The Pre-Embargo Period
Crude Oil prices ranged between $2.50 and $3.00 from 1948 through the end of the 60s. Oil prices rose from $2.50 in 1948 to about $3.00 in 1957. In 2006 dollars, an entirely different story emerges with crude oil prices fluctuating between $17 and $18 during the same period. The apaprent 20% price increase just kept up with inflation dollars.
From 1958 to 1970 prices were stable at about $3 per barrel, but in real terms the price of crude oil declined from over $17 to under $14 per barrel. The decline in the price of crude oil, when adjusted for inflation, was amplified for international producers in 1971 and 1972 by the weakness of the dollar.
OPEC was formed in 1960 with five founding members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Two of the representatives at the initial meetings had studied the the Texas Railroad Commission’s methods of influencing price through limitations on production.
By the end of 1971 six other nations had joined the group: Qatar, Indonesia, Libya, United Arab Emirates, Algeria and Nigeria. From the foundation of the Organization of Petroleum Exporting Countries through 1972 member countries experienced steady decline in the purchasing power of a barrel of oil.
Throughout the post war period exporting countries found increasing demand for their crude oil but a 40% decline in the purchasing power of a barrel of crude oil. In March 1971, the balance of power shifted. That month the Texas Railroad Commission set proration at 100 percent for the first time. This meant that Texas producers were no longer limited in the amount of oil that they could produce. More importantly, it meant that the power to control crude oil prices shifted from the United States (Texas, Oklahoma and Louisiana) to OPEC. Another way to say it is that there was no more spare capacity and therefore no tool to put an upper limit on prices. A little over two years later OPEC would, through the unintended consequence of war, get a glimpse at the extent of its power to influence prices.
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
Will post Part III - “Middle East Supply Interruptions” tomorrow.