OIL PRICES
Oil prices are often expressed in terms of benchmark prices for things like; Arab light crude; light, sweet crude; North Sea Brent crude.
Oil prices are supposed to defied by supply and demand go up and down according to a lot of factors: 1) production levels; 2) economic boom times or recessions; 3) optimism or pessimism about the future; 4) hot summers and cold winters; 5) international politics; 6) prospects of war or peace; 7) terrorism; and 8) the Israeli-Palestinian situation. Producers and consumers do their best to bring stability to the market but often to no avail.
Often the prices seem to act on their own such as rising when they rose even though supply was at a 10 year high and demand was at a 10 year low during a recession as they did in early 2009. One analyst told the New York Times, “Controlling oil prices is like trying to fly a jumbo jet across the ocean without any instruments.”
Around $50 a barrel is considered the “cash cost,” or the average operating cost, for the world’s major oil companies.
Websites and Resources: American Petroleum Institute api.org ; Investopedia Oil Handbook investopedia.com/features/industryhandbook/oil_services.asp ; Petrostratgies Learning Institute petrostrategies.org/Learning_Center ; U.S. Energy Information Administration eia.doe.gov/petroleum ; New York Times article New York Times ; Wikipedia article Wikipedia ; Oil. com oil.com ; Petroleum Online petroleumonline.com ; Natural Gas.org naturalgas.org
Book: “The Prize” by Daniel Yergin.
History of Oil Prices
Through the 1950 and 60s the price of oil was generally less than $3 a barrel. In 1973 there was a six month oil embargo by Arab nations on oil exports to the United States and Europe. Between October 1973 and March 1974 world crude prices quadrupled from $3 to $12.
In the late 1970s and early 1980s there was another oil shock related to the shut down of Iranian oil exports and the Iran Revolution and panic over the Three Mile Island disaster. In 1980 oil prices doubled to $32 a barrel (adjusted for inflation this equals to $80 a barrel in 2006 dollars). .
Through most of the 1980s and early 1990s oil prices were generally between $10 and $20 a barrel. Prices failed to rise significantly during the Iran-Iraq war in the 1980s as new North Sea entered the market and failed to rise again during the Persian Gulf War in 1990 as Saudi Arabia boosted production. In 1994, oil prices were $16 a barrel. During the Asian economic crisis in 1997 and 1998 oil prices dropped from $17 per barrel to $8 a barrel and then rose to $37 per barrel in 2000.
Oil prices bottomed out at $17.50 a barrel in November 2001 and hoovered around $20 a barrel at the beginning of 2002 and soared after that, reaching $70 a barrel after Hurricane Katrina struck New Orleans and the Gulf Coast; then topping $75 a barrel in April 2006 on fears of government sanctions against Iran and the activity of speculators in the commodities markets. Oil hit a high of $78.40 a barrel in August 2006 over worries about Nigeria and the fall out of the conflict between Israel and Hezbollah in Lebanon. and worries about Iran’s nuclear program, but then fell $60 in January 2007 as a mild winter set
The oil companies do not have a large enough share of the market to influence prices that mich.
Rise and Fall of Oil Prices in 2008 and 2009
China’s hunger for oil has created higher prices around the globe. A lot of speculators have also entered the markets as have investors and super rich who have turned to oil as a safe haven during the economic crisis in 2008 and 2009 and have been advised it is safer hedge than gold, which has traditionally been the safe haven during times of inflation and instability.
Oil prices peaked at $147.27 a barrel in July 2008 on worries about tension between Israel and Iran, strong demand in Asia, reports of supply shortages in the United States, and comments from Saudi Arabia that it would not boost production, instability in Nigeria, the war in Iraq, a weak dollar, worries about hurricanes in the Gulf of Mexico, and the flow of money from inventors into commodities over concerns about stock declines Oil producers were flush with cash while consumers paid at the pump. Goldman Sach predicted that priced reach $200 a barrel with a couple of years.
The high oil prices causes riots in India, emergency economic measures in the Philippines and protests by truckers in Britain, France and South Korea ,who clogged road to make sure their message was heard, A survey by the Washington Post found that 51 percent of Americans were experiencing serious financial hardship. But they were only paying $4 a gallon for gas. In Europe they were paying close to 410.
Speculators — which included rich individuals, state-run sovereign wealth funds, pension funds, Wall Street banks and hedge funds — and oil companies were blamed to some degree for the magnitude and the speed of the changes. An estimated $260 billion was invested in commodities funds when oil was peaking in 2008 , mostly in paper oil futures, 20 times the level in 2008 A study by the Commodity Futures Trading Commission four that while many speculators had entered the market, attracting by high returns, their behavior — roughly equal between sales and purchases — die not move the markets and was a of response to changes than a manipulation of them. As for oil companies they simply don’t have the influence they used to have little ability to influence prices.
Then oil prices crashed during the economic crisis in 2008 and 2009, reaching $39 a barrel in February 2009 despite an a record OPEC production cut of 2 million barrels. The decline was blamed a combination of factors: the economic crisis in 2008 and 2009, a corresponding decline in demand, worried about oversupply in the future oil producers suddenly found themselves deep in debt and oil project wee costia more than the oil they produced. This was especially the case with expensive projects such as developments in the North Sea and extracting oil from oil sands in Canada.
Impact of High Oil Prices
The fate of entire economies often hinges on the price of oil and production limits. When oil prices drop in producing countries there is talk of slashing subsidies, cutting government jobs and raising taxes. When oil price rise, there is talk of new construction, and agriculture projects. When prices drop usually leaders do nothing and cross their fingers and hope prices rise again.
Increases in price for oil materials cause the prices of gasoline and heating oil. In the mid 2000s, the cost of filling up a SUV in the United States and a minivan in Europe topped $100 and home heating oil costs for consumers in the United States more than doubled. Some businesses in the United States saw their one month heating bills soar from $250 to $602 between 2005 and 2006 after an unusually cold winter there. In poor countries the poor had to pay higher prices for cooking fuel and bus rides.
High oil prices also resulted in higher airline ticket prices because of high jet fuel costs; higher prices for goods made with petrochemicals; higher prices for goods that have to transported, which is nearly everything; and an increase in sales of small, fuel-efficient cars.
The high prices at the gas stations in the United States were the result of high oil prices and the increased costs of refining. In many cases the refineries made a killing as prices were driven up low supply partly the result of refinery capacity shortages.
In July 2006, Exxon Mobile reported a record $10 billion profit for a three month period. Much of the windfall was due to high oil prices. It was the second largest quarterly profit ever, just shy of a record for the forth quarter in 2005. Exxon-Mobile was widely criticized for reaping huge gains while ordinary Americans were paying through the nose at the pump. There were calls for a windfall profits tax. Exxon-Mobile earned $9.9 billion in the third quarter of 2005. Other oil companies also recorded record profits.
High oil prices can backfire on producers by casing economic slowdowns which decrease demand.
Oil Shortages
Were the oil supply to dry up, it would cause a major catastrophe: mass shortages, economic depression, millions of unemployed.
In October 2005,the Group of 20 industrialized and emerging economic nations called for coordinated efforts among oil producers and consumers to rein in “long lasting high and volatile oil prices” and declared there was a need to boost investment in oil production and refining capacity, promote energy savings and alternative energy sources and reduce fuel subsidies.
In January 2006 in his State of the Union address, U.S. President George Bush declared the United States must end its addiction to oil to break it dependence on the Middle East. He called for the production of more electric and hybrid cars and pushed for more research into the manufacturing of ethanol from wood chips, stalks and switch grass.
Oil consumption has become more efficient. Developed economies use half as much oil per dollar of real gross domestic product on the 2000s than they did in the mid-1970s.
Despite all this oil consumption is expected to increase by 50 percent in the United States in the next 25 years.
Curse of Oil Wealth
The fate of the entire economy often hinges on the price of oil and production limits. Originally oil was heralded as a great blessing but has turned out to be a curse. It has encouraged people to sit around while money flows in with little effort and has discouraged the development of a work ethic, entrepreneurship and innovation.
One of the problems with countries that are rich in natural resource money is that the wealth raises the price of goods and labor. Starting a factory becomes unrealistic because the labor costs are too high to compete with poor countries that have low labor costs. This hurts the entire economy because manufacturing is often an engine for economic growth and innovation, which tends to augment itself and increase with time.
Oil money stifles entrepreneurship because no business generates the kind of profits that oil does. Rather than open new businesses potential entrepreneurs use their talent to try and get a share of the oil money. This encourages corruption and thwarts innovation and competitiveness, especially considering that most of the oil is controlled by state monopolies.
The state oil monopolies create a dependence on the state. People look to government for hand outs and solutions to their problems rather than taking care of themselves and solving their own problems
Dutch Disease
Dutch disease is the name given to the problems suffered by a country after it becomes rich in a resource such as oil. It is named after the troubles experienced by the Netherlands in the 1960s after it discovered natural gas in the North Sea and became a significant producer and exporter of natural gas.
Describing it Michael Ross, a political scientist at UCLA, wrote: “Rising resource exports push up the value of the country’s currency, which makes other exports, such as manufactured and agricultural goods, less competitive broad. Export figures for those products then decline, depriving the country of the benefits of dynamic manufacturing and agricultural bases and leaving it dependent on its resource sector and so at the mercy of often volatile international markets.
“Another facet of the oil curse is the sudden glut of revenues. Few oil-rich countries have the fiscal discipline to invest the windfalls prudently. Most squander them on wasteful projects. The government of Kazakhstan and Nigeria, for example, have spent their petroleum incomes on building new capital cities, while failing to bring running water to the many villages that lack it.”
Solutions to the Curse of Oil Wealth
Indonesia and Malaysia have developed stronger economies than the Arab countries because they used their oil wealth to diversify their economies. They opened their markets to free trade; devalued their currency to offset high prices; invested heavily in education; and established special export zones to encourage manufacturing
The Arab counties have not done any of these things. Their economies are heavily regulated and largely closed. More energy goes into deciding how the oil wealth will be divided up rather on creating new wealth and controlling the economy based on political decisions rather than economic ones. James Surowieki wrote in the New Yorker, “The oil producers are addicts. They prefer the comfortable squalor of staying hooked to the work it would take to kick the habit.”
Oil and Women’s Rights
Michael Ross, a political scientist at UCLA, wrote a paper in the American Political Science Review describing how oil-producing countries have great gender inequality than non-oil-producing ones. Among Muslim countries, he noted, nations with the most oil wealth have tended to be the slowest to give women the right to vote. In Saudi Arabia and the United Arab Emirates, both huge oil producers, women still do not have the right to vote.
The reason for this, Ross says, is that high oil prices make it possible for oil-rich countries to buy everything they need from other nations, negating a need to manufacture them themselves. The result is a weak manufacturing sector and strong service and construction sectors, depriving women of factory jobs, particularly in the textile industries which have long been the entry point for poor women into the workforce. Numerous studies have shown that when women leave the home and go off to work they became more politically aware and demand more political, economic and legal rights.
Ross told the Washington Post, “Patriarchal norms are often very deeply imbedded in society, and it takes a very powerful force to begin to break them up. Women’s employment has historically has been that powerful force , that foot in the door, that first rung on the ladder.” Ross’s data shows that when a nation’s oil profits soar, the number of women in the work force declines: for every $1,280 increase in per capita oil profits there is two percent decrease in the number of elected female leaders.
Ross also found that in Muslim countries oil-wealth rather than religion is more important factor in determining women’s rights. Women in oil-poor Morocco and Tunisia, for example, have higher percentages of female legislators than oil-rich Algeria.
Oil and War
Ross has also noted there is a link between oil and war. He wrote that in during the 1990s and the early 2000s, wars and armed conflicts declined worldwide but — there has been no drop in the number of wars in countries that produce oil. The main reason is that oil wealth often wreaks havoc on a country’s economy and politics, makes it easier for insurgents to fund their rebellions and aggravates ethnic grievances. The number of oil-producer-based conflicts is likely to grow in the future as stratospheric prices of crude oil push much more countries to produce oil and gas.
“Oil wealth can trigger conflict in three ways,” Ross wrote. “First it can cause economic instability, which then the leads to political instability...Second, oil wealth often helps support insurgencies. Rebellions in many countries fail when their instigators run out of funds. But raising money in petroleum-rich countries is relatively easy. Insurgents can steal oil and sell it on the black market (as happened in Iraq and Nigeria), extort money from oil companies working in remote areas (as in Columbia and Sudan), or find business partners to fund them in exchange for future considerations in the event they seize power (as in Equatorial Guinea and the Republic of Congo).
“Third, oil wealth encourages separatism. Oil and gas are usually produced in self-contained economic enclaves that yield a lot of revenues for the central government but provide few jobs for locals — who also bear the cost of petroleum development such as lost property rights and environmental damage. To reverse the balance, some locals seek autonomy from the central government , as have the people of the petroleum-rich regions of Bolivia, Indonesia, Iran, Iraq and Nigeria.
Ross says the easiest ways to turn the problem around is make the governments in the oil-rich nations more transparent and democratic. The government in these states tends to be opaque, fueling corruption and reducing public trust, there is also a need to make sure that oil wealth is spent on projects that help a nation grow such as roads, schools, hospitals, irrigation projects, disease-fighting campaigns and microfinancing.
Oil and the Environment
In United States people continue to buy gas-guzzling SUVs and minivans. In the tax code there are regulations that allow businesses to deduct as much as $100,000 from he their taxes for buying some of the biggest gas-guzzling SUVs. Between 1998 and 2004 the average gas mileage of U.S. passenger vehicles fell.
Carbon dioxide emitted per kilowatt hour: 1) coal, 2.1; 2) petroleum, 1.4; 3) natural gas, 0.8.
Bacteria like Alcanivorox borkumenisi consume and break down oil and other hydrocarbons. They are particularly useful in cleaning up oil spills.
End of Oil
In his book “Crude World: the Violent Twilight of Oil”, Peter Mass argues that petroleum’s dominance as the world’s’s primary energy source is reaching its end.
Book: “Crude World. The violent Twilight of Oil” by Peter Mass (Alfred Knopf, 2009)
Image Sources:
Text Sources: World Almanac, United States Geological Survey (USGS) Minerals Resources Program, Investopedia Industry Handbooks, U.S. Energy Information Administration, Department of Energy and National Geographic articles. Also the New York Times, Washington Post, Los Angeles Times, Smithsonian magazine, Natural History magazine, Discover magazine, Times of London, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.
Last updated March 2011