Crude Oil Prices In The Market

Crude oil prices behave much as any other commodity with wide price swings in times of shortage or surplus. The crude oil price cycle may extend over several years responding to changes in demand as well as OPEC and non-OPEC supply. Reflecting increases in consumer demand for petroleum products, world crude oil demand has been growing at an annualized compound rate slightly in excess of 2 percent in recent years. Demand growth is highest in the developing world, particularly in China and India (each with a population in excess of 1 billion) and to a lesser extent in Africa (0.8 billion) and South America (0.35 billion) (OPECS symbolic move). Where high demand growth exists it is primarily due to rapidly rising consumer demand for transportation via cars and trucks powered with internal combustion engines. For economic and political reasons, this high demand growth did not exist in most of the developing world even a decade ago. (Oiling or Spoiling)

OPEC was formed in 1960 with five founding members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. 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. (OPECS symbolic move)

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. In March 1971, the balance of power shifted. That month the Texas Railroad Commission set peroration 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 (A titanic struggle). A little over two years later OPEC would through the unintended consequence of war get a glimpse at the extent of its ability to influence prices. (The coming energy crisis)

The price of oil was weaker in the 1990s which partly reflected a weakening of OPEC's bargaining power. In 2001, the eleven members of OPEC accounted for only just over a third of total oil production worldwide. Oil producers have often been torn between the desire for higher prices and the need to maintain their own energy revenues. Choking off demand in the importing countries has largely lost its allure for many OPEC producers (The coming energy crisis). The fact that they are oil exporters is often the only thing these countries have in common. Producers such as Venezuela and Indonesia are relatively poor countries with large populations. At the other extreme, Saudi Arabia, the most important exporter, is a swing producer, able to vary production levels more easily than most and thus has a crucial role. (Oiling or spoiling)

Analysts attribute the surge in demand to a surge in consumption triggered by the US economic recovery and China's economic boom. The IEA added that the effective spare capacity of oil producers' cartel OPEC had narrowed to about 600,000 barrels a day in July, following recent efforts to keep pace with rising demand (China syndrome).

The IEA, set up thirty years ago to advise oil consuming nations, said world demand would rise by a further 1.8 million barrels next year to 84 million barrels a day. It added that OPEC's production capacity would rise by 400,000 barrels a day this year, and by a further 700,000 barrels a day in 2005. (The coming energy crisis)

The situation should improve this year and next. Two new oilfields in Saudi Arabia will be ready to pump 800,000 bpd by the end of September, according to the kingdom's oil minister. These new developments were commissioned to replace ageing facilities elsewhere, the retirement of which may now be postponed. Both Kuwait and Algeria will also inflate OPEC's supply cushion by the end of the year, according