27
History and Terminology
of oil will not be traded on an exchange but on an over-the-counter basis, typically with reference
to a marker crude oil grade that is typically quoted via the pricing agency IPE claim that 65% of
traded oil is priced off their Brent benchmarks. The Energy Information Administration (EIA)
uses the Imported Refiner Acquisition Cost, the weighted average cost of all oil imported into the
United States as the world oil price.
1.7.2 oIl PrICe HIstory
Crude oil prices have seen wide price swings over the past decade whether it is due to apparent
shortage or oversupply. At the time of writing, prices are within the $60–$70 barrel range, which
makes the so-called average price of approximately $21 per barrel (a number per barrel placed on
the table by some economists) seem meaningless. Just as the determination of the so-called average
structure is of very questionable validity (Chapters 11 and 12), so is an average price per barrel of
oil! Even when adjusted for inflation to current dollars, an average price per barrel bears little relationship to reality, especially when in reality it has a much higher price per barrel than anticipated.
The analogy often used is a scientist or engineer standing with his/her left foot in a pail of boiling
water and his/her right foot in a pail of ice water and declaring that she/he is comfortable because
she/he is at average temperature!
The very long-term view of petroleum pricing can be considered in the same way. Average
prices, even when adjusted for inflation, do not help the consumer who has to bear the brunt of the
price increases.
Historically (or, some might say, hysterically), crude oil prices varied from $2.50 and $3.00 from
1948 through the end of the 1960s. The price rose from $2.50 in 1948 to about $3.00 in 1957. From
1958 to 1970, prices were stable at about $3.00 per barrel. Organization of Petroleum Exporting
Countries (OPEC) was formed in 1960 with five founding members—Iran, Iraq, Kuwait, Saudi
Arabia, and Venezuela. By the end of 1971, six other nations (Qatar, Indonesia, Libya, United Arab
Emirates, Algeria, and Nigeria) had swelled the membership ranks of OPEC.
Throughout this period, the petroleum-exporting countries found increasing demand for their
crude oil. In 1972, the price of crude oil was about $3.00 per barrel and by the end of 1974 the price
of oil had quadrupled to over $12.00. The Yom Kippur War started with an attack on Israel by Syria
and Egypt on October 5, 1973. Many countries in the Western world showed strong support for
Israel and, as a result, several of the Middle Eastern oil-exporting nations imposed an embargo on
those countries by decreasing oil.
From 1974 to 1978, the price of crude oil was relatively flat, ranging from $12.21 per barrel to
$13.55 per barrel. When adjusted for inflation the price over that period of time exhibited a moderate decline. Then events in Iran and Iraq (overthrow of the Shah of Iran and the Iran–Iraq war) led
to another round of crude oil price increases, and crude oil prices rose to $35 per barrel in 1981.
The higher prices resulted in, among other actions usually involving energy conservation,
increased exploration and production in the non-OPEC world. In mid-1985, oil prices were linked to
the spot market for crude and, by early 1986 (with increased production by some OPEC members),
crude oil prices moved downward to $8–$10 per barrel. The price of crude oil rose again in 1990
with the Iraqi invasion of Kuwait and the ensuing Gulf War, but following the war crude oil prices
entered a steady decline. The price cycle then turned up, and from 1990 to 1997 world oil consumption increased by in excess of six million barrels per day. The price increases came to a rapid end
when, due to downward trend in several Asian economies, higher OPEC production sent downward.
A low point was reached in January 1999 after increased oil production from Iraq coincided
with the Asian financial crisis, which reduced demand. The prices then rapidly increased, more
than doubling by September 2000, then fell until the end of 2001 before steadily increasing, reaching US$40–50 per barrel by September 2004. In October 2004, the price of crude oil exceeded
US$53 per barrel and for December delivery exceeded US$55 per barrel. Crude oil prices surged to
a record high above $60 a barrel in June 2005, sustaining a rally built on strong demand for gasoline
History and Terminology
of oil will not be traded on an exchange but on an over-the-counter basis, typically with reference
to a marker crude oil grade that is typically quoted via the pricing agency IPE claim that 65% of
traded oil is priced off their Brent benchmarks. The Energy Information Administration (EIA)
uses the Imported Refiner Acquisition Cost, the weighted average cost of all oil imported into the
United States as the world oil price.
1.7.2 oIl PrICe HIstory
Crude oil prices have seen wide price swings over the past decade whether it is due to apparent
shortage or oversupply. At the time of writing, prices are within the $60–$70 barrel range, which
makes the so-called average price of approximately $21 per barrel (a number per barrel placed on
the table by some economists) seem meaningless. Just as the determination of the so-called average
structure is of very questionable validity (Chapters 11 and 12), so is an average price per barrel of
oil! Even when adjusted for inflation to current dollars, an average price per barrel bears little relationship to reality, especially when in reality it has a much higher price per barrel than anticipated.
The analogy often used is a scientist or engineer standing with his/her left foot in a pail of boiling
water and his/her right foot in a pail of ice water and declaring that she/he is comfortable because
she/he is at average temperature!
The very long-term view of petroleum pricing can be considered in the same way. Average
prices, even when adjusted for inflation, do not help the consumer who has to bear the brunt of the
price increases.
Historically (or, some might say, hysterically), crude oil prices varied from $2.50 and $3.00 from
1948 through the end of the 1960s. The price rose from $2.50 in 1948 to about $3.00 in 1957. From
1958 to 1970, prices were stable at about $3.00 per barrel. Organization of Petroleum Exporting
Countries (OPEC) was formed in 1960 with five founding members—Iran, Iraq, Kuwait, Saudi
Arabia, and Venezuela. By the end of 1971, six other nations (Qatar, Indonesia, Libya, United Arab
Emirates, Algeria, and Nigeria) had swelled the membership ranks of OPEC.
Throughout this period, the petroleum-exporting countries found increasing demand for their
crude oil. In 1972, the price of crude oil was about $3.00 per barrel and by the end of 1974 the price
of oil had quadrupled to over $12.00. The Yom Kippur War started with an attack on Israel by Syria
and Egypt on October 5, 1973. Many countries in the Western world showed strong support for
Israel and, as a result, several of the Middle Eastern oil-exporting nations imposed an embargo on
those countries by decreasing oil.
From 1974 to 1978, the price of crude oil was relatively flat, ranging from $12.21 per barrel to
$13.55 per barrel. When adjusted for inflation the price over that period of time exhibited a moderate decline. Then events in Iran and Iraq (overthrow of the Shah of Iran and the Iran–Iraq war) led
to another round of crude oil price increases, and crude oil prices rose to $35 per barrel in 1981.
The higher prices resulted in, among other actions usually involving energy conservation,
increased exploration and production in the non-OPEC world. In mid-1985, oil prices were linked to
the spot market for crude and, by early 1986 (with increased production by some OPEC members),
crude oil prices moved downward to $8–$10 per barrel. The price of crude oil rose again in 1990
with the Iraqi invasion of Kuwait and the ensuing Gulf War, but following the war crude oil prices
entered a steady decline. The price cycle then turned up, and from 1990 to 1997 world oil consumption increased by in excess of six million barrels per day. The price increases came to a rapid end
when, due to downward trend in several Asian economies, higher OPEC production sent downward.
A low point was reached in January 1999 after increased oil production from Iraq coincided
with the Asian financial crisis, which reduced demand. The prices then rapidly increased, more
than doubling by September 2000, then fell until the end of 2001 before steadily increasing, reaching US$40–50 per barrel by September 2004. In October 2004, the price of crude oil exceeded
US$53 per barrel and for December delivery exceeded US$55 per barrel. Crude oil prices surged to
a record high above $60 a barrel in June 2005, sustaining a rally built on strong demand for gasoline