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What has caused oil prices to swing over the past five decades?
 

Oil prices have tremendous impact on the global economy. Any major shift in price and availability of oil has a direct bearing on economic growth and cost of living.
The World has seen several changes in oil prices from 1973-2005.
1973 was the first milestone in the history of oil prices, when OPEC began to assert power; commenced the nationalization process and raised prices in response to the falling US dollar. Then, the largest oil producer Saudi Arabia, along with other oil producers, set up an embargo of oil to USA and other developed countries. This triggered a price increase, catapulting prices from less than US$3/barrel to US$12/barrel and higher. Prices did not subside even after the embargo was lifted in mid-1974, because the OPEC countries decided to restrict production according to demand in order to sustain oil prices.

In fact, oil prices remained range bound between 1974 and 1978. They started shooting up again only from 1978 onwards, when the Shah of Iran was deposed and Iran saw a revolution take place. Oil prices went through the roof to reach levels of US$38-40/barrel by 1982. However, prices started sliding to levels as low as US$27-28/barrel around 1984, remaining practically stagnant in a narrow range between US$26-28/barrel until 1986.

Saudi Arabia's decision to stop acting as swing producer in 1986, led to a sudden price collapse. Prices collapsed to almost US$13-15/barrel in a very short time. Prices remained below US$20/barrel until the Gulf War in early 1991, when it shot up to about US$32/barrel. However, at the end of the war in 1991, prices tumbled once again below US$20/barrel and reached as low as US$12/barrel.

A financial crisis in Asian countries in 1997, that led to an oil oversupply, was the next influence on price changes. However, after the revival of economy in Asian region in early 1999, there has been a steady increase in the demand of oil due to overall global economic growth. Another blip was sounded when terrorists attacked New York in September 2001, and prices collapsed to below US$20/barrel. The overall economic growth, however did not permit them to remain lower for a long period. From 2003 onwards, oil prices continue to rise from the level of US$30/barrel.

The buoyant economic scenario and restricted supply by all the oil producing countries have led to very high prices, reaching almost US$38-40/barrel in 2004. The present price increase is even higher and hovers beyond US$60/barrel. No respite is expected at least until there is a reversal of an economic growth.

An interesting aspect of the history of oil price over the last 5 decades is that it reached the highest level of US$72-73 in 1982, just at the commencement of the Iran-Iraq war. Interestingly, if one analyzes the price in the constant US$ term, we get an entirely different picture. At the constant, price of oil was about US$32/barrel in January 1974 compared to US$34/barrel in December 2004- indicating very low disparity. No wonder the oil producing countries are not in mood to reduce prices. If the economy continues to grow robustly, it may not be very surprising to see the prices spike up to even US$75/barrel.


 
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