A Brief History Of Oil
In order to clearly understand the dynamics of oil and gas prices and its impact on the world economy, we need to dwell into the history of oil and have a look at some of the major events of the past that have affected the oil price and its availability.
1956- Suez Crisis
The Suez Canal was the only access by sea from the Mediterranean Sea to the Indian Ocean; this allowed shipping between Europe and Asia without navigating through Africa. In 1956, Egypt nationalized the Suez Canal and bought it under its control. The Britain and France along with Israel attacked Egypt to regain control of Suez Canal. However, in 1957, Britain and France had to back down due to pressure and immense criticism from United Nations and the U.S. The Suez Canal was given back to Egypt in 1957. In 1967, there was again a six-day war between Israel and the Arab world which resulted in the closure of the Suez Canal.
The formation of OPEC in 1960
OPEC is an inter-governmental organization that was formed in Baghdad in 1960.OPEC still has the capability and clout to create a major impact in world oil markets as its members hold more than 40% of the total world- oil supply. The OPEC sets ‘production quotas’ and has been criticized for following this policy in recent times, which, according to some, have played a major role in increasing the crude oil prices over the last few years.
1973- The First ‘oil shock’
America was on Israel’s side in the Yom Kippur War that started in 1973, when Egypt and Syria attacked Israel. The members of OAPEC (Organization of Arab Petroleum Exporting Countries, consisting of Arab members of OPEC including Tunisia, Syria and Egypt) declared an oil ban on Israel’s supporter, U.S. This led to a sudden reduction in the supply thus increasing the oil prices from $2.9 to almost $12 a barrel. This led to a high rate of inflation in the industrialized countries as they depended on oil supplies from the OAPEC nations. This was the turning point in the history of oil and gas as the need and importance to find new sources of oil, alternate fuels and better conservation techniques came into the picture.
1979- The second ‘oil Shock’
1979 was a year of Islamic revolution in Iran. Along with massive protests, the Shah of Iran was deposed and oil exports from Iran stopped. U.S was importing a large part of its crude oil supplies from Iran and was badly affected by this shortfall. The prices increased to almost $32 per barrel as 5% of the overall crude supply was affected.
In 1980, Iraq launched a war against Iran, the battle between two big oil producing countries blocked about 8% of the total crude oil supply. The crude price rose to $34 per barrel by 1981. However, after learning a lesson in 1979, many countries began to make substantial efforts in increasing their oil and gas reserves. Saudi Arabia, along with other OPEC nations, rammed up the production to avert any supply crisis.
1980’s: Sinking of Oil Prices – Oil Glut
The oil price fell in 1986 from $27 to below $10 a barrel. The reason for this was slow economic growth of industrial countries due to oil shocks, energy conservation initiatives and over -production.
1990- 1991 Gulf War
In August 1990, Iraq invaded Kuwait. The combined loss of production along with the threat of blockage of production in Saudi Arabia made price spiral to $46 per barrel in October. The Gulf War (2 August 1990 – 28 February 1991), code named Operation Desert Storm was a war started by a U.N.-authorized force from 34 nations led by U.S, against Iraq in response to invasion of Kuwait. The UN imposed sanctions on Iraq after that war.
Oil and gas prices again collapsed as Iraq’s oil exports resumed (UNSC –United Nations Security Council approved Iraqi oil exports under the program "Oil for food") and Asian Oil Demand in the wake of severe economic crisis fell sharply in 1998. Another reason for fall in demand was a ‘warmer winter’. U.S. is one the largest consumers of residual fuels during winter. These factors reduced the demand for oil and resulted in fall in oil prices. This even resulted in OPEC cutting the production quotas of their members.
Price fluctuations of last few years and current low oil prices
Oil prices has been very volatile over the past few years. During 2003, price of crude oil rose above $30 per barrel, reaching $60 by 11 August 2005, and peaked at $147.30 per barrel in July 2008. Prices continued to be volatile and reached a low of $30 per barrel in December 2008 as the global economic recession which began from the USA dampened the demand. However, in 2009-2010, improving economic conditions, steady growth of developing economies like India and China made the prices head north. As per EIA, the prices rose to an average of $62 a barrel in 2009 and $79 a barrel in 2010. In 2011, the price of WTI crude reached $113 a barrel while Brent reached $127 a barrel.
Today, in February 2015, the Brent stands somewhere around $50 per barrel while the WTI stands at around $47 per barrel.
One has to note that the current oil price decline is exceptionally long lasting. There are several issues that have contributed to this long lasting decline. Some of them are the decision of OPEC (especially Saudi Arabia) to stick to their production targets, reduced demand in key markets such as China, US energy market, market Speculation and certain complex geo- political factors.
About the Author
Gaurav Agnihotri, a Mechanical engineer and an MBA -Marketing from ICFAI (Institute of Chartered Financial Accountants), Mumbai, is a result oriented and a business focused Oil and Gas professional. Having started his career with Essar Oil Limited as a Graduate Engineer Trainee, he was involved in the Essar Oil Limited’s Refinery Expansion project in Vadinar, Gujarat, India.
He is an Author of a book ‘Oil- Past, present, future- An Indian Perspective’ which is a Single Point Reference Guide of Oil Industry (with Focus on India) for Students and Oil and Gas Professionals. Having travelled extensively to various Oil and gas locations around India, Gaurav has successfully dealt with Oil companies such as O.N.G.C; Oil India limited IOCL, BPCL, HPCL and others. He is currently based in Mumbai and works as a National Sales Manager in Sulzer Chemtech Tower Field Service India.
Follow Gaurav at Twitter at @Gaurav81184
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