The oil market in 2020 has been turned on its head by two major forces: the price war between Russia and Saudi Arabia, and the sharp global economic downturn spurred by the global pandemic. This has led to a price collapse that, until now, was unthinkable to most oil investors and economists. The price of oil produced in the U.S. turned negative for the first time in history on Monday, April 20. Traders worried about a glut of unsaleable oil sent the price of benchmark West Texas Intermediate (WTI) crude oil plummeting as they paid other parties to take the over-supplied commodity off their hands.
While oil prices staged a modest rebound following the collapse, it’s unclear whether the gains are sustainable. The reason: demand for oil is plummeting faster than supply in a shrinking global economy.
50 Years of Price Turmoil
The latest turmoil marks another dramatic chapter in the history of oil, which has seen wild swings over the span of five decades. Those price moves have been sparked by a long list of seminal events, including the Arab oil embargo of the early 1970s, the First Gulf War in the early 1990s, the Great Recession of 2007-2009and now the 2020 crisis.
The upheaval in early 2020 is unlikely to end soon, even after Saudi Arabia and Russia have belatedly agreed to production cuts. “This is off-the-charts wacky,” observes energy equity analyst Stewart Glickman. “The demand shock was so massive that it’s overwhelmed anything that people could have expected.” Aaron Brady, vice president for energy oil market services at research firm IHS Markit, agrees. “If you are a producer, your market has disappeared.”
Below we look at the major events since 1960 that have shaped the oil markets in the wake of the formation of OPEC. The events show that oil prices during this period have remained highly volatile even as nations have strived for stable and predictable economic growth. The data is based on the price per barrel of West Texas Intermediate Crude (WTI), as compiled by Macrotrends LLC from NYMEX data.
Formation of OPEC
The Organization of the Petroleum Exporting Countries (OPEC) was founded in 1960. The stated objective of member countries was “to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers.” OPEC members function as a cartel, seeking to maximize their oil sales revenue by adjusting output in light of prevailing world economic conditions and demand.
But prices have been anything but stable. Initially, OPEC did not wield its full pricing power as a cartel in the 1960s. Oil prices were relatively stable until the 1970s amid U.S. oil companies’ continued dominance of global crude markets, and due to plentiful U.S. oil reserves.
Arab Oil Embargo
In retaliation for U.S support of Israel in the Yom Kippur War of 1973, oil-producing Arab nations cut off crude exports to the U.S. As a result, the price of crude oil soared from about $24 to $56 per barrel by early 1974.
The pro-Western Shah fled Iran in January of 1979, with the anti-Western Grand Ayatollah Ruhollah Khomeini emerging as the leader of an Islamist government that takes control. A sharp drop in Iranian production as a result of the political unrest sent crude oil prices even higher than during the Arab oil embargo. Oil jumped from about $56 per barrel to over $125.
Reagan Deregulates U.S. Oil Industry
Shortly after taking office in 1981, President Ronald Reagan signed an executive order abolishing price and allocation controls on domestic oil and gasoline production and distribution. The price of crude fell from almost $113 per barrel in January 1981 to about $26 by mid-1986.
First Gulf War
In August 1990, Iraq invaded Kuwait, sending the price of oil soaring from about $34 per barrel to nearly $77. After a U.S.-led military coalition succeeded in removing Saddam Hussein’s Iraqi forces from Kuwait in early 1991, the price fell to about $37.
The 2008 Oil Shock
In 2008, a series of events that cut global production sharply led to a significant spike in oil prices. Venezuela cut off sales to Exxon Mobil in a legal battle over nationalization of that company’s properties. Exports from Iraq had not recovered from the most recent war in the region, and labor strikes reduced production in Nigeria and the U.K.’s North Sea oil fields. Militants blew up oil facilities and pipelines in Nigeria. Mexico endured a severe decline in production from one of its major oil fields.
From about $118 per barrel in December 2007, the price of oil rose to above $165 by mid-2008. The spike capped a long uptrend in oil’s price since bottoming at about $28 in late 2001 in the aftermath of the 9/11 terrorist attacks on New York’s World Trade Center and the Pentagon in Washington.
Recession and Financial Crisis
The second half of 2008 was marked by a deepening economic recession, accompanied by a severe financial crisis. Oil sank to the low $50s per barrel by January 2009 before rebounding to nearly $95 by year-end as the global economy recovered.
The U.S. Shale Oil Revolution
U.S. oil and gas output increased by about 57% over the past decade until early 2020 as advances in fracking technology unlocked vast reserves in various areas of the country. Fracking returned the U.S. to the status of one of the world’s biggest oil producers, reducing U.S. demand for imported oil and turning the U.S. into a net exporter. At its peak, the Permian Basin region of Texas and New Mexico has produced more crude oil than most OPEC nations.
Partly as a result, the price of crude oil fell from about $87 per barrel in early 2010 to just under $51 by January 2020.