Despite the zest with which oil is being covered by financial market participants, this is not the first time that oil prices are facing a crisis. A common denominator shaping the oil market in the past 60 years is without any doubt OPEC.
OPEC has 1.2 trillion barrels of proven reserves; equivalent to 70 percent of global reserves of oil. OPEC also supplies 40 percent of daily demand. These figures provide OPEC with considerable muscle if it wants to push. However, over time OPEC has learnt that force ultimately results in unwanted market reactions.
1973
By 1973 OPEC controlled more than half to global oil supply. As a reaction to US involvement in the Yom Kippur War, Arab members of OPEC proclaimed an oil embargo. By the end of the embargo in March 1974, the price of oil had risen from $2.7 per barrel to nearly $12.
1979
In 1979 oil production decreased in the wake of the Iranian Revolution. Global oil supply decreased by only 4 percent, however, panic and hoarding sent prices to $36 from $13. The crisis was reinforced following the outbreak of the Iran-Iraq war in the 1980.
Every action has a reaction
When something has essential value and is overpriced, human beings do 2 things. They look for ways to produce more and the look for ways to use less. The spike in the price of oil led to heavy investment in the oil industry in the Western world.
Within a few years countries like Mexico, Nigeria, and Venezuela expanded production; the USSR became the world’s top producer, the UK turned from a heavy importer to an exporters of oil, and Alaskan oil flooded the Market. OPEC’s golden era ended as quickly as it started. By 1987 the price of oil was back to $13 per barrel.
1990s
In the 1990s China entered the equation. By 1997 China was importing over 1 million barrels a day. By 1999 OPEC agreed with Russia to cut supply. The next oil bull market was on its way. In 1998 the price of oil touched $12. By 2007 oil reached $140, and some analysts were predicting $200.
The new millennium
The financial crisis in 2008 cut short the bull market; however, it was not long before prices were back above $100. And once more the market intervened. OPEC got its worst nightmare; shale and the electric cars seem to be here to stay. Until a few years ago it seems unthinkable but oil is suddenly out of fashion.
This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.