Crude Oil Prices In The MarketEssay Preview: Crude Oil Prices In The MarketReport this essayCrude oil prices behave much as any other commodity with wide price swings in times of shortage or surplus. The crude oil price cycle may extend over several years responding to changes in demand as well as OPEC and non-OPEC supply. Reflecting increases in consumer demand for petroleum products, world crude oil demand has been growing at an annualized compound rate slightly in excess of 2 percent in recent years. Demand growth is highest in the developing world, particularly in China and India (each with a population in excess of 1 billion) and to a lesser extent in Africa (0.8 billion) and South America (0.35 billion) (OPECS symbolic move). Where high demand growth exists it is primarily due to rapidly rising consumer demand for transportation via cars and trucks powered with internal combustion engines. For economic and political reasons, this high demand growth did not exist in most of the developing world even a decade ago. (Oiling or Spoiling)
OPEC was formed in 1960 with five founding members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. By the end of 1971 six other nations had joined the group: Qatar, Indonesia, Libya, United Arab Emirates, Algeria and Nigeria. From the foundation of the Organization of Petroleum Exporting Countries through 1972 member countries experienced steady decline in the purchasing power of a barrel of oil. (OPECS symbolic move)
Throughout the post war period exporting countries found increasing demand for their crude oil but a 40% decline in the purchasing power of a barrel of crude. In March 1971, the balance of power shifted. That month the Texas Railroad Commission set peroration at 100 percent for the first time. This meant that Texas producers were no longer limited in the amount of oil that they could produce. More importantly, it meant that the power to control crude oil prices shifted from the United States (Texas, Oklahoma and Louisiana) to OPEC (A titanic struggle). A little over two years later OPEC would through the unintended consequence of war get a glimpse at the extent of its ability to influence prices. (The coming energy crisis)
In 1971, the balance of power shifted.
The US was then faced with increasing demand which had led to a crisis of production, and to the creation of a global monetary system with many nations in a desperate need for financial help. A price war would take a while or decades to develop as the world developed a more stable currency, and in that time the oil price would rise. Prices began to rise even more, and by 1973 the price of crude (and gas) increased, rapidly rising as oil became easier to store and export. Oil prices could reach a peak of $44 per barrel, and an increase in oil revenues could account for $70 per barrel in 1973. This led to the US needing to borrow to help pay for a debt. In 1973, all of the other countries in OPEC’s negotiating table (such as Germany) needed to receive loans of up to six times that amount.
A US Government program of monetary easing, however, wasn’t in all matters helped, as the US Federal Reserve was forced to make a more severe adjustment to its foreign exchange rates (which are now based by the US Dollar), and all of the other emerging economies of the world. The US dollar rose as much as 6% when OPEC broke its oil embargo in 2003 and to near-zero during the Asian financial crisis. In recent years Russia and the US had seen a major increase in their exports. The US stock market’s rally peaked in May 2008 shortly after OPEC’s end, after which the US also rose sharply to record highs.
An increase of nearly 1% was just part of the US and its financial problems. OPEC’s financial troubles followed an almost 100% rise in foreign investment in 1973 and have been responsible for the economic crisis since. During this time the US government’s economic policy has been dominated by US subsidies and military aid.
In 1973, US crude prices were on a three piece basket of $44 and $72. Oil had been a hot commodity for twenty years and had the highest oil production ever and the lowest interest rates since the Bretton Woods Treaty of 1951 during the 1980s. During this time the US government had cut US government spending in exchange for lower interest rates in the 1980s. But there was one very significant problem with oil. At the same time the United Nations was working out its position on the issue of oil, the US government was also seeking ways to cut the rate to 90%, with a 90% cut would be too much for oil producers
Oil production and investment in 1973 (for comparison)
The biggest change occurred in April 1973. oil prices fell as much as $72 per barrel. In fact, despite the economic downturn, that fall resulted in a 20 year decline in the crude oil price – just about the same as the one that preceded the US debt default in 1974
The price of oil was weaker in the 1990s which partly reflected a weakening of OPECs bargaining power. In 2001, the eleven members of OPEC accounted for only just over a third of total oil production worldwide. Oil producers have often been torn between the desire for higher prices and the need to maintain their own energy revenues. Choking off demand in the importing countries has largely lost its allure for many OPEC producers (The coming energy crisis). The fact that they are oil exporters is often the only thing these countries have in common. Producers such as Venezuela and Indonesia are relatively poor countries with large populations. At the other extreme, Saudi Arabia, the most important exporter, is a swing producer, able to vary production levels more easily than most and thus has a crucial role. (Oiling or spoiling)
The Economist: “Saudi Arabia was in its second year of war with Russia and a week from its fifth, it has started exporting its top gas and oil reserves. Oil is a highly potent weapon; Saudi Arabia is well above the average OPEC member and has more oil on the table. But the country has become a strategic hot spot by using its energy resources to push back on Russian aggression. Oil’s global clout is waning,” the report says. It adds, “While Russia is more likely to use oil as a “relatively affordable” export, Iran, North Korea and Syria do not seem to be particularly enthusiastic about the use of the nation’s energy resources. (In the end, the United States is a major contributor to a massive amount of oil being exported every year on foreign markets.) The report explains: “Russia’s state-owned oil company Rosneft has sold its majority stake in Rosneft to Saudi Arabia for more than $19 billion. (U.S. officials say the deal amounts to an effort to strengthen the Middle East, which they see as a potential partner to Riyadh.”)” In the Middle East, Russia has taken advantage of the same advantage in the Middle East that it has in the Middle East with Saudi Arabia, which is still holding sway, the report added.” Source “This report highlights that countries as diverse as Iran and South Vietnam are experiencing more and more political upheaval. Saudi Saudi Arabia was one of the leaders under the influence of President Abdullah bin Abdulaziz, making it the preferred power in these countries to promote bilateral relations.” The UK foreign secretary said it was important these countries not take sides in Syria, in Syria’s case Syria has been a key player in the international situation in 2014. (The United States has carried out bombing campaigns against the Assad government all over the world over the weekend. It was the most extensive bombing campaign by a military force in 50 years.) He said: “We urge other nations, including the United States, to support the Syrian opposition, especially when it comes to security concerns and the growing threat posed by Bashar Al-Assad’s regime.” (He added: “If the United States does not provide help to the opposition to ensure a peaceful resolution of these issues, the country is less inclined to use its resource and other support to support legitimate opposition forces or protect civilians from attacks or attacks.”) Saudi Arabia is one of the world’s premier oil exporters. In January 2013 a major oil rig exploded on the Saudi Gulf coast, killing more than 70 people. The BP Deepwater Horizon disaster in Louisiana ignited a storm and prompted the cancellation of the Gulf oil company’s plans to export all of its output. Oil prices and energy security in the Middle East have risen. There is a growing concern about oil-pricing. According to the Economist, Saudi Arabia and other oil exporters are “inching closer” on developing countries. “Saudi Arabia and several of its main competitors are expanding their oil businesses while other countries are continuing to develop and expand their market share,” the report says. “Saudi Arabia has an ambitious project to bring its crude to near the levels needed to meet its ambitious energy target, including development of its new deep-water drilling. Saudi Arabia already has about 50 wells drilled and plans to build its own wells later this year.” Saudi Arabia is among the world’s largest exporters
The Economist: “Saudi Arabia was in its second year of war with Russia and a week from its fifth, it has started exporting its top gas and oil reserves. Oil is a highly potent weapon; Saudi Arabia is well above the average OPEC member and has more oil on the table. But the country has become a strategic hot spot by using its energy resources to push back on Russian aggression. Oil’s global clout is waning,” the report says. It adds, “While Russia is more likely to use oil as a “relatively affordable” export, Iran, North Korea and Syria do not seem to be particularly enthusiastic about the use of the nation’s energy resources. (In the end, the United States is a major contributor to a massive amount of oil being exported every year on foreign markets.) The report explains: “Russia’s state-owned oil company Rosneft has sold its majority stake in Rosneft to Saudi Arabia for more than $19 billion. (U.S. officials say the deal amounts to an effort to strengthen the Middle East, which they see as a potential partner to Riyadh.”)” In the Middle East, Russia has taken advantage of the same advantage in the Middle East that it has in the Middle East with Saudi Arabia, which is still holding sway, the report added.” Source “This report highlights that countries as diverse as Iran and South Vietnam are experiencing more and more political upheaval. Saudi Saudi Arabia was one of the leaders under the influence of President Abdullah bin Abdulaziz, making it the preferred power in these countries to promote bilateral relations.” The UK foreign secretary said it was important these countries not take sides in Syria, in Syria’s case Syria has been a key player in the international situation in 2014. (The United States has carried out bombing campaigns against the Assad government all over the world over the weekend. It was the most extensive bombing campaign by a military force in 50 years.) He said: “We urge other nations, including the United States, to support the Syrian opposition, especially when it comes to security concerns and the growing threat posed by Bashar Al-Assad’s regime.” (He added: “If the United States does not provide help to the opposition to ensure a peaceful resolution of these issues, the country is less inclined to use its resource and other support to support legitimate opposition forces or protect civilians from attacks or attacks.”) Saudi Arabia is one of the world’s premier oil exporters. In January 2013 a major oil rig exploded on the Saudi Gulf coast, killing more than 70 people. The BP Deepwater Horizon disaster in Louisiana ignited a storm and prompted the cancellation of the Gulf oil company’s plans to export all of its output. Oil prices and energy security in the Middle East have risen. There is a growing concern about oil-pricing. According to the Economist, Saudi Arabia and other oil exporters are “inching closer” on developing countries. “Saudi Arabia and several of its main competitors are expanding their oil businesses while other countries are continuing to develop and expand their market share,” the report says. “Saudi Arabia has an ambitious project to bring its crude to near the levels needed to meet its ambitious energy target, including development of its new deep-water drilling. Saudi Arabia already has about 50 wells drilled and plans to build its own wells later this year.” Saudi Arabia is among the world’s largest exporters
Analysts attribute the surge in demand to a surge in consumption triggered by the US economic recovery and Chinas economic boom. The IEA added that the effective spare capacity of oil producers cartel OPEC had narrowed to about 600,000 barrels a day in July, following recent efforts to keep pace with rising demand (China syndrome).
The IEA, set up thirty years ago to advise oil consuming nations, said world demand would rise by a further 1.8 million barrels next year to 84 million barrels a day. It added that OPECs production capacity would rise by 400,000 barrels a day this year, and by a further 700,000 barrels a day in 2005. (The coming energy crisis)
The situation should improve this year and next. Two new oilfields in Saudi Arabia will be ready to pump 800,000 bpd by the end of September, according to the kingdoms oil minister. These new developments were commissioned to replace ageing facilities elsewhere, the retirement of which may now be postponed. Both Kuwait and Algeria will also inflate OPECs supply cushion by the end of the year, according