The crude oil price Essay Example

percent. This implied that there were no more restrictions on the quantity of oil that Texan producers could generate. Importantly, this policy change also moved the power to regulate crude oil prices from the United States (specifically states like Texas, Oklahoma, and Louisiana) to OPEC. In October 1970, Libya elevated its listed price and tax rate on privately produced oil which led other OPEC members to increase their prices too. By January 1971, an agreement had been reached among oil companies to accept a 55% tax on oil production. Consequently, global oil prices witnessed an immediate escalation. The Yom Kippur War in 1973 further affected these rising oil prices significantly. In comparison, while crude oil cost roughly $3.00 per barrel in 1972; by end of year 1974 it had soared over $12.

The Yom Kippur War, initiated on October 5, 1973, was triggered by a Syrian and Egyptian assault against Israel. In response to this conflict, several Arab oil-exporting nations implemented an embargo on countries that supported Israel. This resulted in a notable increase in crude oil prices and reduced production by 25%. During this period, the United States along with many western countries voiced their support for Israel. The Arab Oil Embargo underscored the shift of power in terms of setting crude oil prices from the USA to OPEC as price per barrel soared from $5.12 to $11.65 within six months due to supply shortages.

Despite OPEC ending the embargo and ramping up production in 1974, crude oil prices more or less continued to hover around $15 per barrel. This was primarily due to increased demand for oil, outstripping supply, as a result of economic boom

particularly in the US and some other nations.

The Iran-Iraq conflict from 1978-79 further escalated the cost of crude oil. The revolution taking place in Iran led to a daily decrease of oil production by approximately 2-2.5 million barrels from November 1978 until June 1979. Oil output in Iran fell from an initial rate of 1.5 million barrels per day to just half a million, while Saudi Arabia too made substantial reductions in its output, capping it at around 9.5 million barrels each day.

The Iranian revolution and the subsequent Iraq invasion of Iran resulted in a significant oil shortage in countries that import oil. This caused a considerable surge in the price of oil, with prices per barrel reaching $24 by the end of 1979. The situation worsened when Iraq attacked Iran in September 1980, leading to a decline in Iran's daily oil production capacity from 6.5 million barrels to only one million barrels. Consequently, there was around a 10 percent decrease in global crude oil production compared to levels recorded in 1979. Both events -the Iranian revolution and the conflict between Iraq and Iran- played major roles in causing crude oil prices to more than double by the end of 1980, hitting $32 per barrel.

In the middle of the 1980s, oil prices saw a significant drop, hitting rock bottom at $11 per barrel in real terms. This was similar to prices before 1973. Both supply and demand factors contributed to this decline. To begin with, customers reacted to rising costs by decreasing their usage via methods like improved insulation for both new and old homes, increasing energy efficiency in industrial procedures, and opting for cars

with better fuel economy. Moreover, a worldwide economic slump further decreased the demand for oil leading to reduced prices. On the other hand, there was an upsurge in oil production between 1982 and 1985 due to increased exploration and output outside OPEC nations which led to an additional daily production of 10 million barrels from non-OPEC countries. Attempts by OPEC to stabilize prices through imposing production restrictions on its members were unsuccessful as some members exceeded their quotas. Reflecting on these responses provides clear understanding into the drastic fall in oil prices from 1980 till 1985.

### OPEC's Impact on the Oil Sector
During the 1980s, OPEC faced challenging situations as there was a decrease in oil demand while non-member countries' supply increased. Unfortunately, these shifts were enduring and resistant to price cuts. This led to a substantial drop in crude oil prices, sinking below $10 per barrel by mid-1986.

A significant event that impacted oil prices was Iraq's assault on Kuwait in 1990. The incident caused disruption in production and introduced uncertainty into the market due to the ensuing Gulf War. The aggression resulted in a worldwide reduction of oil production by 4 million barrels daily, escalating prices up to $32 per barrel.

Various other incidents during this period also had effects on the oil sector. The destruction of Kuwaiti oil infrastructures led to major losses, which were partially compensated for in 1991 when America released 33.75 million barrels from its Strategic Petroleum Reserve. Additionally, OPEC announced an output cutback during March 1991 as a response to producers possessing excessive unsold oil.

Moreover, Kuwait recommenced oil production in 1992 and an embargo was placed on Iraqi oil exports. While

these events were not as impactful as others, they contributed to fluctuations in oil prices (as shown in the exhibits). The resumption of Kuwait's production and US interventions led to a drop in prices. However, price hikes resulted from OPEC's cutbacks on production. Between 1998 and 2000, various political, economic, and environmental occurrences influenced the oil market leading to another surge in prices by late 1999. The Asian financial crisis of 1998 put a stop to the swift expansion of Asian economies for the first time since 1982 resulting in a decrease in Asia Pacific’s consumption of oil. This mix of lowered demand and increased OPEC output caused a significant fall in prices. In reaction to this, OPEC reduced its quotas by 1.

During March, there was a production of 245 million barrels each day, which rose by an additional 1.355 million barrels daily in June. Oil prices kept falling until December 1998. At the start of 1999, oil prices started to recover as non-OPEC oil producers agreed to cut down production and OPEC also reduced its output by about 1.716 million barrels per day. Even though not all quotas were fulfilled, OPEC's output fell approximately by 3 million barrels every day from early 1998 till mid-1999, leading to prices exceeding $25 for each barrel. As the US and worldwide economies grew, prices continued their upward trend throughout the year of 2000 hitting a record high since the year of1981. However, post the terrorist attack on September 11, 2001 on American soil, there was a minor dip in the oil market which resulted in price drops within $15 range (Exhibit 1).

OPEC reacted by cutting production by

1.5 million barrels/day, with non-OPEC countries like Russia and Norway following suit. Mexico also declared a reduction in exports of 100 thousand barrels/day. This shows that even as a cartel, OPEC has had only limited success in regulating prices. The organization found it challenging to time quota adjustments correctly and enforce production discipline among its members. Moreover, OPEC's high price hikes led to decreased demand. It is clear from this scenario that when prices soar, the market's demand side responds faster and more robustly than the supply side, sustaining this reaction for longer periods. Hence, it goes without saying that keeping oil prices low necessitates specific actions.

High energy prices can actually be the most effective means to promote conservation and enhance the efficient utilization of our energy resources.