THE ECONOMICS OF OIL

1870 Standard Oil is Founded

John D Rockefeller was the single most important figure in shaping the new oil industry.

By 1877 Standard Oil controlled more than 90% of all American Oil refining.

1895 Invention of Combustion Engine

1890 Founding of the Royal Dutch Petroleum Company

1895 Invention of the combustion engine

1985 Oil discovered in Sumatra by Royal Dutch

1896 Henry Ford’s first motor car

1933 Modern Day Oil Exploration Begins

1933 The Saudi government signed a concessionary agreement with Standard Oil of California

1938 Oil discovered in Kuwait and Saudi Arabia by US geologists.

1950 The Start of North America’s Addiction to Cheap Oil Aramco agreement with

Saudi Arabia

Demand for oil was outpaced by growth in production causing prices to stay low.

This, & America’s new Interstate infrastructure, effectively started America’s reliance on foreign oil. It was a net exporter of oil at this time.

1960 The Formation of The Organization of Petroleum Exporting Countries

Founded in Baghdad, the original members were:

Saudi Arabia

Venezuela

Kuwait

Iraq

Iran.

Important Dates in North American Oil Exploration

1901 - Lucas No. 1 well blew near Beaumont, forever changing the Texas economy

1947 – First off shore drilling of the Louisiana Coast

1967 - Suncor start drilling in the tar sands, in Northern Alberta giving Canada the 2nd largest oil reserve in the world

1968 - Oil discovered on Alaska’s north slope

1971 Balance of Power Shifts in the Oil Market

The Texas Railroad Commission set proration at 100 percent for the first time.  This meant that Texas producers were no longer limited in the volume of oil that they could produce. 

More importantly, it meant that the power to control crude oil prices shifted from the United States to OPEC. 

Another way to say it is that there was no more spare capacity in the U.S. and therefore no tool to put an upper limit on prices. A little over two years later OPEC, through the unintended consequence of war, obtained a glimpse of the extent of its power to influence prices.

1973 Arab Oil Embargo to the U.S.

1973 - Arab oil embargo on oil exports to the US for siding with Israel in the Yom Kippur War - oil prices rise from $2.90 to $11.65 per barrel Since the balance of power in the market was tipped toward sellers, oil prices could be raised at the discretion of governments, which, if they so desired, could increase the rents from

oil exploitation and force a shift in income and wealth from the consuming countries.

This set the stage for another critical element of the old political economy of oil--the use of the "oil weapon." Thanks to the overall instability of supply, oil became an instrument of foreign policy for oil-exporting countries

Case Study: Lines At The Gas Pumps in the US in 1973

S2 (after P of crude oil increase)

Demand

Price

Quantity

P2

P1

PC

QS QD

Shortage

Q1

S1

1979 -1981 Economic Stagflation

Oil prices rise from $13.00 to $34.00 In the interim, the economy struggled with stagflation, a combination of high inflation and low growth, and the oil price was a primary cause.

1985 OPEC’s Price System Collapses

The netback oil pricing experiment of 1985 marked the end of OPEC’s price control and the beginning of the present era of market-related price formula.

As a result, the market reacted.....

1986 Oil Prices Collapse 1985 The policies of Paul Volcker,

the Chairman of the Federal Reserve would have their effect, and by 1983, oil consumption as a share of the economy had fallen dramatically.

By 1986, it would fall sufficiently to break the will of OPEC, and Saudi Arabia would abandon its role as swing producer, never to return and accepted a production quota. The price of oil fell, and US oil consumption fell back to 2% of GDP.

The “Great Moderation” had begun. Equities began their long bull run, inflation would remain tame, and the developed economies would begin a long period of prosperity.

Until....

1998 The oil crisis was similarly self-inflicted by OPEC

Oil reaches $17 per barrel after increased oil production from Iraq coincided with the Asian Financial Crisis, which reduced demand

After the price collapse of 1998 OPEC became more concerned about its own economic performance.

OPEC rejected the notion that low oil prices were good for everyone.

OPEC began to see

that low oil prices were a subsidy for growth for importing countries and thus decided to shift the burden of price adjustments back onto the oil importing community

2008 Crude Oil Hits $147 per Barrel. High price hikes in oil, historically leads to ....

2010 World Consumption of Oil

2010 The United States consumed a total of 6.9 billion barrels of oil.

That is about 27% of total world oil consumption.19 million barrels per day

History of Gas Prices 1861-2006

2010 BP’s Gulf of Mexico Disaster

British Petroleum’s Deepwater Horizon rig explosion and fire while drilling in Gulf of Mexico.

This was the most catastrophic oil spill in history. It’s effect won’t be known for years