The price of oil, or the oil price, generally refers to the spot price of a barrel of benchmark crude oil—a reference price for buyers and sellers of crude oil such as West Texas Intermediate (WTI), Brent Crude, Dubai Crude, OPEC Reference Basket, Tapis crude, Bonny Light, Urals oil, Isthmus and Western Canadian Select (WCS).There is a differential in the price of a barrel of oil based on its grade—determined by factors such as its specific gravity or API gravity and its sulfur content—and its location—for example, its proximity to tidewater and refineries. Heavier, sour crude oils lacking in tidewater access—such as Western Canadian Select—are less expensive than lighter, sweeter oil—such as WTI.
Oligopolistic period (1861-1972)
The price of oil remained “relatively consistent” from 1861 until the 1970s. In Daniel Yergin’s 1991 Pulitzer prize-winning book The Prize: The Epic Quest for Oil, Money, and Power, Yergin described how the “oil-supply management system”—which had been run by “international oil companies”—had “crumbled” in 1973. Yergin states that the role of Organization of the Petroleum Exporting Countries (OPEC)—which had been established in 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela— in controlling the price of oil, was dramatically changed. Since 1927, a cartel known as the “Seven Sisters”—five of which were headquartered in the United States—had been controlling posted prices since the so-called 1927 Red Line Agreement and 1928 Achnacarry Agreement, and had achieved a high level of price stability until 1972, according to Yergin. By December 2018, OPEC members controlled approximately 72% of total world proved oil reserves, and produced about 41% of the total global crude oil supply.
The OPEC era(1973-1990)
There were two major energy crisis in the 1970s: the 1973 oil crisis and the 1979 energy crisis that affected the price of oil. Starting in the early 1970s—when domestic production of oil was insufficient to satisfy increasing domestic demands—the US had become increasingly dependent on oil imports from the Middle East. Until the early 1970s, the price of oil in the United States was regulated domestically and indirectly by the Seven Sisters. The “magnitude” of the increase in the price of oil following OPEC’s 1973 embargo in reaction to the Yom Kippur War and the 1979 Iranian Revolution, was without precedent. In the 1973 Yom Kippur War, a coalition of Arab states led by Egypt and Syria attacked Israel. During the ensuing 1973 oil crisis, the Arab oil-producing states began to embargo oil shipments to Western Europe and the United States in retaliation for supporting Israel. Countries, including the United States, Germany, Japan, and Canada began to establish their own national energy programs that were focused on security of supply of oil, as the newly formed Organization of Petroleum Exporting Countries (OPEC) doubled the price of oil.
During the 1979 oil crisis, the global oil supply was “constrained” because of the 1979 Iranian Revolution—the price of oil “more than doubled”, then began to decline in “real terms from 1980 onwards, eroding Opec’s power over the global economy,” according to The Economist.
The 1970s oil crisis gave rise to speculative trading and the WTI crude oil futures markets.
The 1980s oil glut was caused by non-OPEC countries—such as the United States and Britain—increasing their oil production, which resulted in a decrease in the price of oil in the early 1980s, according to The Economist. When OPEC changed their policy to increase oil supplies in 1985, “oil prices collapsed and remained low for almost two decades”, according to a 2015 World Bank report.
In 1983, the New York Mercantile Exchange (NYMEX) launched crude oil futures contracts, and the London-based International Petroleum Exchange (IPE)—acquired by Intercontinental Exchange (ICE) in 2005— launched theirs in June 1988.
The price of oil reached a peak of c. US$65 during the 1990 Persian Gulf crisis and war. The 1990 oil price shock occurred in response to the Iraqi invasion of Kuwait, according to the Brookings Institute.
Multiple pricing period(since1990)
There was a period of global recessions and the price of oil hit a low of $15 before it peaked at a high of $45 on 11 September 2001, the day of the September 11 attacks, only to drop again to a low of $26 on 8 May 2003.
The price rose to $80 with the U.S.-led invasion of Iraq.
There were major energy crises in the 2000s including the 2010s oil glut with changes in the world oil pmarket.
From 1999 until mid 2008, the price of oil rose significantly. It was explained by the rising oil demand in countries like China and India.
By May 2008, The United States was consuming approximately 21 million bpd and importing about 14 million bpd—60% with OPEC supply 16% and Venezuela 10%.In the middle of the financial crisis of 2007–2008, the price of oil underwent a significant decrease after the record peak of US$147.27 it reached on 11 July 2008. On 23 December 2008, WTI crude oil spot price fell to US$30.28 a barrel, the lowest since the financial crisis of 2007–2008 began. The price sharply rebounded after the crisis and rose to US$82 a barrel in 2009.
On 31 January 2011, the Brent price hit $100 a barrel briefly for the first time since October 2008, on concerns that the 2011 Egyptian protests would “lead to the closure of the Suez Canal and disrupt oil supplies”. For about three and half years the price largely remained in the $90–$120 range.
From 2004 to 2014, OPEC was setting the global price of oil. OPEC started setting a target price range of $100–110/bbl before the 2008 financial crisis —by July 2008 the price of oil had reached its all-time peak of US$147 before it plunged to US$34 in December 2008, during the financial crisis of 2007–2008. Some commentators including Business Week, the Financial Times and the Washington Post, argued that the rise in oil prices prior to the financial crisis of 2007–2008 was due to speculation in futures markets.
Up until 2014, the dominant factor on the price of oil was from the demand side—from “China and other emerging economies”.
By 2014, hydraulic fracturing in the United States and oil production in Canada, caused oil production to surge globally “on a scale that most oil exporters had not anticipated” resulting in “turmoil in prices.” The United States oil production was greater than that of Russia and Saudi Arabia, and according to some, broke OPEC’s control of the price of oil. In the middle of 2014, price started declining due to a significant increase in oil production in USA, and declining demand in the emerging countries. According to Ambrose Evans-Pritchard, in 2014–2015, Saudi Arabia flooded the market with inexpensive crude oil in a failed attempted to slow down US shale oil production, and caused a “positive supply shock” which saved consumers about US$2 trillion and “benefited the world economy”.
During 2014–2015, OPEC members consistently exceeded their production ceiling, and China experienced a marked slowdown in economic growth. At the same time, U.S. oil production nearly doubled from 2008 levels, due to substantial improvements in shale “fracking” technology in response to record oil prices. A combination of factors led a plunge in U.S. oil import requirements and a record high volume of worldwide oil inventories in storage, and a collapse in oil prices that continues into 2016. Between June 2014 and January 2015, according to the World Bank, the collapse in the price of oil was the third largest since 1986.
In early 2015, the US oil price fell below $50 per barrel dragging Brent oil to just below $50 as well.
The 2010s oil glut—caused by multiple factors—spurred a sharp downward spiral in the price of oil that continued through February 2016. By 3 February 2016 oil was below $30— a drop of “almost 75% since mid-2014 as competing producers pumped 1–2 million barrels of crude daily exceeding demand, just as China’s economy hit lowest growth in a generation.” The North Sea oil and gas industry was financially stressed by the reduced oil prices, and called for government support in May 2016. According to a report released on 15 February 2016 by Deloitte LLP—the audit and consulting firm—with global crude oil at near ten-year low prices, 35% of listed E&P oil and gas companies are at a high risk of bankruptcy worldwide. Indeed, bankruptcies “in the oil and gas industry could surpass levels seen in the Great Recession.”
In June 2018, OPEC reduced production. In late September and early October 2018, the price of oil rose to a four-year high of over $80 for the benchmark Brent crude in response to concerns about constraints on global supply. The production capacity in Venezuela had decreased. United States sanctions against Iran, OPEC’s third-biggest oil producer, were set to be restored and tightened in November.
The price of oil dropped in November 2018 because of a number of factors, including “rising petro-nations’ oil production, the U.S. shale oil boom, and swelling North American oil inventories,” according to Market Watch.
The 1 November 2018 U.S. Energy Information Administration (EIA) report announced that the US had become the “leading crude oil producer in the world” when it hit a production level of 11.3 million barrels per day (bpd) in August 2018, mainly because of its shale oil production. US exports of petroleum—crude oil and products—exceeded imports in September and October 2019, “for the first time on record, based on monthly values since 1973.”
When the price of Brent oil dropped rapidly in November, 2018 to $58.71, more than 30% from its peak,—the biggest 30-day drop since 2008—factors included increased oil production in Russia, some OPEC countries and the United States, which deepened global over supply, were factors in the crash.
In 2019 the average price of Brent crude oil in 2019 was $64, WTI crude oil was $57, the OPEC Reference Basket (ORB) of 14 crudes was $59.48 a barrel.
In 2020, the economic turmoil caused by the COVID-19 recession, included severe impacts on crude oil markets, which caused a large stock market fall. The substantial decrease in the price of oil was caused by two main factors: the 2020 Russia–Saudi Arabia oil price war and the COVID-19 pandemic, which lowered demand for oil because of lockdowns around the world.
The IHS Market reported that the “COVID-19 demand shock” represented a bigger contraction than that experienced during the Great Recession during the late 2000s and early 2010s. As demand for oil dropped to 4.5m million bpd below forecasts, tensions rose between OPEC members. At a 6 March OPEC meeting in Vienna, major oil producers were unable to agree on reducing oil production in response to the global COVID-19 pandemic. The spot price of WTI benchmark crude oil on the NYM on 6 March 2020 dropped to US$42.10 per barrel. On 8 March, the 2020 Russia–Saudi Arabia oil price war was launched, in which Saudi Arabia and Russia briefly flooded the market, also contributed to the decline in global oil prices. Later on the same day, oil prices had decreased by 30%, representing the largest one-time drop since the 1991 Gulf War. Oil traded at about $30 a barrel. Very few energy companies can produce oil when the price of oil is this low. Saudi Arabia, Iran, and Iraq had the lowest production costs in 2016, while the United Kingdom, Brazil, Nigeria, Venezuela, and Canada had the highest. On 9 April, Saudi Arabia and Russia agreed to oil production cuts.
On 20 April, due to excessive demand for storage of the large surplus in production, the price for future delivery of US crude in May had become negative, the first time to happen since the New York Mercantile Exchange began trading in 1983. With the price of WTI at a record low, and 2019 Chinese 5% import tariff on U.S. oil lifted by China in May 2020, China began to import large quantities of US crude oil, reaching a record high of 867,000 bpd in July. Since then, oil prices have stabilized and started to rise.