The History and Analysis of Crude Oil Prices Part I

Posted by Oil Tycoon

June 9, 2008

The price of Crude Oil behaves similar to other commodities with wide price swings in times of shortage or oversupply. The crude oil price cycle may extend over several years responding to changes in demand as well as OPEC and non-OPEC supply.

The U.S. petroleum industry’s price has been highly regulated through production or price controls through much of the twentieth century. In the post World War II era, U.S. oil prices at the wellhead averaged $24.98 per barrel (adjusted for inflation to 2007 dollars). In the absence of price controls at the time, the U.S. price would have tracked the world price averaging $27.00. Over the same post war period the median for the domestic and the adjusted world price of crude oil was $19.04 in 2007 prices. That means that only fifty percent of the time from 1947 to 2007 have oil prices exceeded $19.04 per barrel. (See note in box on right.)

Until the March 28, 2000 adoption of the $22-$28 price band for the OPEC basket of crude, oil prices only exceeded $24.00 per barrel in response to war or conflict in the Middle East. With limited spare production capacity OPEC abandoned its price band in 2005 and was powerless to stem a surge in oil prices which was reminiscent of the late 1970s.

The long term perspective

click for larger image

The long term perspective is very simliar. Since 1869, US inflation adjusted crude oil prices have averaged $21.05/barrel in 2006 dollars compared to $21.66 for world crude oil prices.

Half the time US and world prices were below the median oil price of $16.71 per barrel.

If history is a guide, those in the upstream segment of the crude oil industry should structure their business to be able to operate with a profit, below $16.71 per barrel at least half of the time. The very long term data and the post World War II data suggest a “normal” price far below the current price.

click for larger image

The results are dramatically different if only post-1970 data are used. In that case U.S. crude oil prices average $29.06 per barrel and the more relevant world oil price averages $32.23 per barrel. The median oil price for that time period is $26.50 per barrel.

If oil prices revert to the mean this period is likely the most appropriate for today’s analyst. It follows the peak in U.S. oil production eliminating the effects of the Texas Railroad Commission and is a period when the Seven Sisters were no longer able to dominate oil production and prices. It is an era of far more influence by OPEC oil producers than they had in the past. As we will see in the details posted later, influence over oil prices is not equivalent to control.

In an attempt to keep this article manageable and readers interested, I will post the next section “Post World War II” tomorrow.

Part I - The History and Analysis of Crude Oil Prices
Part II - The History and Analysis of Crude Oil Prices
Part III - The History and Analysis of Crude Oil Prices
Part IV - The History and Analysis of Crude Oil Prices
Part V - The History and Analysis of Crude Oil Prices