Since March 2008, the prices of petroleum products have increased incessantly and at an unprecedented scale, crossing all the previous milestones. This astronomical rise in petroleum prices have suddenly brought forth possibilities of a major economic crisis looming over world, one that may prove more crippling than the oil crisis of 1973. As the prices continue to soar and with dire future predictions, the market has become very volatile, rife with speculations and fears that threaten to destabilize many leading economies of world, cause widespread unemployment and general hardship for public.
Meanwhile governments, oil industry and petroleum producers are engaged in discussions to find out methods to lower the domestic and international heat generated by rising petroleum prices. Cause of Fuel Price Increase The giant economies of China and India, with their billion plus population, have caused petroleum demands to jump drastically since 2002, in addition to sustained increase in fuel demands by Western developed nations. It is estimated that since 2002, oil consumption has increased by more than 100 percent in fuel consumption in China and India.
On the other hand, oil supplies have failed to keep pace with the increase in demand and have considerably slowed down since 1980. Wild speculations on this demand-supply discrepancy constitute is one of the reason behind increase in fuel prices. An equally important reason is disturbance in Middle East, following U. S’ invasion of Iraq in 2003. The invasion of Iraq was a significant event from oil markets perspective because Iraq posses vast reservoirs of oil.
The fact that rise in petroleum prices have started their upward curve since 2003- the year of Iraq War, suggests a strong correlation between these two events, which is also obvious when one considers that the Iraq war had also caused substantial increase in petroleum demands while lowering Iraq’s production capacity. The price of oil rose in the months running up to the invasion in March. For a short while prices were lowered in mid-2003, which was attributed to speculations on quick end to war. But as the war dragged and production of oil suffered in Iraq, prices resumed their northwards journey.
Many analysts prefer to view the situation on broader scale while taking in account of peaking and decline of many present or former oil-exporting countries around the world, such as Mexico, Indonesia, and the U. K. However, all the analysis comes to agreement that that the combination of relentlessly rising global demand and peaking and eventually declining supply has very general economic implications that the price must eventually go up. Further, as evidenced in 1973 oil crisis, once prices go up, they maintain the upward trend despite cessation of original cause of increase.
Hence experts estimate that prices would continue to rise end of year 2009. Trends in Fuel Price Increase Crude oil prices reflect the same economic constraints of demand, supply and speculations as any other commodity. Prices undergo wide fluctuation at times of shortage or oversupply. However, one major difference that distinguishes crude oil from other commodities is that changes in oil supply initiate a long feedback effect that continue to reflect in prices much after the original conditions have been restored and causes abated.
Therefore crude oil price cycle may extend over several years in response to change in demand as well as OPEC and non-OPEC supply. Throughout 20th century, various production and price control mechanism have heavily regulated petroleum prices in the U. S. The prices increased in post World War II era U. S. , averaging $24. 98 per barrel in 1950s, adjusted for inflation to 2007 dollars. But yet they were substantially below the international average prices at $27. 00 per barrel.
The median for the domestic and the adjusted world price of crude oil was $19. 4 in 2007 prices for the same time period which implied that oil prices exceeded $19. 04 per barrel for only fifty percent of the time. Until March, 2000 OPEC oil prices were kept within the median price band of $22-$28, limiting the increase per barrel to $ 24. 00 even in face of 9/11 attacks and Middle East conflicts Long Term Analysis Since 1869 US inflation adjusted crude oil prices have averaged $21. 05 per barrel in 2006 dollars for more a considerable period of time. Immediately after Second World War, crude Oil prices ranged between $2. 50 and $3. 00 for 10-12 years (1948-1960).
This is equivalent to $17-$18 prices with respect to 2006 dollars. For 50 percent of the time the prices stayed below the median value of $16 per barrel (Figure 1). From 1960 to 1970, prices of crude oil actually declined slightly to $ 15 a barrel The first major jump in oil prices came in 1973 after Arab oil embargo when prices increased around 300 percent (Figure 1) as compared to 1971 prices. The crisis for once and all made it clear the production and price control of crude oil was no longer within grasp of USA and OPEC had emerged as the long term player to dictate and determine global oil prices.
Oil differentiated itself as a commodity owing to its extreme sensitivity to prices. This sensitivity was visible immediately after announcement of embargo when prices increased 400 percent in six short months. Once the prices soared, they stayed at top from 1974 to 1978, ranging from $ 40 per barrel to $55 per barrel (2007 price adjusted). As it can be seen from figure1, prices continued to soar after 1973 and defied all the attempts to bring them down until 1983-84 when normalcy was restored, bringing prices down to pre-embargo days.