Behind the price of oil - Financial Times – Paid Post by BP

Oil: Spot crude prices

Source: The BP Statistical Review of World Energy

Careful Judgement

There are caveats to drawing close parallels between the present and previous oil cycles. Professor Paul Stevens, an oil industry expert at Chatham House, argues that cycles should be treated with caution: “It’s fairly easy to predict trends. If you’re really smart you can predict bends in trends. But what you can’t predict are discontinuities and if you look at the history of energy markets they are dominated by discontinuities – oil price shocks, technological shocks – and those really are unpredictable.”

He believes those who suggest that big cuts in spending on exploration are set to produce a “supply crunch” may have missed one such discontinuity. “The major change this time is shale technology and in particular the way it affects the lead time on oil projects. A conventional oil project has lead times of five to 10 years and sometimes more; unconventional oil has a lead time of a matter of months.” This suggests that future oil supply may be able to respond more quickly to rising demand and therefore militate against a sudden, sharp rise in prices.

Future oil supply may be able to respond more quickly to rising demand and militate against a sudden, sharp rise in prices

Understanding oil market cycles takes a keen awareness of both the familiar influences and the unpredictable “discontinuities” that mean each will resemble and yet differ from previous ones. BP’s Statistical Review of World Energy provides 65 years of valuable data that can help these judgements be made. Ultimately, this is the background against which energy producers and governments must attempt to resolve the so-called “energy trilemma” in order to maintain sources of supply that are secure, affordable and sustainable.

A short history of oil cycles

Over the decades since The BP Statistical Review of World Energy made its first appearance, the oil market has experienced a succession of sudden swings – all with different causes

Arab members of the Organisation of the Petroleum Exporting Countries (OPEC) imposed an embargo on oil sales to countries supporting Israel in the Yom Kippur war. The price trebled rapidly from $20 to about $60 as a result.

Iranian oil output plunged during the country’s revolution, then the outbreak of the Iran-Iraq war in 1980 led to further big falls in exports from the region. The price peaked at more than $100 a barrel.

Oil prices dropped as low as $30 as new sources of supply from the North Sea and Alaska reached the market, coinciding with weak demand caused by a global economic slowdown. Saudi Arabia abandoned attempts to support the oil price by cutting its production and increased output to maintain its market share.

During the Asian financial crisis, which included a series of sharp currency devaluations across the region, oil prices fell to levels not seen since the early 1970s. They recovered quickly as the crisis faded.

Having risen strongly through the early 2000s, mainly due to increasing demand from China, oil prices dropped sharply as demand briefly collapsed at the height of the global financial crisis. They quickly recovered to trade above $110 a barrel.

Steadily rising US shale oil production coupled with slowing demand from China saw the price tumble from more than $100 to below $30, before staging a partial recovery. In the absence of an agreement on co-ordinated production cuts among OPEC members, Saudi Arabia maintained output to defend its market share. Iran – returning to the market after the lifting of sanctions – stepped up its exports.