Techong's Global Research: What makes oil prices volatile? History explains.

Crude oil prices had many rise and fall in history. After crude oil attracted media attention in the 1850s, the price now has been lower than the average price. Energy and petroleum expert, Daniel Yegin indicated that crude oil could be the most popular speculative option for investors to bet against the volatility.

Rise of Crude Oil

Crude oil was the first discovered by Edwin Drake and was industrialized by John D. Rockfeller. The oil started to be used in many different areas. By 1890, Standard Oil Co. controlled almost 88 percent of the refined oil flows in United States which triggered to face antitrust legislation that restricted the market monopoly. In March of 1908, geologist George Bernad Reynolds started to explore other than U.S. and founded out the possibility the oil could be discovered in Persian area (which is now considered Iran).

As crude oil production places increased, the supply of crude oil also surged. According to the law of supply and demand, demand remains the same, but when supply increases, prices go down.

Automobile

Oil prices, which had been cut in half due to increased supply in oil, doubled again in around 1910. This is the time when Henry Ford installed first moving assembly line for the mass production by applying the conveyor belt system to the automobile plant. The innovation contributed automobiles to be widely popularized. Demand for crude oil soared as demand in automobile fueled.

WWI and Great Depression

However and the supply of crude oil became unstable due to World War I, which pushed the oil price higher. With the onset of the Great Depression, oil prices fell again due to the loss of demand and more countries started to extract more oil. In the early days of oil market, short-term prices were determined by supply and demand, and in a longer-term, the rise of crude oil supply made the prices fall gradually and steadily.

Aramco and OPEC

However, things got different after significant amount of oil was discovered on March 4, 1938. The name Aramco (short meaning of Arabian American Oil Company) started to be famous in the beginning of 1944 and the company reached the milestone of supplying 500,000 barrels a day in 1949 and later, one million barrels a day in 1953. As Aramco had a domination of global oil market in 1960 which later came up with foundation of Organization of Petroleum Exporting Countries. OPEC’s objective of formation is “to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers.”

Wars in Middle East

However, political issues happened in 1970s. In 1973, oil-producing Arab nations cut off supply of crude oil to U.S in retaliation for supporting Israel in the Yom Kippur War ($24 $56). In 1979, Iranian revolution resulted in sharp drop in oil production which lifted oil price from $56 to $125. After that President Reagan controlled the price of oil to $26 from $113 in 1986 by abolishing last price controls on U.S. produced oil. Gulf War lifted $34 to $77 in August 1990 when Iraq invaded Kuwait. Later the price fell back to $37 after U.S. military success in removing Iraqi forces that Saddam Hussein regulated.

Expansion of Emerging Market

From 2004 to 2007, oil prices continue to rise and reach $74 because emerging economies such as China, India, and Southeast Asia spurred industrialization, resulting in enormous energy demand, while the supply remained stable. It was because oil-producing countries did not increase production to have more gains by benefiting high oil price.

Great Recession

However, in 2007 and 2008, series of event such as Venezula cutting oil production to Exxon Mobile, slow recovery of Iraq’s export on oil, labor strikes in Nigeria and the U.K.’s North Sea oil fields, and Mexico’s decline in oil. The price of oil reach in $118 in December 2007, and peaks $165 in mid 2008s. However, after weak demand of oil during great recession caused by financial crisis, the price sank till $50s.

Shale Revolution

Recovery from global economic crisis made oil price rebound to nearly $95 until huge increase in shale gas production. The revolution of fracking the oil led oil price plummet in 2015. It was a strategy to increase the market share in the long run, bearing short term low oil price. Afterwards, OPEC reduced production again until 2018, and oil prices recovered.

COVID-19

In April of this year, Western Texas Oil's May futures price hit an unprecedented oil price of negative $37.63. It means that the future price (May) for crude oil has fallen to negative as of April. The price of crude oil was too low that the seller had to give more premium to the buyer. The demand for crude oil dropped sharply as COVID-19 spreads globally. Shutdown of factories and lockdown sharply reduced oil but supply remained the same, creating a huge gap between supply and demand. This situation is regarded as contango where future price of commodity is higher than the sport price. (Backwardation has opposite meaning)

Warehouses that handle oil inventory were insufficient, which increased more on storage fees. However oil producing countries did not reduce production. (China used it as chance to buy crude oil cheaply) OPEC+, a group of oil producing countries no matter they are in OPEC or not, failed to reach an agreement to reduce production. Rather than cutting production, Saudi Arabia and Russia increased their production, and the rest of the countries were also struggling to increase their production, which made refinery companies in danger.

If the price of crude oil went down too much, it would be a big problem for each countries. In particular, Russia was worried American shale oil would take over market share. Afterwards, with the agreement to cut production gradually, the oil price slowly recovered. However, anxiety still remains since oil cut tapering puts pressure on OPEC+’s economy such as unemployment and GDP.

Summary

Oil prices move according to supply and demand in this way and it is also closely related to international political abuse.

• Increase in oil-producing countries

• Significant increase or decrease in demand for external reasons such as political and economical issue.

• Rise of industries that replace crude oil such as shale gas

Future

The shifting to the energy industry also has an impact on crude oil market in the future. Alternative energies such as solar power, electrical energy, hydrogen fuel, and nuclear power, are threatening the crude oil market. Will they change the frame? Well nobody knows for sure, but decline in need for crude oil is now on process.