Oil Prices: Overview

Introduction

During the industrial era, oil emerged as arguably the most important natural resource in the modern world. Oil, it may be said, has long been the lifeblood of the industrial, developed state: Every major form of transportation relies on oil as a fuel and lubricant; homeowners depend on oil for heat to keep their families warm; and manufacturers require oil to keep their machines running.

Rising oil prices therefore become a major global issue. Many of the world’s oil producers are located in politically unstable regions or are politically and economically unstable themselves and engulfed in civil conflict. (This includes nations in the Middle East, the former Soviet Union, and Africa.) While this instability can extensively be a contributor, oil prices are not just affected by political issues and organizations; natural disasters such as hurricanes can also have an impact on oil prices.

Fluctuations in the price of oil have long been a significant contributor to economic recessions. The recession of the late 2000s, for example, was exacerbated by a spike in oil prices, which affected everything from manufacturing to air travel. The recession and the increased attention on the United States for its dependence on foreign oil has fueled a debate over how to address the high price of oil. Some argue that the United States must engage in more exploratory drilling on its own soil by tapping into the resources of Alaska and along the Atlantic seaboard. Others believe in transitioning the country’s financial resources toward the development of alternative or renewable fuel sources. When oil prices rise and fluctuate, the debate over how to reverse this trend and reduce the country’s dependence on oil will continue.

Understanding the Discussion

Alaska National Wildlife Refuge (ANWR): A national refuge in northeastern Alaska that is managed by the United States Fish and Wildlife Service. The largest wildlife refuge in the United States, it has been the subject of intense debate over oil drilling due to its potential to contain vast amounts of oil as well as the potential for negatively impacting the habitats in the area.

Organization of Petroleum Exporting Countries (OPEC): Founded in Iraq in 1960, OPEC is an organization made up of twelve oil-exporting member countries. The intergovernmental organization has come under criticism and scrutiny for its ability to influence and control the price of oil.

Peak Oil: The theoretical point at which oil production can no longer increase, ushering in a period of decline.

Price Band: A cost or price range that sets a market rate for oil purchases.

History

Throughout history, oil has played an important role in humanity’s way of life. Five thousand years ago, many different cultures collected the substance as it bubbled up through underground seeps, using it as a sealant or an adhesive. Around 1500 BCE, oil was used in fire pans (which over time would evolve into wick lamps). In 500 BCE, the ancient Chinese discovered oil deposits and natural gas in underground salt wells, and understanding its uses, began to draw from those wells. In the thirteenth century CE, Persians in the city of Baku (in present-day Azerbaijan) created new methods for collecting oil by digging holes (some of which were over one hundred feet deep) that would serve as history’s first true oil fields. By the seventeenth century, Europe had its first commercial oil reservoir in Romania, which would contribute heavily to the rapidly developing continent.

In the mid-nineteenth century, the United States took an enormous leap forward in the field of oil exploration and extraction. Oil had been extracted from an area in northwest Pennsylvania known as Oil Creek, an oil seep under the river that sent oil to the water’s surface where people simply soaked it up with blankets. By this time, oil was extremely important for both illumination and lubrication, and demand for it fostered the establishment of the first US oil company, the Pennsylvania Rock Oil Company (also referred to as the world’s first petroleum company). The company sent Colonel Edwin Drake, a man with no knowledge of drilling or geology, to the region to survey a site where oil seeps were known to appear and drill oil wells. After a year of surveying and numerous attempts to drill, the Drake Well struck oil in 1859 and became the first commercial oil well and helped launch the modern oil industry.

In the decades that followed, Pennsylvania became the largest oil-producing region in the world. In 1901, however, Texas quickly surpassed Pennsylvania when drillers at Spindletop Hill struck oil that created a gusher that produced 100,000 barrels of oil per day. Throughout the first half of the twentieth century, the United States remained the top oil producer in the world, even as fields were developed in South America, Southeast Asia, and the Middle East. By the mid-1950s, however, US oil production had been surpassed by foreign production.

In 1960, the Middle Eastern countries of Iran, Iraq, Kuwait, and Saudi Arabia, along with Venezuela, in South America, formed the Organization of the Petroleum Exporting Countries (OPEC) to demonstrate the enormous power (particularly in the form of limiting production) these petroleum-producing nations had in light of their wealth of oil resources. In 1973, OPEC used this power to initiate an oil embargo, effectively placing a stranglehold on the United States and other Western nations for their support of Israel in the Yom Kippur War (also known as the 1973 Arab–Israeli War). During the embargo of 1973, which came to be known as the 1973 oil crisis, gasoline prices quadrupled in the span of only one year, causing widespread turmoil and economic strife in the United States.

Over the next two decades, oil prices remained relatively consistent, hovering around $24 per barrel and rising only during periods of conflict in the Middle East. In 2000, OPEC adopted a price band (a cost range of $22–$28 per barrel within which oil could be sold on the market), creating stability in the oil markets. Following the September 11, 2001, terrorist attacks on the United States, oil prices were sent skyward and reached nearly $100 per barrel as the world responded to the attacks by pursuing terrorism in the Middle East and overthrowing the regime of Saddam Hussein in Iraq. In 2007, oil prices again started increasing, which was the result of heightened demand against stagnated worldwide production and was not due to deliberate disruptions in production or conflict.

The heightened concern over oil resources caused Americans to consider their reliance on oil, particularly from foreign sources. Since the middle of the twentieth century, a debate has grown over the concept of peak oil, or the point at which production can no longer increase, thus beginning a decline in resources; there is considerable and intense debate over when that stage will occur. The global recession in the late 2000s and the corresponding spike in oil prices added a sense of urgency to that debate.

The global recession and the role oil prices played in that fueled the debate over whether it was prudent to reduce US dependence on foreign oil by expanding or further exploring offshore oil drilling along the Atlantic seaboard and by opening exploratory drilling in the vast Alaska National Wildlife Refuge (ANWR). Although both proposals have raised resistance, President Barack Obama approved new drilling in the Atlantic region in 2010 (although the impetus for such drilling was temporarily derailed with the 2010 oil spill in the Gulf of Mexico). In 2011, the US House of Representatives filed and passed the Jobs and Energy Permitting Act (H.R. 2021) that proposed to amend the Clean Air Act and that allowed for the exploration and development of ANWR for oil extraction and production. Proponents of the legislation argued that it would increase oil production, lower dependence on foreign oil, lower oil prices overall, and increase jobs. Others were opposed to the bill and to the inevitable drilling in the Alaskan wilderness and argued that oil exploration would have harmful and potentially devastating effects on what is an ecologically sensitive region in the refuge. Regardless of the debate, the bill did not pass the Senate in 2012 and efforts to explore ANWR were stalled as of January 2015 when President Obama proposed designating over twelve million acres within ANWR as wilderness and prohibiting drilling within the area.

In the early 2010s, demand, geopolitical and economic instability, and natural disasters affected fluctuations in oil prices. In addition to increased demand for oil, ongoing conflict and uncertainty in the Middle East, particularly in countries such as Libya and Iraq, as well as instability in oil-producing nations such as Saudi Arabia triggered price increases. The devastating 2011 earthquake and tsunami in Japan had a somewhat tempering effect on oil prices that caused energy prices worldwide to decrease. Due to reduced demand for oil worldwide in 2012, oil prices fluctuated. Oil supply was also affected due primarily to economic sanctions imposed on Syria and Iran by the European Union (EU) and the United States. Prices rose again in 2013, reaching $119 per barrel, and US domestic gasoline prices also rose to a national average of $3.85 per gallon.

High oil prices spurred US and Canadian companies to increase efforts to remove oil from such hard-to-extract areas as Alberta, Canada’s oil sands and South Dakota’s shale formations. Demand for oil in the United States, Europe, and Asia began to decrease as some economies weakened and as countries developed and implemented energy efficiency measures. Oil producing countries such as Iraq were still producing the same amounts, if not more, oil. The result in late 2014 was the beginning of sharply falling oil prices: Whereas the price per barrel of oil had reached approximately $115 in June 2014, by January 2015, the price per barrel had fallen over 50 percent to land at $52 per barrel. US gas prices also fell, with the average price per gallon of gas in January 2015 at $2.19, with many areas in the country seeing gas prices below $2.00 per gallon. According to the World Bank, the 70 percent drop in oil prices between mid-2014 and 2016 was one of the largest oil price reductions in modern history.

By 2016, OPEC had expanded its membership beyond the original five Founding Members to more than a dozen nations. That same year, the organization responded to the plunging oil prices by signing an agreement with ten other oil producing countries, including Russia and Mexico, to establish what became known as OPEC+.

Another significant decrease in oil prices occurred in April 2020, when COVID-19 pandemic quarantines and closures reduced travel worldwide and demand for oil plunged. Prices recovered but stayed flat for the rest of the year. In 2021, prices recovered to pre-pandemic levels and started to rise through mid-2022. In June 2022, closing prices of crude oil peaked at above 120 US dollars per barrel.

Oil Prices Today

In October 2022, the twenty-three members of OPEC+ cut production of oil exports to the global economy by 2 million barrels per day (bpd), or the equivalent of 2 percent of the global supply at the time. The cuts helped maintain oil prices and came as Europe and the United States were trying to decrease the amount of oil money going to Russia, which had launched an invasion of Ukraine in February of that year and was funding the war with its oil revenues. OPEC+ said that the lower production rate would be effective through the end of 2023. However, OPEC+ continued production cuts in 2023. In June 2024, the organization extended its deep oil output cuts, the equivalent of 5.86 million bpd or about 5.7 percent of global demand, into 2025. It also announced that it would gradually phase out cuts of 2.2 million bpd between October 2024 and September 2025.

When oil prices are low, the average consumer benefits, but nations and states whose economies depend on oil sales may suffer, and the debate over oil prices and how to offset them has continued. There are those who believe that the US government should redirect its energy resources away from oil-oriented endeavors and invest more instead in production of renewable energy sources, such as wind, solar, and biofuels. Others argue that such policies are blinded by the fact that the United States is heavily dependent on oil and simply cannot expect to undo this reliance in the short term.

Adding to the debate is the discussion over how to mitigate dependence on foreign oil. Drilling proponents argue that by exploring ANWR and the Atlantic seaboard, the significant new reserves these areas appear to contain will increase supply and lower prices. Some critics, however, argue that such operations will neither lower prices nor reduce imports.

These essays and any opinions, information, or representations contained therein are the creation of the particular author and do not necessarily reflect the opinion of EBSCO Information Services.

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