History of Oil Prices

By Tomasz Wisniewski|

Published: May 11 2021, 11:29 GMT+0

History of Oil Prices

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Oil serves as a lifeblood for almost every nation now. In fact, if we count in the refined oil products that take part in production of plastics, paints, fertilizers and even medicine then it becomes obvious that oil essentially underpins modern society. The world as we know it today began gradual dependence on oil in the mid-1950s. However, amid the pandemic-induced demand crash of 2020-21 left the petroleum and oil industry in an existential panic. While long-term prospects for the oil industry remain uncertain, we decided to illustrate the path that oil underwent since the very first drilling until now. 

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The 19th century was a period of significant advancement and accelerated industrialization. The industry of iron and steel was producing new materials for construction, railroads were built massively connecting the states and counties and the oil was discovered that provided a novel source of fuel. Nowadays, there are more than 9000 oil and natural gas production companies only in the United States. Oil production numbers are record-high at the moment, producing over 95 million barrels per day. The Oil industry has always had a massive impact on the global economy. Below we present you the history of oil prices with illustrated points to demonstrate how the oil industry has been developing over time. 

Edwin Drake drills for oil in Pennsylvania 1859

US oil drilling history begins with Edward Drake, the founder of the hydrocarbons industry in the late 1850s. As a railroad engineer at Seneca Oil Company, Drake was responsible for searching oil deposits in Titusville, Pennsylvania. After some time, Edward decides to create a team of drillers and buy the necessary equipment to start oil-drilling operations on his own. His unique drilling method involved driving an iron pipe within the ground, into the underlying bedrock. The method actually allowed him to drill without collapsing the hole. 

It was in 1859’s August that the well of Drake, or more famously called Drake’s Folly by the local community began to extract oil with success. The Drake’s Folly was pumping around 25 oil barrels per day which were mainly sold for heating and lighting. Some claim that back then the collected oil was originally stored in a bathtub.

Standard Oil is broken up in 1911

Standard Oil has been the largest oil-producing corporation ever established, set up by John D. Rockefeller and Henry Flagler. If the company still continued to exist as a single entity it would be the largest corporation worldwide and would be worth over 1 trillion US dollars. Based in Ohio, the company developed to have a strong impact on the American oil industry in 1870. It was controlling over 90% of oil production and 85% of oil product sales in the region during the early 20th century. 

However, soon the Supreme Court of the United States decided that the corporation was trying to monopolize the market of the oil industry. Therefore, the board of directors of Standard Oil was obliged to split the company into multiple competing firms in 1911. At that point, the average annual price of oil was $15.19 per barrel. 

Oil Embargo, 1973

Organization of Petroleum Exporting Countries (OPEC) was a union of oil-producing countries worldwide. In 1973, as the Arab-Israeli War broke out, the US supplied the military of Israeli that caused Arab members of the OPEC to impose an embargo. The embargo was placed against other Israeli-supporting countries as well, such as Netherlands, Portugal, and South Africa. The embargo did not only ban the petroleum export to the named countries, but also started introducing cuts in oil production. In 1973, oil prices were extremely volatile, at one point quadrupling from $2 up to $8 in just a 6 month period and eventually spiking up to $12.52 in 1974.

Oil Crisis: The Iranian Revolution, 1978-79

The world was about to experience another oil crisis in 1978-1979 as the Iranian Revolution has questioned the supply of oil. The revolution was cut short when Shar Mohammad Reza Pahlavi’s royal reign failed and Sheikh Khomeini replaced him in 1979. During the turmoil, the total production of oil in Iran fell by 4.8 million barrels per day. However, the shortage of Iranian oil production was not the sole reason behind the panic that caused the spiking prices, it was rather a fear of further disturbances that led to speculation on the oil prices. As a result, oil hit double the amount of its price in 1980, climbing up to $21.57 as the average nominal price per barrel. 

Oil Price Shock of the ’90s

OPEC countries once again experienced a great disruption during the Iraqi invasion of Kuwait, Saddam Hussein’s another attack on the OPEC members in the summer of 1990. The official statement of Iraq blamed Kuwait for stealing its oil via slant drilling, however, many suspects that true intentions were further complicated. During the Iran-Iraq War in 1980-88, Kuwait lent Iraq over 14 billion USD which was never repaid by Iraq. Furthermore, Iraq claimed that Kuwait overproduced oil, caused price drops, and hurt Iraqi oil profits significantly. The situation forced the price of oil to hit $46 per barrel, but as soon as the US got involved in the conflict, successfully combating Iraqi forces, oil prices began to stabilize. In 1986, the average nominal price was $21.73 per barrel.

Energy Crisis of 2000

The beginning of the 21st century pressured the oil industry greatly with the tensions in the Middle East, the USD currency struggling with its value, rapid industrial development accompanied with increased demand, dwindling oil reserves, and price speculations on oil. The oil crisis was worsened by various geopolitical and natural disasters including Israel-Lebanon conflicts, missile testing in North Korea and Iran’s nuclear plans, hurricanes, and finally the global financial crisis of 2008. The oil prices were increasing sharply just before the economic crisis of 2008. As a result of economic hardship, the demand for oil and energy, in general, began to fall significantly, which caused oil prices to collapse from $147 to $32 in just 7 months. 

2011 Oil Price Shock

By early 2011, demand for oil was rapidly increasing in the emerging markets, especially in the Asian regions. Not to mention the risks of oil supply shortages affecting the prices, political instabilities outbroke in several crucial places around the globe. Egypt, Libya, Yemen, and Bahrain were all experiencing political turmoils in February of the same year, pushing the prices of oil up to $95 per barrel. Libya was hurt the most and had to cut oil production that further drove prices of oil to the top at $103. 

The panic began as the public expected more instabilities in oil-producing countries. Additionally, demand for oil was growing in emerging markets, notably China and the Middle East, further driving crude oil prices higher. However, the situation improved quickly during the second half of the year as Libya returned to producing oil, and oil output from Saudi Arabia increased greatly. The average nominal price for 2011 remained at $102.58 per barrel of oil. 

Lasting scars from the pandemic

The oil industry has finally been at peace since 2012 until the very recent events induced by the COVID-19 pandemic. As most of the regions around the globe announced lockdowns forcing people to remain indoors and the travel restrictions and limits were introduced, the demand for oil began to decrease at an incredible rate. The U.S. Energy Information Administration reported U.S. drivers consumed the least gasoline in 2021 for the last 30 years. The decrease in the consumption of crude oil was approximated at 27 million barrels a day. 

The industry was especially threatened by the dual crisis that emerged in the first half of the year – Texas cold spell and the Suez Canal blockage. In order to save the prices of oil, the OPEC meeting was held eventually deciding to cut oil production by 10 million barrels a day. However, the prices are still very hurt with the expected average nominal price at $41.96 per barrel.