When we take a well considered historical perspective of what has occurred over the recent years and in particular, the last two decades regarding the price of crude oil, we learn some very significant facts that work greatly to our advantage over those who haven’t kept track of the “ebb and flow” of the value of what has come to be known as “black gold!
Like most other commodities on the market, crude oil prices have experienced wide price swings between those times of great shortage and tremendous oversupply. These crude oil “Price Cycles” tend to extend over a period of several years, depending on variances in amounts of oil demanded, drilled, processed and sold by both OPEC and non-OPEC providers.
Starting back in the early to mid 1980s, in order to more effectively help create a stabilized crude oil price, throughout the global market, OPEC agreed with the rest of the oil producing countries across the globe to set their production quotas lower than they previously projected. Initial confidence in this agreement brought a general sense of balance to the oil producing world.
However, the continue failure of various members of OPEC to actually stay within the production limits that they agreed to, caused wide spread turmoil between OPEC and the “Non-OPEC” producers of the west. During this period of economic and political turbulence, Saudi Arabia actually heroically tried to play the role of a “buffer” to balance out the surplus caused damage done to the agreement by the non-complying OPEC nations, acting as a “swing producer,” dramatically cutting back it’s own production to stem the free fall of crude oil prices created by the glut on the market.
Eventually the Saudi’s tired of having to single handedly play the role of “Savior,” and once again began to link their crude oil price to the spot market and then by early 1986, decided to go ahead and increase production by 250%. This created a hyper-glut on the market, which was literally now swimming in cheap oil which drove the plummeting prices to below $10 per barrel. Due to this increased production, the Saudis revenue remained as high as ever, as the exponentially increased oil sales effectively compensated for dramatically lower prices.
In 1990, the price of oil began to spike due to lower production and great political and supply-end uncertainties connected to the Iraqi invasion of Kuwait and the eventual Gulf War. After the war to liberate Kuwait, oil prices once again entered a period of steady decline and by 1994, with inflation adjusted prices, crude oil prices reached their lowest level in over a decade, going back to the year 1973.
By the year 1997, world oil consumption increased by 6.2 million barrels per day. This increase was attributed to 2 major factors. One was the fact that the U.S. economy was vital, vibrant, sturdy and strong. The second factor was the huge book in the Asian Pacific region. This along with the severely declining Russian production served to bring the price of crude oil back up.
Then, just as the impact of the 97-98 economic crisis in Asia was just beginning to be felt, OPEC again decided to flood the market by increasing its production quota by an additional 10%, driving an extra 2.5 million barrels of oil onto the market per day. This combination of lower consumption and higher OPEC production sent oil prices into another downward spiral.
After two consecutive, voluntary production reductions by OPEC, prices began to stabilize in 1999.But as it turned out, even with the newly reduced quotas, OPEC failed to meet production levels by approximate 3 million barrels per day and that effectively drove the price of oil to over $25 per barrel.
In 2000, though the much feared “Y2K” actually proved to be nothing more than a slightly minimal inconvenience, with steadily growing US and world economies doing well, oil consumption was up and so were prices. This was the dawning of the “Reign of the SUV” and the conquest of motor sports surpassing all other sports in the west. Prices continued to rise to a “Post 1981” high and even with back to back OPEC quota increases of 3.2 million barrels per day, prices kept going higher and higher.
By the year 2001, Russian oil production increases dominated non-OPEC production growth and was responsible for most of the non-OPEC increase following the new millennium. With a weakened U.S. economy on decline and increased production by Both OPEC and Non-OPEC producers, prices dipped until OPEC responded with a calculated series of reductions by 3.5 million barrels per day by September.
September 11, 2001 the world experiences a terrorist attack that sent oil prices plummeting as much as 35% by November. Normally this drop in price would activate an immediate and dramatic quota cut-back help stabilize the price of crude oil. However OPEC decided to delay any additional cuts till 2002.
The global 2002 quota reduction reduced the glut by 1.5 million barrels per day which began to stabilize the market and soon oil was back to $25 per barrel once again. From mid 2002 and heading into 2003 the price of oil continued to rise as production was reduced world wide, including the catastrophic strike in Venezuela which placed oil availability at 900,000 barrels per day below its peak capacity of 3.5 million barrels per day.
In 2003, just as OPEC increased quotas by 2.8 million barrels per day and Venezuelan production was beginning to return, military action commenced in Iraq. Crude oil inventories were already low and now the war effort and an improving economy in the U.S. and Asia created strenuous demands on the system.
The consequent loss of production capacity in Iraq and Venezuela was partially offset by increased OPEC production, hoping to effectively meet growing international demands. By mid-2003 the glut of over 6 million barrels a day was down to below 2 million.
The years 2004 and 2005 saw that glut on the market dip to below a million barrels per day. Such a small amount of surplus proved to not be enough spare capacity to cover any interruptions of supply from most OPEC producers. Therefore, a global community that thirsts for over 80 million barrels per day soon finds itself experiencing self induced oil price in well excess of $50 per barrel.
A weakened U.S. dollar and the continued growth in Asia, increased oil consumption world-wide. The 2005 hurricanes and U.S. refinery problems associated with the conversion from MTBE as an additive to ethanol led to increasing higher oil prices.
Concerned about growing OECD inventories, OPEC cuts back production in November of 2006 and again in February, 2007. The market now begins to experience more predictably mild “ebbs and flows” in the pricing of crude oil which we now look to the future to try to determine what might happen next.
As we move closer and closer to consuming much of the oil that we have thus far been able to discover and tap, we have also dramatically increased our ability to get more and more energy out of each and every gallon of crude oil that we process. Meanwhile, major advances in technology as well as a the current changes in some governmental legislation could prove to help us find oil in places that even 5 years ago we assumed were dry as a stone or simply politically set aside to never be harvested.
This means there could be another wave of new oil available to the market within years and with our increased abilities to better process it, we may end up with more available gasoline throughout the planet than we ever could have dreamed of even a year ago!
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