Oil is so much more than a fuel. It’s a force even bigger than its trillion-dollar market. It’s a weapon, a strategic asset, a curse. It’s a maker and spoiler of fortunes, a leading indicator and an echo chamber. Each has a part in determining oil prices.
During the mid-20th century, a group of multinational oil giants known as the Seven Sisters (including the companies that became Exxon Mobil, Chevron and BP) dominated the market. Controlling the barrels from the wellhead to the gasoline tank, they traded mainly with each other on confidential terms; there was no open market. Countries with oil fields wrested more control with the formation in 1960 of the Organization of the Petroleum Exporting Countries. The cartel’s Arab members used their power for political and economic ends, shocking the global economy with an embargo in 1973. Prices spiked again in 1979 because of the Iranian revolution. In the 1980s, OPEC infighting, the emergence of new suppliers and the development of futures exchanges gave rise to new market-based prices. Today the international benchmark is Brent crude from the North Sea. The U.S. benchmark, West Texas Intermediate crude, which for years traded at a discount to Brent, has been close to parity in 2016. The U.S. repealed its 40-year-old ban on exporting crude in December 2015.
Few analysts expect oil prices to return to the levels seen a few years ago any time soon, giving rise to the idea that this could be a new era of energy abundance. The price slump has been a blessing for gasoline-guzzling consumers and a curse for governments in countries like Venezuela and Nigeria, whose fortunes are tied to energy sales. U.S. producers say the shale revolution — which made the country one of the world’s biggest producers of oil and gas — has freed it from fears that Middle East conflicts will cut off its supply. Some industry-watchers worry that bargain prices will begin a period of under-investment in oil production that could set the stage for another surge in prices. Environmentalists worry that cheap oil will increase energy consumption and slow the shift to cleaner fuels that would help fight climate change. Longer-term, though, remedies for global warming could have a dramatic effect on oil, if governments favor policies to keep crude in the ground. But oil companies say the future includes rising energy demand and population growth, making oil an important fuel for decades to come.
The Reference Shelf
- An Oxford Energy report on the history of oil pricing.
- U.S. Energy Department data.
- The International Energy Agency’s monthly oil market report.
- Joint database of global energy ministers.
- Daniel Yergin’s Pulitzer Prize-winning history of oil.
- Bloomberg interactive graphic on gasoline prices around the world.
Isaac Arnsdorf contributed to the original version of this article.
First published Oct. 17, 2014
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