oil prices. After the Gulf War, crude oil prices steadily declined, reaching their lowest level since 1973 in 1994.

OPEC quota increase/Asian economic crisis

Prices began to increase in 1994 as the U.S. economy strengthened and the Asian Pacific region experienced an economic boom. As world oil consumption increased 6.2 million barrels per day (Asian consumption accounted for all but 300,000 barrels per day of that increase) between 1990 and 1997, Russian production declined more than 5 million barrels per day.

However, prices began to rapidly decline in 1997-98 as an economic crisis hit Asia. OPEC increased its quota by 10 percent to 27.5 million barrels per day as Asian Pacific oil consumption declined in 1998 for the first time in 16 years.

As oil prices plummeted during 1998, OPEC cut quotas by 1.25 million barrels per day in April and 1.335 million barrels per day in July. Prices began to recover in 1999, and OPEC cut 1.719 barrels per day in April, moving prices above $25 per barrel.

Sept. 11, 2001

OPEC overshot production in 2000-01 and cut quotas to stabilize prices. However, the Sept. 11 attacks caused crude oil prices to fall drastically. In November, spot prices for U.S. benchmark West Texas Intermediate were down 35 percent. In January 2002, OPEC cut its quota 1.5 million barrels per day. This, along with cuts from non-OPEC oil producers, moved oil prices into the $25 range by March 2002. When non-OPEC members began producing more oil, prices continued to increase and U.S. inventories reached a 20-year low.

Other factors

During the past six years, additional factors have affected oil production and prices.

Oil production in Venezuela plunged when Venezuelan state-owned petroleum company Petróleos de Venezuela, S.A., went on strike in 2002. Although production eventually resumed, Venezuela was never able to return to its previous capacity level after the strike. OPEC increased quotas by 2.8 million barrels per day in early 2003.

The Iraq War began March 20, 2003, as inventories were low in the U.S. and other countries and demand for crude oil was increasing. Excess oil production capacity was significantly affected. There were more than 6 million barrels per day of excess production capacity in mid-2002, and that number was below 2 million in mid-2003. The spare capacity to produce oil was less than 1 million barrels per day in 2004 and 2005. These events were a main cause of prices increasing to more than $50 per barrel.

Other factors that have contributed to increased oil prices include a weak U.S. dollar; oil consumption by growing Asian economies; and the 2005 hurricanes.

A sign of the times

After reaching a record peak in July, oil prices currently are significantly lower and continue to decline (with few modest increases). But as history shows, the U.S. and other countries always are involved in a sometimes unpredictable cycle and are being affected by world events.

Oil prices will continue to go up and down. But what they predict for the future remains to be seen.

This Web exclusive information is a supplement to Crude yet refined.