Oil price increases of 2004-2006

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The price of standard crude oil on NYMEX was under $25/barrel in September 2003, but by August 11, 2005, it had risen to over $60/barrel, and out at a record price of $78.40 per barrel on July 13, 2006. Experts attributed the spike in prices to a variety of factors, including North Korea's missile launches, the Crisis between Israel and Lebanon, Iranian nuclear brinksmanship, and reports from the U.S department of energy showing a decline in petroleum reserves.^[1] While oil prices in mid-2006 were considerably higher than a year earlier, they were still roughly $14 from exceeding the inflation-adjusted peak of the 1980 shock, when prices exceeded what would be equivalent to $90 a barrel.^[2]

In the United States gasoline prices reached an all-time high during the first week of September 2005 in the aftermath of Hurricane Katrina. The average retail price was nearly $3.04 per gallon.^[3] The previous high was $2.38 per gallon in March 1981, which would be $3.20 per gallon after adjustment for inflation. In comparison, the average retail price of a litre of petrol in the United Kingdom (gasoline in American English) was 86.4p on 19 October 2006.^[4] This equates to £3.29 per U.S. gallon, or US$6.13 per U.S. gallon.

Contents 1 Supply 2 Causes 3 History 3.1 Spring and summer 2005 increase 3.2 Winter 2005-2006 increase 3.3 Spring and summer 2006 increase 3.4 Late summer 2006 decreases 4 Prices as of 05 April 2007 5 Effects 5.1 United States stock markets 5.2 Asia Pacific region (excludes Australia) 5.3 Sub-Saharan Africa 5.4 Latin America and Caribbean 5.5 Gulf States and Eurasian Arab-Islamic regions 6 See also 7 Notes 8 External links and sources

[edit] Supply

There are a number of reasons for the decrease in oil supply, leading to increased prices. Growing turbulence in the Middle East, the world's largest oil-producing region, has led to decreased exports; some economists attribute the dramatic fall in supply to the war in Iraq, Iran's nuclear program, and instability in Saudi Arabia. Outside the Middle East, other oil producing nations have experienced similar problems, such as the strikes and political problems in Venezuela and potential instability in West Africa.

In view of a looming supply crunch worldwide, terrorist and insurgent groups have increasingly targeted oil and gas installations to maximise both mayhem and political gains. Sometimes, such attacks are perpetrated by militias in regions where oil wealth has produced little tangible benefits for the local citizenry, as is the case in the Niger delta. The terror factor adds an additional premium, including insurance costs, to the price of oil.^[5]

In late August, 2005, Hurricane Katrina crippled the supply-flow from off-shore rigs in the Gulf Coast, the largest source of oil for the domestic U.S. market. Short-term shutdowns because of power outages knocked out two major on-shore pipelines, and at least 10% of the nation's refining capacity was not operating in the wake of the storm. Gas prices in the region, normally 70 cents below the national average, were at $3.12 on August 30.^[6]

World supply (specification) came in at 83 million barrels a day during 2004 in department of energy EIA calculations ([14]). This rate of increase is faster than that of any other date in the past.^{[citation needed]} Despite this increase in supply, prices have continued to rise, leading to increasing discussion of the Peak Oil theory and the possibility that the future may see a reduced supply of oil.

Even if oil supplies themselves are not reduced, some experts feel the easily accessible sources of light sweet crude are almost exhausted and in the future the world will depend on more expensive sources of heavy oil and alternatives.

The short term price of oil is partially controlled by the OPEC cartel and the oligopoly of major oil companies. One other important cause is the United States dollar's slump against the Euro. Since oil is traded in dollars, the price must increase for OPEC to maintain purchasing power in Europe.

[edit] Causes

Labor strikes, hurricane threats to oil platforms, fires and terrorist threats at refineries, and other general problems are not responsible for the higher gas prices. These kinds of problems periodically push price higher, but they are not fundamental or long term enough to cause the large jump in gas price. A more fundamental problem that is causing the price to rise is peak oil has already or will soon be being reached. Not only is there a limited amount of fossil fuel which has been burnt as fuel, but the remaining accessible supply will be consumed more rapidly by a growing, industrializing Third World. What fuel remains will be more difficult to extract since the easiest wells have been tapped. Producing many remaining known reserves is more technically difficult and therefore more expensive, so it is only economically feasible in high oil price environments. The remaining sources have not been discovered or at this point in time are unable to be utilized due to political turmoil or other reasons of instability in the countries of discovery.

Recently, there has been an increasing amount of speculation on the oil market, therefore the increase in price could be partially due to this oil speculation extending into the long term. As mentioned above, speculators foresee increasing demand, decreasing supply, or both, leading to a long term increase in the price of oil. If speculators are wrong, current prices may actually be a price bubble, and the price could thus collapse. A July 14, 2005 Morgan Stanley report^[7] suggests that opinions of the oil market could burst just like a bubble if indications of declining Asian demand continue.

Lack of energy efficiency in general is one other cause that could be ameliorated by increasing the efficiency of factories, homes, transportation and easing the demand crunch by using less energy and more renewable energy.

The United States has the largest demand for oil by far, using around 25% of the world's total oil production and 40% of the world's gasoline production-- with only about 5% of the total world population. Due to depleting domestic reserves (current production is about half as much as at peak in 1971) and expanding demand each year, approximately 2/3 of the oil consumed by the U.S. is being imported from foreign countries. This dependency leaves the U.S. highly vulnerable to any supply disruption.^[8]

[edit] History

[edit] Spring and summer 2005 increase

After retreating for several months during the winter of 2004/2005, prices rose to new highs in March 2005. The price of crude oil on NYMEX has been above $50/barrel since March 5, 2005. On March 16, 2005, the price surpassed the October 2004 high of $55.17 to close at $56.46. In April 2005 the price began to fall, reaching $53.32 on April 9. It then reversed course and headed to an all time high of $58.28, driven mainly by lingering concerns of a prolonged weak dollar. In June 2005 crude oil prices surged to record highs eventually breaking the psychological barrier of $60.

[edit] Winter 2005-2006 increase

On January 17, 2006 crude oil for February delivery rose by $2.38 (3.7%) to $66.30 a barrel. This was the highest increase since early October 2005. Observers believe that violence in Nigeria, and Iran's friction with the West are responsible for this price increase. Continued concerns about Iran raised the price to $68.38 on January 31.^[9] However, due to rising stockpiles of crude oil and an abnormally warm winter, as of February 14, the price of crude had hit a 2006 low of $59.60.^[10]

[edit] Spring and summer 2006 increase

Regular gasoline prices were averaging $3.04/gallon ^[11] across the U.S. in August, 2006. Adjusted for inflation, this U.S. price is the highest in 25 years. The all-time U.S. inflation-adjusted record is approximately $3.20/gallon, set in March, 1981.^[12]

In July 2006, crude oil for August delivery traded over $79/bbl,^[13] an all-time record. The early and mid-summer 2006 runup is attributable to increasing gasoline consumption, up 1.9% year over year in the U.S., and geopolitical tensions as North Korea launched missiles, the Iran nuclear standoff drags on, and Israel and Lebanon went to war. The early spring 2006 runup in prices has been attributed to a number of factors, including continuing supply disruptions from the summer 2005 hurricane season (18% of Gulf Coast supplies were still off-line in spring '06), supply disruptions from the changeover from MTBE to ethanol, lingering concerns over Iran and Nigeria, and anticipation of higher summer demand. Hostilities in Nigeria alone have caused a supply disruption of 675,000 bbl/day.^[14] On August 7, BP shut down its Prudhoe Bay, AK field due to pipeline corrosion, bringing supply down by up to 400,000 bbl/day or about 8% of total U.S. production.^[15]

"Rationing by price" is a reality because near-stagnant world crude supply is not meeting ever-increasing demand, as witnessed by oil shortages in Africa, India, and China. It is possible that the apex of peak oil production has or will soon arrive, and an energy crisis is possible in the U.S., by far the world's biggest oil consuming nation. With approximately 5% of the world's population, the U.S. uses about 25% of the world's oil and 40% of the world's gasoline produced each day -- about 2/3 of which are imports. This dependency leaves the U.S. highly vulnerable to any supply disruption and/or ratcheting up of prices.

The Iranian situation is particularly troubling, as the possibility of an attack on Iran by Western powers looms due to their alleged nuclear weapons ambitions. Such an attack could create serious oil supply disruptions, because Iran sits on the eastern flank of the Straits of Hormuz, the channel in which almost all of the oil from the Persian Gulf flows through on tankers to industrialized nations. Iran could take measures to disrupt that supply if they are attacked. A blockage of the Straits of Hormuz would disrupt a significant percentage of world oil supplies, and could potentially send oil prices to $100.00/barrel^[16] or more, which would put gasoline in the $5.00/gallon range in the U.S.

The higher price of oil substantially cut growth of world oil demand in 2006, including an outright reduction in the oil demand of the OECD^[17]. Larger energy conservation and demand destruction will probably take place only after average U.S. gasoline prices are sustained in the $4.00-5.00/gallon range. This would equate to the psychologically-significant level of $100.00 or more per fillup of an average SUV or full-size pickup truck.

[edit] Late summer 2006 decreases

Oil prices began to decrease at the end of the summer of 2006, closing below US$66/barrel on September 11.^[18] The U.S. national average gas price dropped to US$2.70/gallon in early September, down US$0.11 from the previous week. Some cities were seeing average prices below US$2.40/gallon.^[19]

As of September, prices continue to fall, and the average cost of gasoline per gallon (U.S. nationwide) is below US$2.50. On September 19, crude oil fell US$2.14 to a 6-month low of US$61.66. The recent significant fall in the price of crude oil has led some to speculate that price of gasoline may fall to as low as $1.15/gallon^[20] By October 3, the price closed at US$58.68, its lowest close since mid-February. ^[21] Reasons for the recent price decreases have included easing tensions with Iran, ample supply and the lack of hurricane activity in oil-producing regions of the Gulf of Mexico^{[citation needed]}.

After news of North Korea's successful nuclear test on October 9, 2006, oil prices rose past $60 a barrel, but fell back the next day. Also, for several days in early October, oil prices bounced around the $60 mark on possible news that some OPEC countries would cut oil production by 1,000,000 barrels a day. OPEC had not cut its production since December 2004. However, the oil market has lately seemed to shrug that news off, especially considering that Saudi Arabia said that no such agreement exists (to cut production).

On October 11, oil prices fell below US$58 for the first time since February. Days later, on October 20, a barrel of crude oil closed at US$56.82 per barrel. The same day, OPEC declared that they would cut production by 1.2 million barrels per day in order to arrest the sliding price, the first drop since December 2004.^[22]

[edit] Prices as of 05 April 2007

Contract	PRICE	CHANGE	% CHANGE	TIME
Nymex Crude Future	$64.27	-0.11	-0.17	18:37
Dated Brent Spot	$68.85	+0.76	+1.11	CLOSING
WTI Cushing Spot	$64.38	-0.26	-0.40	CLOSING

[edit] Effects

There is controversy regarding the potential effects of oil-price shocks. Some see these increases in the price of oil leading to a recession comparable to those that followed the 1973 and 1979 energy crises or a potentially worse situation such as a global oil crash. Most economists see this as unlikely, partly because many (particularly European) developed countries have high fuel taxes that could be temporarily (or even permanently) suspended in the event of a dramatic price spike. Nevertheless, that loss of revenue would put a strain on government balance sheets. The American Strategic Petroleum Reserve could on its own supply current U.S. demand for about a month in the event of an emergency, unless it were also destroyed or inaccessible in the emergency. This could potentially be the case if a major storm were to hit the Gulf of Mexico, where the reserve is located. While total consumption has increased,^[23] the western economies are less reliant on oil than they were twenty-five years ago, due both to substantial growth in productivity and the growth of sectors of the economy with little oil dependence such as finance and banking, retail, etc. The decline of heavy industry and manufacturing in most developed countries has reduced the amount of oil per unit GDP; however, since these items are imported anyway, there is less change in the oil dependence of industrialized countries than the direct consumption statistics indicate.

In the United States, for instance, each $1000 dollars in GDP required 2.4 barrels of oil in 1973 when adjusted for inflation this number had fallen to 1.15 by 2001.^[24] For calendar 1981, United States oil consumption was 5,861,058,000 bbl^[25] and GDP was $5,291.7 billion^[26] (chain-volume 2000 dollars), a ratio of $902.86/bbl. In 2005, consumption was 7,539,370,000 bbl and GDP was $11048.6 billion, a ratio of $1465.45/bbl.

Oil's historically high ratio of Energy Returned on Energy Invested continues a significant decline. Despite the rapid increase in the price of oil, neither the stock markets nor the growth of the global economy have been noticeably affected. Arguably, inflation has increased; in the United States, inflation averaged 3.3% in 2005-2006, as compared to an average of 2.5% in the preceeding 10-year period.[15] As a result, during this period the Federal Reserve has consistently increased interest rates to curb inflation.

Economists say that the substitution effect will spur demand for alternate energy sources, such as coal or liquified natural gas. For example, China and India are currently heavily investing in natural gas and coal liquefaction facilities. Nigeria is working on burning natural gas to produce electricity instead of simply flaring the gas, where all non-emergency gas flaring will be forbidden after 2008.^[27][28] Outside the U.S., more than 50% of oil is consumed for stationary, non-transportation purposes such as electricity production where it is relatively easy to substitute natural gas for oil^[29].

The increased price of oil also makes other, nonconventional sources of oil attractive to businesses. The most prominent example of this are the massive reserves of the Canadian tar sands. They are a far less cost-efficient source of heavy, low-grade oil than conventional crude, but with oil trading above $60/bbl, the tar sands have become very attractive to exploration and production companies. Recent months have seen billions of dollars invested in the tar (bitumen) sands.

Prior to the runup in fuel prices, many motorists opted for big, fuel-thirsty sport utility vehicles and full-sized pickups in the United States, Canada and other countries. This trend is now reversing due to sustained high prices of fuel. The September 2005 sales data for all the vehicles vendor indicated SUV sales dropped while small cars sales increased compared with 2004 sales. There is also an ever increasing market for hybrid vehicles (e.g., Toyota Prius & Honda Civic Hybrid) and diesel engine vehicles (e.g., VW TDI & Mercedes-Benz E320 CDI) since they are more fuel efficient; since the 1973 energy crisis, the four-cylinder front-wheel drive passenger car has replaced rear-wheel drive as the preferred layout for energy efficient cars. There is increasing demand of "crossover" sport utilities (i.e., SUVs based on passenger car platforms) which are marginally more fuel efficient than traditionally heavier truck-based SUVs.

For the working class (those who earn a living wage with no benefits), those who have older vehicles averaging less than 20 MPG usually face several alternatives - commuting via public transportation (bus, rapid transit or light rail), carpooling, motorcycling, scootering, bicycling or walking and/or relocation into the inner city if one resides in suburban/exurban areas.

Many businesses are moving away from 24-hour operation (e.g. box stores like Wal-Mart, groceries, convenience stores, restaurants) since the higher prices discourage past lifestyle trends^{[citation needed]}. Some restaurants close their doors at 9 or 11 p.m., and/or neighborhoods known for a 24 hour culture reduce their operating hours^{[citation needed]}. Airlines, trucking and delivery-intensive service businesses (e.g., UPS, FedEx, pizza, flowers, gifts, etc.) are introducing fuel surcharges and/or scaling back their operations in an effort to trim spiraling fuel costs.

Many school districts have been particularly impacted by the high cost of fuel to run their large bus fleets. Child advocates envision a return to the traditional method of walking or bicycling to school, helping to mitigate the growing childhood obesity epidemic in the U.S.^{[citation needed]}

[edit] United States stock markets

The increase in oil prices over two years was mirrored by an increase in stock values in the energy sector. Energy ETFs like XLE and OIH did well during the period, with XLE's price increases from $26 (01/01/2004) to $54 (3/2/2006), and OIH's price increases from $60 (01/01/2004) to $143(3/2/2006).

The value of the stock in companies such as Apache^[30] and Conoco-Phillips^[31] rose sharply during this period. These prices increased more rapidly toward the end of August, particularly after Hurricane Katrina.^[32]

Wal-Mart shares continued their decrease in value that began with the increase in the oil prices. Over two years, stock in Wal-Mart dropped in value by 25% from $60 per share to under $45 per share.^[33] Earlier in August, Wal-Mart announced that higher than expected oil prices cut into the corporation's profits for the 2nd quarter of 2005. Since oil prices after the end of the 2nd quarter continued to rise, 3rd quarter profits from Wal-Mart are expected to be small. Because Wal-Mart's distribution system relies on the customer to drive to a large discount big-box store, increases in the price of fuel might discourage some customers from making the trip as often. Wal-Mart, like all retailers, will also face higher shipping costs to get goods from the factory to the stores. This will likely cause inflationary pressures.

[edit] Asia Pacific region (excludes Australia)

The Pacific rim had been experiencing oil shortages on an ongoing basis prior to Hurricane Katrina. Some countries are increasing production of biofuels to offset the higher costs of oil.

[edit] Sub-Saharan Africa

High oil prices are hurting many countries in Africa, including Zimbabwe, Eritrea and Tanzania. High oil prices have created an oil supply instability, per barrel price instability or both. In some cases this has led to fuel rationing being enacted^{[citation needed]}. Many countries in Sub-Saharan Africa lack the foreign exchange reserves to purchase enough oil products at increasingly higher prices. These nations must resort to limiting imports or rationing their existing supplies.

[edit] Latin America and Caribbean

Venezuela's president, Hugo Chávez, came under increasing scrutiny as he began selling oil at lower-than-market prices to cash-strapped U.S. consumers, as heating oil, and to island nations in the Caribbean such as Cuba.^[34] At the same time, Cuba has experienced electricity shortages

[edit] Gulf States and Eurasian Arab-Islamic regions

Some stock markets in the GCC, notably in Saudi Arabia and Dubai, experienced a boom, roughly 100% index increase in the Saudi stock market.^[35] However, this boom was followed by a market crash. A number of planned projects to stir development, such as King Abdullah Economic City, have been proposed due to $29.3 billion surplus.^[36] On May 1, 2006 Saudi Arabia lowered prices on all hydrocarbon fuels for local consumption; 95 octane gasoline costs 0.65 USD/gallon (fixed price).^[37]

[edit] See also

• Price of oil
• Market Data/Energy at Wikinews
• 1990 spike in the price of oil
• 1979 energy crisis
• 1973 oil crisis
• Energy conservation
• Energy crisis
• Hubbert peak theory
• List of recessions
• Petroleum
• Oil Storm, a mockumentary about a 2005-2006 energy crisis.
• Rimini protocol
• Energy policy of the United States
• Price gouging
• Price Fixing

[edit] Notes

[edit] External links and sources

• John V. Mitchell (Associate Fellow Chatham House, London): A New Era for Oil Prices; 32 Pages, August 2006
• Crude Oil Prices Per Barrel: Former Market Maker Reveals Where Oil Prices May Be Headed by Investment Director Karim Rahemtulla of Mt. Vernon Research
• Oil to $386.57 per Barrel! How derivatives drive oil prices up, despite ample supply in physical oil market, (9 Jun 06).
• Asia/Pacific: Scary Oil Andy Xie, MorganStanley economist for Asia, commenting on possibility that oil is financial bubble, (16 Jun 2005).
• Explanation of pricing mechanism in oil markets
• The real problems with $50 oil, An analysis by Henry C.K. Liu in Asia Times Online, details the economic impact of high oil prices.
• The Association for the Study of Peak Oil and Gas Newsletters
• Oil Prices and the Iraq War: Market Interpretations of Military Developments by U.S. Navy CCC
• Top Saudi Says Kingdom Has Plenty of Oil "261 billion barrels in reserve..."
• Graph of light crude oil price increase
• Oil Industry Combined Graph Graph of oil prices in relation to other fossil fuel prices.
• U.S. DOE EIA retail gasoline prices
• U.S. DOE EIA retail gasoline and diesel prices charts
• an Economist article about oil price inflation and concerns [16] (login required)
• World Bank article which states that US$90 per barrel is the equivalent of the 1980 oil shock (pdf file, page 18, 473kb)
• International Fuel Prices 2007 with diesel and gasoline prices of 172 countries
• EU Oil Bulletin Fuel prices in EU countries updated weekly, includes information on taxes and VAT.