RISING OIL PRICES

Potential Causes of Rising Global Oil Prices during Approximately the Past 36 Months

Potential Causes of Rising Global Oil Prices during Approximately the Past 36 Months

Oil is the main source of energy for highly developed industrial economies. A sudden rise in the price of oil due to, for example, speculation or to a severe disturbance in the existing relationship between supply and demand can therefore create an oil crisis (Amuzegar, 2001). This can endanger economic and political stability throughout the global capitalist economy. In the postwar period there have been two major oil crises. The prospects for further crises cannot be discounted. (Clark, 1991)

The nominal (unadjusted for inflation) price of oil went virtually unchanged from 1950 to 1972, settling at around $2 per barrel. With the oil embargo of 1973, the price suffered its first sharp hike since the end of World War II: Prices soared when OPEC member countries refused to ship oil to those countries that had supported Israel against Egypt and Syria during the Yom Kippur War (Amuzegar, 2001). By the end of 1974, the price of crude reached $10 per barrel and helped unchain a cycle of inflation and unemployment (stagflation) in developed countries that had relied on cheap oil for decades. The next sharp rise in prices occurred when Iran significantly decreased its flow of oil following its 1979 revolution and subsequent war with Iraq. At the time the Shah left power Iran produced 6 million barrels of oil (about 20% of OPEC exports) per day, but by the end of 1980 the combined production of Iran and Iraq was in the neighborhood of just 1 million barrels.

In the mid-1980s, the price of oil began a precipitous decline: Not only did the nominal price of oil fall sharply, but by 1999 the real price (adjusted ...