Crude Oil Prices From Around the World

To understand the how crude oil prices are set, it's important to examine the level of crude oil prices from around the world.

A Snapshot of Crude Oil Prices from Around the World

According to the EIA (Energy Information Administration), since 1978, crude oil prices remained fairly constant between $10 to $25 per barrel with the exception of a few years where there was crisis in the Middle East. This steady trend changed dramatically immediately following the invasion of Iraq in 2003. In January 2003 the crude oil price per barrel was $29.55. Five years later, in January 2008, the crude oil price per barrel had risen to $92.15 per barrel. The price continues to rise exponentially, with no end in sight.

A Brief History of Crude Oil Prices

Worldwide crude oil prices have always fluctuated over the years. The price depends on several factors, but most importantly demand and supply. During the decades between the end of WWII and 2007, oil prices never exceeded $24 per barrel except during times of conflict in the Middle East. Looking at any chart that outlines crude oil prices from the late 1800's through 1969, the price remained fairly constant below $20 per barrel (adjusted for inflation).

What Created the Upswing in Oil Prices?

The moment in history that preceded the sudden rise of oil prices based on middle-east crisis was in 1960 when OPEC was formed. The founding countries of OPEC include Iran, Kuwait, Iraq, Saudi Arabia, and Venezuela. By 1971, Qatar, Indonesia, Libya, Algeria, Nigeria, and the United Arab Emirates had also joined OPEC.

Before this occurred, the Texas Railroad Commission typically put an upper limit on prices because Texas producers were limited in oil production. March 1971 marked the first point in history when Texas producers were no longer limited in production, however U.S. purchasing power of a barrel of oil declined by 40%. Since OPEC still had the capacity to meet demand, it also took over the power to influence oil prices through supply.

Examples of OPEC's Power

OPEC received its first taste of power in 1972 during the Yom Kippur War when Syria and Egypt attacked Israel. The Arab states imposed an embargo on western nations that supported Israel, resulting in a net loss of 4 million barrels per day of oil production through 1974. Suddently, oil prices skyrocketed by 400 percent in six months. In 1979, the Iran/Iraq crisis caused a reduction of 2.5 million barrels per day in oil production, resulting in another price spike in oil prices.

How OPEC's Power Was Overruled

Events that countered the price increases in the 1970s was consumer reaction to high oil prices. Consumers began reacting by making their lifestyles more energy efficient. Consumers insulated their homes better, installed more energy efficient appliances and energy conservation efforts at the industry level. By the time OPEC increased supply, demand had dropped and would not recover for many years. So through the 70s and 80s, OPEC recognized their power, but also the limitations of that power.

History Repeats Itself

Contrary to popular belief, the recent spike in oil prices didn't begin in 2001. It actually began on March 19, 2003, when the Iraq War started. The low oil production in Iraq and Venezuela, combined with increased demand from the rest of the world, like China, resulted in a lower excess capacity of oil production. Because demand exceeded supply to the degree that the excess capacity dropped to less than a million barrels a day, the risk of even a temporary interruption of OPEC oil supply is what largely resulted in the dramatic price increases since 2003.

How to Break the Cycle

As the country enters a new era that is, for the most part, almost identical to what the country went through in the 1970s, the solution now is the same as the solution was then. Through making different lifestyle choices that drastically reduce our demand of foreign oil, the United States will be able to remove the political and financial grip that OPEC has over this country. By making sure that our elected politicians pursue new alternative energies and also stricter guidelines enforcing energy efficiency throughout industry, the United States will successfully move beyond the era of foreign oil dependence, and into a new era of energy independence.

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