Energy Oil

From December 26th 1978 to Marth 4th 1979, Iran, the second largest oil export country over the world stopped its oil export due to the Iranian Revolution.  

Superficially, the second oil crisis is only caused by the stop of Iran's oil export. In fact, hidden behind the deeper reason is the results of long-term and short-term factors.

   The strategic Petroleum reserve plan implemented by the western countries increased the intensity of the oil crisis. The first oil crisis, the western countries in order to increase and oil producers in the energy market game chips, to strengthen the status of the consumer countries, have developed a strategic oil reserve plan. But before the second oil crisis, the strategic oil reserve plan of all countries has been slow progress. After the Islamic Revolution broke out in Iran, western countries have accelerated the pace of implementing strategic oil reserves because of the fear that they could get a stable oil supply from the Persian Gulf region. Major oil companies are hoarding crude oil for commercial interest, making it more than normal. Individual consumers have also been added to the "rush to the oil" ranks, but also exacerbated the shortage of oil and oil prices rise. Oil companies and individual consumers buying behavior, making the supply of crude oil in the supply reduction of about 3 million barrels per day, in addition to an increase of 3 million barrels of demand". That is to say, buying, hoarding to make the actual shortage of oil doubled, and thus further exacerbated the market tension. 1980 January western countries of the total oil reserves reached 53 billion barrels, equivalent to almost half of the organization of the Petroleum Exporting Countries (OPEC) 1979 annual oil production, and the 10 billion barrels of reserves is increased in 1979, a year, more than the small oil producing nations Qatar exploitable oil reserves. From the importer, rising oil prices make the purchase of oil, which increased the purchase and hoarding impulse, and promote the rise in demand. Large-scale implementation of the strategic oil reserve plan and Iranian oil supply suspension. The combination of the two intensifies the shortage of oil and the market worried about the lack of oil, people on the market missing oil feeling more and more intense, oil speculation is also increasing rapidly.

Iran's "Islamic Revolution" disrupted the international oil consortium to obtain the market structure of Iran oil supply under the contract, the market order to obtain a stable supply of oil to rely on contracts tend to collapse. In normal market conditions, major oil companies through and the oil producing countries signed long-term supply contracts to obtain the stable oil supply, they in addition to its own refinery and distribution network with oil, can also control their excess crude oil sold to third parties. After the outbreak of the revolution in Iran, Iran canceled the long-term purchase contracts with the international oil consortium. At the same time, Nigeria and other oil producing countries government after the oil industry nationalization or in advance to take over the right to operate its oil industry, give priority to the supply of domestic state-owned oil company, the western oil companies oil sources is greatly reduced. Battered Iran international oil consortium of British Petroleum Company and Shell oil company cited legal "force majeure" cut to third parties (mostly independent refiners in Japan) the amount of oil provided. These lost steady supplies of oil refinery operators in order to meet the need, to the spot market to competition in the market price to buy limited crude oil, making the spot market oil surge in trading volume, and push the oil spot prices continue to rise. Because there is a close relationship between the spot market prices and price, rise in the spot price of oil increased and the reasons of the oil producing countries to increase official. Also because of concerns about Iran's future political situation of stability and its foreign policy may further affect the oil supply, oil importers began to buy oil, an adequate supply of oil and the price is not is the primary factor that they consider, they used a variety of methods to desperately to get the oil, and continue to push prices higher, market appeared a typical seller's market. Some desire to profit from the market volatility of oil speculators began to involved, which further aggravated the market speculation, many speculative activities actually occurs when there is no second-hand goods. As a result of oil demand and oil prices both rose sharply.

Before the outbreak of the crisis, the oil spot market transactions accounted for only 8% of the total amount of transactions, it plays a role of market balance mechanism, the buyer can buy in the spot market, the fixed supply of cheap oil, rather than in the contract as to ensure more expensive crude oil futures. Spot market is the marginal market, very sensitive to price signals, when a large number of buyers flock to the spot market, the price of oil will rise immediately, but also a rise and then rise. In late February 1979, rising oil spot market to double the price. The industry's huge oil port spot market is called the "Rotterdam market", but in fact, it is a busy telephone and telex network linked to the global market. Market supply is not in time to keep up with the first oil crisis after the end of the crude oil and oil products supply and demand structure changes, but also an important reason for this crisis. After the first oil crisis, oil industry structure occurred significant changes, oil consuming countries to implement the saving measures and fuel substitution project, making the market collapse in demand for oil products, and demand for oil products such as gasoline and diesel were not affected by the impact of soaring oil prices. OPEC countries increased oil supply is mostly heavy oil, new small light oil yield, and oil refining enterprises did not from the past to meet high demand on heavy oil change, this also caused tension in the market. Iran's oil supply means a lot of light oil disappear (half of its products), which is exacerbated by the tight market. In addition, some short-term factors also make some long-term factors surfaced. After the Iranian revolution oil market conditions make the world aware, the organization of Petroleum Exporting Countries (OPEC oil production capacity is not, as previously thought that is without limit, the international oil trade there is a real possibility of imbalance in supply and demand. Iran to stop oil exports, some oil producing countries such as Saudi Arabia, Kuwait once increased oil production, oil gap has been and is not, as long as the coordinated, a severe oil crisis is avoidable. But the emergence of market sentiment reflects a new fact: the growth capacity of OPEC's short-term oil production is limited. Although some OPEC countries have increased oil production by the capacity, but it is not possible to quickly beyond the production limit. Expand production capacity means that the needs of most OPEC countries, such as Algeria, Nigeria, Libya and Venezuela, take a long time for a large number of investment to in the short term rapid increase production capacity there are technical barriers and put the additional cost of the problem, that is to say, OPEC's production is not does not consume cost can be easily implemented. As a result, once the outbreak of the oil crisis, OPEC's production capacity constraints are difficult to ensure market supply and demand balance. In addition to the production capacity constraints, the outbreak of the oil crisis and the role of economic factors. OPEC countries in the period of the first oil crisis grasp the crude oil production and pricing power, almost all OPEC countries tend to higher prices and a drop in oil production, the oil as a future fiscal reserves. When oil prices rose, reduce oil production may still be able to obtain enough revenue and oil producing countries to expand force production is reduced, so OPEC countries have reduced oil production to ease the oil depletion rate, kept the oil development in the future, because if there is no new fields have been found, between reserves and oil production decline in the ratio will further shorten the oil life. And those can increase oil production countries, such as Kuwait, Qatar, on the one hand, by restricting the size of its economy and the level of productivity, they absorb new increases in oil revenues is limited; on the other hand, for them, increased more than required by the development of the petroleum revenue means increasing redundancy funds, and these funds facing because the world inflation and exchange rate fluctuations bring huge risk of the depreciation of the value. Therefore, they do not want to too much increased oil revenues. The tight oil market provides an opportunity for oil producing countries to increase oil prices. In more than two years of oil crisis, the organization of petroleum exporting countries held the Seven meeting of the oil ministers, the vast majority of countries (except Saudi Arabia) are trying to put the meeting as a favorable opportunity to increase oil prices.