Crude Oil Prices 1970 - 2000
October 2010
Overview
Many of the traditional fundamental factors described above explain crude oil price movements over the 1970 – 2000 period. The average annual West Texas Intermediate (WTI) crude oil price over the period, in both nominal and real (2008$) U.S. dollars, as well as factors that influenced the direction of crude oil prices during this period are shown on figure 1. Note that these are average annual prices, and monthly prices displayed a greater range of values – greater fluctuations.
Figure 1
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Energy analysts sometimes refer to oil’s “golden age” as the 100-year span between 1874 and 1973, when the annual real price of crude oil (in 2009 dollars) was relatively stable, trading for most times within a narrow range of $10 to $30 per barrel.
This period of long term stability ended in the 1970s because of major geopolitical events. These included the Arab oil embargo in response to the Yom Kippur War in October 1973, the Iranian Revolution (1979) and the Iran-Iraq War that started in 1980. The decade was characterized by reduced oil production in non-OPEC countries, which enhanced OPEC’s ability to dictate prices by coordinating their oil production policies. “At the peak of its influence, OPEC countries controlled about 55% of world crude production (1973-1974), and maintained over 50% control throughout the 1970s”12. From 1973 to 1980 the crude oil price rose (in 2009 dollars) from $20 US per barrel to almost $100 US per barrel.
In the early 1980s, a recession reduced crude oil demand, and this had a significant downward impact on oil prices. Higher prices during the previous decade had led to increased fuel efficiency13, further depressing demand, and had also created an incentive to find and develop non-OPEC production. This fact taken together with technological advances (particularly in terms of offshore production in the North Sea, and production from Canada’s oilsands) were keys to higher non-OPEC production. In sum, all these developments left OPEC with an ever-shrinking share of the world crude oil market. By the end of the decade, prices had declined steadily to below $40 US per barrel.
The 1990s brought the first Gulf war (1990-1991) which had an impact on supply and prices. Despite the low prices for crude oil for most of the 1990’s, there was little discipline within OPEC to try to raise prices. OPEC’s lack of action kept oil prices low for an extended period. However, when crude oil prices plummeted to $10 per barrel following the Asian financial crisis (1998), OPEC instituted a series of production cuts, starting in late 1999. This allowed OPEC to regain control over the oil market, and this began to result in higher oil prices.