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
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.