Price of oil

The Price of Oil: A Journey Through Global Economics

Imagine the price of oil as a river flowing through the global economy, its currents dictated by supply and demand. This river, however, is not just any stream; it’s a powerful force that can shape economies, influence politics, and even dictate the course of wars.

The Early Days: A Relatively Steady Flow

In the nineteenth and early twentieth centuries, oil prices were like a calm river, relatively consistent. But as we move into the 1970s, something changed. The river began to churn with significant fluctuations, driven by events such as the 1973 OPEC oil embargo and the Iranian Revolution.

The Modern Era: A Turbulent Stream

By the early 2000s, the price of oil had become a tempestuous stream. The US shale revolution created a new riverbed, leading to a significant decline in prices from 2014-2015. This was followed by record-high energy prices in 2021 due to global demand surges and geopolitical tensions.

Structural Drivers of Oil Prices:

• Oil supply shocks: These are like sudden storms that disrupt the flow, causing prices to spike.
• Demand shocks: Just as a drought can reduce water levels, economic downturns or growth can affect demand for oil.
• Storage demand shocks: Think of these as dams holding back the river, creating surpluses that can flood markets later.
• Global economic growth: The economy’s health is like the weather; it can either nourish or dry up the river.
• Speculative demand for oil stocks: Investors betting on future prices can amplify price movements, much like a dam that can burst.

The US Shale Revolution: A New Riverbed

In 2015, the United States became the third-largest producer of oil and resumed exporting after a 40-year ban. This was akin to discovering a new riverbed, leading to a significant increase in global supply.

The 2020 Oil Price War: A Tsunami

The 2020 Russia-Saudi Arabia oil price war was like a tsunami, causing the price of oil to plummet by 65% at the start of the COVID-19 pandemic. This event highlighted how geopolitical tensions can disrupt global markets.

Global Oil Prices: A Historical Overview

The price of oil has fluctuated since 1861, with two major crises in the 1970s that led to OPEC’s rise over global economies. Non-OPEC countries increased production in the early 1980s, causing a glut and subsequent price decline.

The 2010s: A Decade of Turmoil

From 2004-2014, OPEC set a target price range. However, the rise of unconventional sources like hydraulic fracturing caused turmoil in prices. The 2010s saw a significant oil glut, leading to a sharp decline in prices that continued into 2016.

The Future: A Volatile Stream

By February 2016, the price of oil was below $30—a drop of almost 75% since mid-2014. The US became the leading crude producer in 2018, mainly due to shale ‘fracking’ technology improvements.

Contango: Storing Oil for Profit

The oil-storage trade involves large companies purchasing and storing oil when prices are low, then selling it later at a higher price. This practice can amplify the volatility of oil prices, much like a dam that can burst.

Conclusion: The Price of Oil as a Global Indicator

The price of oil is not just about barrels; it’s about the health of global economies and the stability of nations. As we navigate this complex river, understanding its currents can help us predict where it might flow next.