Oil_and_Gas_Prices

Oil and Gas Prices Steven Donaldson COM 150 December 18, 2011 Lacey Thompson Oil has been used for over four thousand years with the use of asphalt in Babylon for construction. In more modern times, the internal combustion engine has brought many new uses of oil. Oil is both bought and sold in many countries around the world, many countries consuming more than they produce. As the years went by, organizations such as OPEC, Organization of Petroleum Exporting Countries, were formed and have controlled the price of oil. When a drop in oil production starts to affect the ability to supply the demand, such as when Iraq invaded Iran, the prices of oil will rise. Because of the changes in demand for oil and conflicts in oil producing countries, oil prices have risen over the years. Oil prices continue to rise because of the slightest change in demand and conflict in countries which produce the World's oil. In 1970 a barrel of crude oil was $2 and hit a record high of over $140 a barrel in 2008. As of today the average price of a barrel of crude oil is $96 to $106, this price is affected with the slightest change in demand. In 1972 crude oil was $3.50 a barrel and by the end of 1974 it had gone up to $12 a barrel. The cause of this sudden change is the Yom Kippur War, which began on October 5, 1973 when Egypt and Syria attacked Israel, and the United States and many other western countries supported Israel. This support caused several Arab countries that exported oil to impose an embargo on counties supporting Israel. "Any doubt that the ability to influence and in some cases control crude oil prices had passed from the United States to OPEC was removed as a consequence of the Oil Embargo" (Williams, 1996-2011). With the oil embargo of late 1973 over oil prices were steady at around $14 a barrel. The revolution in Iran between 1978-1979, followed by the invasion of Iran by Iraq, caused a production loss and a price spike of oil. The revolution in Iran caused a production loss of two and a half million barrels of oil a day. The production of oil in Iran was soon back up to four million barrels a day shortly after the revolution. The effects of the loss of production on worldwide oil prices was limited and looked to be short lived. When Iraq invaded Iran in 1980 the production of the two countries combined went down to only a million barrels of oil a day, a loss of oil production by six and a half million barrels a day. "Over three decades later Iran's production is only two-thirds of the level reached under the government of Reza Pahlavi, the former Shah of Iran" (Williams, 1996-2011). Because of the loss of 10 percent of the worldwide oil production, oil went from $14 a barrel in 1978 to over $35 a barrel by 1981. With oil prices almost three time what they were in 1973 after the invasion of Iran, new sources of oil were found to meet the demand and the price of oil declined from 1982 to 1999. The surging prices of oil between 1978 and 1981 caused consumers to react in many ways that caused crude oil prices to go down. New homes received better insulation, old homes were made better insulated, and industrial processes as well as automobiles became more energy efficient. These high prices for oil spawned new exploration for oil and non-OPEC production was up six million barrels of oil a day from 1980 to 1986. "The combination of lower consumption and higher OPEC production sent prices into a downward spiral" (Williams, 1996-2011). With a higher supply and a lower demand crude oil was less than $10 a barrel by mid-1986. The uncertainty with the invasion of Kuwait by Iraq in 1990 caused a small spike in the price of crude oil, but soon after the Gulf War oil prices steadily declined to reach a new low in 1994 since 1973. Thanks to the Asian Pacific region booming and a strong United States economy, oil consumption from 1990 to 1997 was up by over six million barrels a day. This increase in consumption and the reduction in Russian oil production of five million barrels a day, oil prices began to recover until 1998 when Asian consumption declined but oil production increased. By the middle of 1999, thanks to a cut in OPEC production, oil prices had recovered to $25 a barrel. Just as oil prices were stabilizing at $25 a barrel after the production changes by OPEC, conflict around the world triggered oil prices into a gradual increase starting in 2000. Since the United States economy was growing and problems with Y2K were minimal, oil prices in 2000 saw a post 1981 high. In the wake of the terrorist attack on the United States in 2001 oil prices went in to a downward spike, but with production reductions oil prices were back to $25 a barrel by March 2002. By the end of 2002 OPEC production was restored, but the United States oil inventories were at a 20-year low and problems in Venezuela caused a strike at PDVSA, a state owned energy company in Venezuela, leading to production of oil to plummet. These factors and with the loss of production of oil in Iraq the spare oil production capacity by 2005 was down to under one million barrels a day, which was not enough oil to supply an interruption producers from OPEC might encounter. "In a world that consumes more than 80 million barrels per day of petroleum products that added a significant risk premium to crude oil price and was largely responsible for prices in excess of $40-$50 per barrel" (Williams, 1996-2011). With a weaken United States dollar and Asian economic growth added to lowering oil inventories from many oil consuming countries the price of oil hit an all time high of over $145 a barrel in July 2008, but with the demand for oil going down and a recession closing in the price of oil plummeted to $40 a barrel by December 2008. With a cut in production in 2009 and Asian oil consumption rising, the price of oil has risen to around $96 to $110 a barrel as of November 2011. With oil prices over $110 a barrel the cost of gasoline is high all over the world and has changed with the cost of oil over the years, but also consumers wallets paid to help the environment. Gasoline is made by using hydrocarbons obtained from crude oil via distillation in oil refineries. In 1950 a gallon of gasoline was 27 cents and by 1969 had only risen to 35 cents a gallon, but by 1974 was 53 cents a gallon. In 1974 the Clean Air Act Amendments was introduced, this required automobiles and gas companies to meet a minimum octane of 87 and limit lead to a gallon of gasoline to 4.0 grams. "Since lead had to be replaced by more and more blended additives to maintain an 87 octane in its absence, it cost the oil refineries more money to produce automotive fuel thus driving up the prices considerably" (Bellis, 1999-2008). When the cost of a barrel of crude oil rises the cost to produce gasoline does as well, so by 1982 gasoline was up to $1.19 a gallon because of higher oil prices and restrictions now required only 1.1 grams of lead a gallon. By 2004 a gallon of gas was to $2, but by the summer of 2008 gasoline in some places was $5 a gallon but has come down to $3.20 to $4 a gallon as of November 2011. Since oil is traded in United States dollars, the weaken dollar effects the cost of oil and as conflicts around the world in oil producing countries drive the cost of oil up the cost to produce gasoline is affected. Just as the cost of gasoline is affected by the change of oil prices, so do the many things used each day that are made from oil and make life easier. "It's enough to make you wonder how we ever did without it -- and what else it's in" (O'Neill, 2010). Petroleum is used to make many things like the makeup women wear, the clothes on our backs, all plastic products, and of course the gasoline to run our cars and machines. These products make life easier for many people to look better and gasoline helps us to go where we want. Plastics are used in most everything and the things we use each day make things convenient, but plastics also help save lives with the many ways it is used in the medical field like in respirators, incubators, and many others. When the cost of oil goes up because of a conflict or an increase in demand it will affect anything made from it. The most obvious example would be gasoline, which is now over $4 a gallon in some places and for many people is a major cost of living. A less obvious example would be the plastic we use for almost everything, as the cost to make plastic goes up so will the cost to buy the items made from it. When the cost of gasoline at the pump goes up or the cost of makeup in the store increases many see it as a cost of living, but the things that cause a loss of oil can have a big effect on the price of things we use each day. Disasters involving spilled oil effect the world in both loss of supply and the environment in which they happen. In March 1978, the tanker Amoco Cadiz, unable to halt the ship when its rudder was damaged, ran aground near Portsall, France causing 1.6 million barrels of oil to spill and affecting the coastline for 125 miles. In June 1979, the exploratory oil well Ixotoc 1, owned by Pemex, 600 miles of the coast of Texas suffered a blowout spilling 3.34 million barrels of oil. "The US government took two months to contain the spill and was able to protect major inlets. Pemex is owned by the Mexican Government, has refused US requests to pay damages to compensate for the clean-up costs" (Toscano, 2010). In August 1983, the Castillo de Bellver, a Spanish tanker, caught fire and exploded spilling 1.8 million barrels of oil near South Africa 70 miles off the coast and affected many marine animals. In February 1983, the Nowruz platform was hit by an oil tanker and tilted by a 45 degree angle, 1.9 million barrels of oil were spilled when the supports were crippled by wave action. In January 1991, Iraqi forces invading Kuwait intentionally opened oil pipelines and dumped crude oil from tankers to prevent the landing of US Marines and caused 5.7 million barrels of oil to spill in to the Persian Gulf. In April 1991, the M/T Haven spilled a million barrels of oil when an explosion, causing 100 meter high flames, occurred close to an offshore loading platform near Genoa, Italy, affecting the coast of France and Italy in the Mediterranean for the following decade. In May 1991, the ABT Summer, a Liberian super tanker, spilled 1.92 million barrel of oil 900 off the coast of Angola caused by an explosion killing the five members aboard and sinking three days later. This loss in oil causes the supply to go down which in turn drives up the price not to mention the environmental impact they cause on the areas they happen. Oil spills and other loss of oil over the years have affected the demand and supply for oil many times, but conflict in the oil producing counties of the world also affect the supply by cutting the production at those times. The top five oil producing counties of the world are Saudi Arabia, Russia, the United States, China, and Iran. "Saudi Arabia has an oil-based economy with strong government controls over major economic activities. It possesses about 20% of the world's proven petroleum reserves, ranks as the largest exporter of petroleum, and plays a leading role in OPEC" (The Central Intelligence Agency's Office of Public Affairs, 2011). Saudi Arabia is the leader in oil reserves with 262,600,000,000 barrels of oil followed by Venezuela, Canada, Iran, and Iraq as the top five counties with oil reserves. The worldwide production was down by 10 percent when Iraq invaded Iran in 1980 and in 2002 oil production plummeted in Venezuela with the strike at PDVSA. Many oil consuming countries produce some of their own oil and demand for that oil has changed over the years. The top five oil consuming countries of the word are the United States, the European Union, China, Japan, and India. "Imported oil accounts for about 60% of US consumption" (The Central Intelligence Agency's Office of Public Affairs, 2011). This means that even though the United States produces 9,688,000 of oil a day it has to import over 10 million barrels more to meet the amount it consumes. Of the remaining four countries Japan imports the most of their oil at 99 percent and India imports 96 percent of their oil. The European Union, which is made up of 27 countries in Europe, imports 63 to 64 percent of their oil and China imports 52 percent of the oil they consume. The demand for oil has changed over the years with the booming Asian economy increasing demand at times and recessions reducing it at others. When the demand for oil does not go down but the supply of that oil does, the price of oil goes up. Conflicts that erupted in oil producing countries, such as the invasion of Iran by Iraq, lower or even stop the production of oil. Oil spills over the years cause the supply of oil to temporally go down, sometimes by millions of barrels. Since many things depend on oil, such as plastic for a very many things and gasoline for cars and machines, oil is important to everyone. Changes in the production of oil can control the price, but at the same time when the demand changes the price can rise or fall, depending on the supply. With many things to affect the price of oil, oil prices will continue to rise and fall as history has shown. References Bellis, M. (1999-2008). History of gasoline. Retrieved from http://www.americanautoshipping.com/history-of-gasoline.asp The Central Intelligence Agency's Office of Public Affairs. (2011). World Factbook. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/index.html O'Neill, M. (2010). 50 Surprising fashion and beauty products made from oil that you probably use everyday (Even if you're green). Retrieved from http://www.treehugger.com/style/50- surprising-fashion-and-beauty-products-made-from-oil-that-you-probably-use-everyday- even-if-youre- green.html Toscano, P. (2010). The World's Worst Oil Disasters. Retrieved from http://www.cnbc.com/id/36851250/The_World_s_Worst_Oil_Disasters'slide=1 Williams, J. L. (1996-2011). Oil price history and analysis. Retrieved from http://www.wtrg.com/prices.htm