The Causes and Effects of the Swings of Price of Crude Oil

Crude oil experiences a swing in price at a time of either shortage or oversupply just as other commodities. The price cycle may go on for several years in response to price demands for either OPEC or non-OPEC supply. In this paper, I will discuss the dynamics faced by OPEC in its mandate to regulate the prices in the last 10 years presented by Robert J. Carbaugh. The dynamics are presented in terms of geopolitical occurrences, supply-demand, and stocks alongside NYMEX trading together with the economy.

Formerly the price of petroleum was heavily regulated by production and price controls. After World War II, oil prices escalated due to inflation bringing to about a median for domestic crude oil of $20.53 in 2010. Adjustment due to inflation exceeded this price tag from 1947 to 2010 only 50 times.

In March 2000 OPEC adopted a range of $22 to $28 price band for its crude and real oil prices going beyond this only in response to the conflict in the Middle East.

In 2005 OPEC abandoned its price band due to limited spare production, henceforth being powerless to handle the surge in oil prices awakening the memories of the late 1970s.

If we have to go for a long-term guide, then it is purported that the upstream segment can be able to obtain a profit selling their oil at $24.58 per barrel and below. The post-World War suggests further a lower price. With the introduction of OPEC, replacing Texas Railroad Commission as a regulator of spare production capacity twinned together with enhanced interest of oil future as an asset brought changes that promoted raising of the price even further.

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The outcome is different based only on post-1970 data. For instance, since U.S average price stood at $34.77 per barrel, and the world oil price averaged at $37.93per barrel, while the median oil price for the aid term stood at $32.50 per barrel.

In 1999, oil prices began to recover, this can be attributed to the reduced barrel production by about three million barrels per day in 1999. The price was lowered to $25 per barrel.

In 2000, the increase was stable despite the OPEC quota increase. Russian production emerged to dominate non-OPEC production from 2000 to 2007. In 2001, the effect of non-OPEC production and down falling US economy forced the price to go down, forcing OPEC quotas to reduce to 3.5 million barrels by 2001. The 2001 US attack could not do any good than to make the prices irreversible downward.

Between 2007 and 2008 there has been a growing demand for oil with a stagnant supply due to the global economic growth that occurred between 2004 and 2005. Oil consumption world widely increased to 5 million barrels per day within this period representing a 3% increase per year. This trend could be attributed to the steady price escalation in this period despite excess surplus to keep production increasing with demand.

It is worth noting that production did not grow further after 2005. Compared to other past oil shocks, one could not attach this slow production to any geopolitical event. Instability witnessed in Iraq and Nigeria were the main players to this effect. Another factor major factor was the fact that oil fields that had earlier enabled the stability in production had reached maturity with an unprecedented decline rate. For instance, production in the North Sea which contributed 8% of production worldwide in 2001 had lowered by 2 million barrels per day by the end of 2007. Mexico’s Cantarell, rated as the second-largest producer declined by 1 million barrels per day from 2005 to 2008. Indonesia once an OPEC member with peak production in 1998 was rather an importer than an exporter.

Saudi Arabia could be seen as an import tant player in oil production accounting for 13% of global production in the year 2005. The kingdom also had actively played as the world’s residual supplier in the 1980s and 1990s, supplementing productions whenever required. Many analysts anticipated Saudi to continue playing this role in the 200On.On the  In contrary, the Kingdom’s production fell by 850,000 barrels a day in 2007 compared to 2005. The explanation for this fall varies, according to Simons (2005) Ghawar (which accounted for 6%of  global oil production) had reached its peak while Gately (2001) argued that it was not economically prudent for the OPEC members to contribute to the production increase projected by many analysts. It was then concluded that both Simons and Gately were on point to suggest that Saudi production would fall eventually contrary to the analysts’ opinions.

The trend of increase in demand with a struggling global production rate persisted between 2010 and 2014. This trend could be accounted to the fact that countries were recovering from financial crises. The majority of the original oil fields were lagging in production. Civil upraises in countries such as Libya and Iraq restrained the supply. Nations had to lower their stockpiles soaring the prices to about $100 per barrel.

The soaring prices, compelled US drillers to innovate hydraulic fracturing and horizontal drilling method to explore the potential oil from areas like North Dakota and Texas. The invention has led to a doubling of United States crude oil production since 2010.

Further supply met demand, eventually surpassing it, bringing another crash. In mid-2014, demand started to go down due to the Europe zone mess, China’s stumbling economy yet, and the US producing more and more crude oil. Libya and Iraq had also begun to contribute to the world market. This event compelled the prices to slide down to $70 each barrel.

At this moment it was expected that OPEC producers and Saudi Arabia would roll back to the production league, only for the economic constraint to deter Saudi from getting back. With even the $100 per barrel requirement by Saudi Arabia so to remain profitable, they decided to increase their production hoping price fall would crush US frackers the price has kept tumbling.

The oil prices have tumbled from $5 to $40 and eventually $30 per barrel – mainly because of the strength of supply downplaying the demand. This has made the US more adaptable to low prices as opposed to Saudi’s Oil prices regulatiinitiallyial was influenced by geopolitical events, then since 2007, it has been subjected to the strength and weakness of supply compared to the demand. Saudi Arabia has unsuccessfully steadied its production hoping for the downfall of the US innovative oil field production techniques to the strong supply compared to the demand. Up to today, no one knows for sure when oil prices will rise again.

References

1. Gately, D. (2001). How Plausible is the Consensus Projection of Oil Below $25 and Persian Gulf Oil Capacity and Output Doubling by 2020?. The Energy Journal, 22(4).
2. Hamilton, J. (1985). Historical Causes of Postwar Oil Shocks and Recessions. The Energy Journal, 6(1).
3. Plumer, B. (2017). Why crude oil prices keep falling and falling, in one simple chart. [online] Vox. Available at: https://www.vox.com/2016/1/12/10755754/crude-oil-prices-falling [Accessed 31 Oct. 2017].
4. Plumer, B. (2017). Why oil prices keep falling — and throwing the world into turmoil. [online] Vox. Available at: https://www.vox.com/2014/12/16/7401705/oil-prices-falling [Accessed 31 Oct. 2017].
5. Yglasias, M. (2017). Saudi Arabia’s latest panicky move: a possible IPO of its state-owned oil company. [online] Vox. Available at: https://www.vox.com/2016/1/8/10737638/saudi-aramco IPO [Accessed 31 Oct. 2017].