Crude Oil Board

OIL: Its Not All About Supply
Kanti Mohan Pandit
CEO, Center-Business Intelligence & Forecasting

Oil price is a subject of great interest to all. When oil price becomes volatile it disturbs many economies and may even threaten political entities. There came three major oil shocks in the oil market, one in1973, in 1979 and finally in 2008 that changed the entire equation in the contemporary economy. The first ever known oil upheaval that got registered in the economic history is in 1859 when crude oil price hit the peak of $16 per barrel that was extremely high from that time standard. The price did not stay at that level for long and in the next year price reduced to $9.59 per barrel. From here the price nosedived to $0.49 per barrel. What led the price to be so volatile? Oil industry was at nascent stage that time with new drilling in Pennsylvania. Demand for oil was very high but uncertain. Supply was very uncertain and inelastic. The market was fragmented and monopolized. Slight variation in demand supply positions fomented the oil problem with shooting up in oil price.
In 1970s OPEC came into the picture of oil market to control the supplies and aimed to leverage the price. In the uncertain environment of world of war between Israel and Arab countries the oil price moved about four times from $3 per bbl in 1972 to $12 per bbl in 1974. The period of 1980s was also marked with extreme price volatility when oil price from the bottom of single digit to $34 per barrel by March 1981. The extreme movement of prices is so adamant that efforts to control it by controlling supplies hardly respond.
OPEC made their efforts to stop a falling price in1997 did not respond and the market crashed. In 1997 crude oil price had a sudden halt and reversed. In 1997 two important events took place. South East Asia faced acute financial crisis with reduction in oil consumption and OPEC countries instead of curtailing quota increased it by 2.5 million bbl per day. The action had unexpected impact on the price and that fell down to a low of $ 8 per barrel.
During 1986 when crude oil price continued falling from $24 in 1985 to sheer $9 per barrel in 1986 July the efforts of OPEC to stabilize prices utterly failed. The main reason was the overruling the dictate of OPEC by the members to control production and they produced beyond the quota. In the new millennium when the world economy was growing rapidly from 2002 onward crude oil prices too increased rapidly to unbearable level by 2004. Successive efforts of OPEC to increase quota of production to stabilize the price could not materialize and price went on increasing till touched the peak of $46 per barrel in 2004. Barring a small gap oil price continued increasing to touch two peaks of $147 and $100 in the span of 3 years. OPEC or non OPEC countries remained onlookers with pious wishes to stem the prices and could not do anything.
When countries connected with oil supply and demand go uncertain caused by political, social or economic reasons oil market goes volatile with oil price up trends and downtrends. Supply efforts to stem price hardly respond until it takes its toll and completes its cycle.