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Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Oil Prices: Past, Present, & Future
Gulf Research CenterNovember 23, 2005
*A. F. Alhajji, PhD is also George Patten Chair of Business and Economics, College of Business Administration, Ohio Northern University, USA
Gulf Energy Program - ModeratorGulf Research Center
Dubai, UAE
A. F. Alhajji*, PhD
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Outline
• Historical Overview of Oil Prices• Recent Development
– Short Term Factors– Long Term Factors
• Future Prospects
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Politics and Oil Prices
0
5
10
15
20
25
30
35
40
45
50
1973
Jan
1974
Jan
1975
Jan
1976
Jan
1977
Jan
1978
Jan
1979
Jan
1980
Jan
1981
Jan
1982
Jan
1983
Jan
1984
Jan
1985
Jan
1986
Jan
1987
Jan
1988
Jan
1989
Jan
1990
Jan
1991
Jan
1992
Jan
1993
Jan
1994
Jan
1995
Jan
1996
Jan
1997
Jan
1998
Jan
1999
Jan
2000
Jan
2001
Jan
2002
Jan
2003
Jan
2004
Jan
2005
Jan
2006
Jan
$/b
Embargo
IranianRevolution
Saddam becomespresident
Start of Iraq-Iran War
Saudisincreaseproduction
Major destructionto Iraqi and Iranianoil facilities
Invasion of Kuwait The Gulf War
Iraq-Iranwar ends
Iraq & UNOil-for-Food
The Asian Crisis
Oil-for Food
IraqNigeriaIndonesia
September 11
IraqVenezuela
Invasionof Iraq
Terror
IraqRussiaVenezuela
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Two conclusions
• This is the only time in history when oil prices increased substantially without a major political event
• Minor political events lead to daily price volatility• Political events exist even with low oil prices
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
The Impact of Iraq in 2001
15
17
19
21
23
25
27
29
31
33
35
2/1
11/1
1/23 2/
1
2/12
2/22 3/
5
3/14
3/23 4/
3
4/12
4/24 5/
3
5/14
5/23
4/6/
2001
6/13
/01
6/22
/01
3/7/
2001
7/13
/01
7/24
/01
2/8/
2001
8/13
/01
8/22
/01
8/31
/01
9/17
/01
9/26
/01
5/10
/200
1
10/1
6/01
10/2
5/01
5/11
/200
1
11/1
4/01
11/2
6/01
5/12
/200
1
12/1
4/01
12/2
6/01
Arab Light Brent WTI
Bush Threatens Iraq
Attack on Iraq
Increase in IraqiExports
Iraq
Return of IraqiExports
The Terrorists' Attack
Return of IraqiExports
Bush Threatens Iraq
IraqBush orders f illing the SPR
Iraq
Data source: IEA, 2002
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Politics & Oil Prices in 2003
20
22
24
26
28
30
32
34
36
38
40
12/3
1/02
1/14
/03
1/28
/03
2/11
/03
2/25
/03
3/11
/03
3/25
/03
4/8/
03
4/22
/03
5/6/
03
5/20
/03
6/3/
03
6/17
/03
7/1/
03
7/15
/03
7/29
/03
8/12
/03
8/26
/03
9/9/
03
9/23
/03
Brent WTI
Bush issues ultimatum to Saddam
Start of the invasion
Some Iraqi Resistance
The fall of Baghdad
The Official end of war OPEC announces
production cutPipeline explosions
Labor strike in Nigeria
Terrorist attack in Jakarta
OPEC maintainsquotas
Iraq resumesproduction in the north
$/b
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Daily Spot Oil Prices in 2004
262830
323436384042
4446485052
545658
1/1
1/16
1/31
2/15 3/1
3/16
3/31
4/15
4/30
5/15
5/30
6/14
6/29
7/14
7/29
8/13
8/28
9/12
9/27
10/1
2
10/2
7
11/1
1
11/2
6
12/1
1
12/2
6
OPEC Brent WTI$/b
Source: EIA and OGJ
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
812162024283236404448525660646872
1/2/
1998
4/2/
1998
7/2/
1998
10/2
/199
8
1/2/
1999
4/2/
1999
7/2/
1999
10/2
/199
9
1/2/
2000
4/2/
2000
7/2/
2000
10/2
/200
0
1/2/
2001
4/2/
2001
7/2/
2001
10/2
/200
1
1/2/
2002
4/2/
2002
7/2/
2002
10/2
/200
2
1/2/
2003
4/2/
2003
7/2/
2003
10/2
/200
3
1/2/
2004
4/2/
2004
7/2/
2004
10/2
/200
4
1/2/
2005
4/2/
2005
7/2/
2005
10/2
/200
5
Brent WTI$/b
Daily Spot Oil Prices (1998-Present)
Source: EIA, 2005
The Invasion
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Short-term vs. Long-term
• Short-term factors are those political, economic, technical, and natural factors that cause short term fluctuations in oil prices around their average.
• They do not determine the long-term direction of oil prices.
• They determine the upper and lower limits in the short run.
• Examples: Pipeline explosions, changes in weekly stocks, hurricanes, ..etc
• Long-term factors are those political, economic, technical, and natural factors that determine the long-term direction of oil prices.
• They shift the average of prices for an extended period of time.
• They do NOT determine the upper and lower limits
• Examples: Major wars sanctions, oil market collapse, new technology ..etc
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Short-Term Factors
• Political Factors– Iraq– Venezuela– Nigeria– Russia– Terrorism
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Short-Term Factors
• Economic Factors– Economic Growth– OPEC– Inventories– Speculation– Price of Natural Gas– Labor Strikes– The US Strategic Petroleum Reserve
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Increase in Economic Growth Rates
Sٍource: International Monetary Fund, World Economic Outlook Database, April 2005.
0123
456789
101112
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Adv. economiesEuro area WorldChinaIndiaUnited States
%
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Change in World Petroleum Consumption
0
500
1000
1500
2000
2500
3000
1998 1999 2000 2001 2002 2003 2004
000 b/d
Source: IEA, 2005
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Why Demand Increased?
• China– Economic Growth– Migration of IT Companies to China (transferred
demand)– Electricity Sector and Private Generation
• United States– Economic Recovery– Rise of Price of Natural Gas– SUVs– SPR
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Why Demand Increased?
• Japan– Maintenance of nuclear power plants
• Europe– Economic recovery– The increase in the value of the Euro
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Oil Prices in Dollar and Euro
0
10
20
30
40
50
60
1/4/
1999
4/4/
1999
7/4/
1999
10/4
/199
9
1/4/
2000
4/4/
2000
7/4/
2000
10/4
/200
0
1/4/
2001
4/4/
2001
7/4/
2001
10/4
/200
1
1/4/
2002
4/4/
2002
7/4/
2002
10/4
/200
2
1/4/
2003
4/4/
2003
7/4/
2003
10/4
/200
3
1/4/
2004
4/4/
2004
7/4/
2004
10/4
/200
4
1/4/
2005
WTI in $ Brent in Euro$-€ /b
$
€
Source: EIA and Federal Reserve Board, 2005.
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
0
5
10
15
20
25
30
35
40
45
Oct
-73
Oct
-74
Oct
-75
Oct
-76
Oct
-77
Oct
-78
Oct
-79
Oct
-80
Oct
-81
Oct
-82
Oct
-83
Oct
-84
Oct
-85
Oct
-86
Oct
-87
Oct
-88
Oct
-89
Oct
-90
Oct
-91
Oct
-92
Oct
-93
Oct
-94
Oct
-95
Oct
-96
Oct
-97
Oct
-98
Oct
-99
Oct
-00
Oct
-01
Oct
-02
Oct
-03
Oct
-04
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
$ Oil Price Oil Price¥$/b ¥/b
Oil Prices in Dollar and Yen
Source: EIA and Federal Reserve Board, 2005.
$
¥
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Short-Term Factors
• Technical factors– Refinery outages– Adjustment for new environmental laws– The UN Shipping and Port Security Code
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Short-Term Factors
• Natural Factors– Storms in the US and Europe– Hurricanes in the Gulf of Mexico– Sandstorms in Iraq– High wind in the North Sea
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
In the Long Run
• Major Political Events– The Iraq-Iran War (1980-1988)– The Iraqi Invasion of Kuwait (1990)– The Gulf War (1991)– The War on Terrorism (2001-present)– The US Occupation of Iraq (2003-present)– Economic sanctions on oil producing countries (Iraq, Iran,
Libya, Myanmar, Sudan, and Syria)
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
In the Long Run
• Major Economic Events– The price collapse of 1986– The price collapse of 1998– Growth in IT Technology– Dollar depreciation (2002-present)– Predictions of growth in non-OPEC production
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
World Excess Capacity Vs. Oil Prices
0
1
2
3
4
5
6
7
8
9
10
11
12
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Dec
2004
Jan
2004
June
2004
Aug
2004
Oct
2004
Dec
2005
Feb
2005
Apr
2005
June
0
5
10
15
20
25
30
35
40
45
50
World Excess Capacity Nominal Price Price ($)mb/d
Embargo
The IranianRevolution
Invasionof Kuwait
Economic sanctions
Strengthening the sanctions
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Additions to Reserves
5523562037.3
24455.2
91529.4
18692.0
0
20000
40000
60000
80000
100000
120000
1972-1981 1982-1991 1992-199
Middle EastLatin America
000 b
ME
LA
ME
ME
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
The Future??
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
The Future
• Macroeconomic variables in the consuming countries• Expansion of production capacity in the producing countries
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
0
5
10
15
20
25
1973
Oct
ober
1974
Oct
ober
1975
Oct
ober
1976
Oct
ober
1977
Oct
ober
1978
Oct
ober
1979
Oct
ober
1980
Oct
ober
1981
Oct
ober
1982
Oct
ober
1983
Oct
ober
1984
Oct
ober
1985
Oct
ober
1986
Oct
ober
1987
Oct
ober
1988
Oct
ober
1989
Oct
ober
1990
Oct
ober
1991
Oct
ober
1992
Oct
ober
1993
Oct
ober
1994
Oct
ober
1995
Oct
ober
1996
Oct
ober
1997
Oct
ober
1998
Oct
ober
1999
Oct
ober
2000
Oct
ober
2001
Oct
ober
2002
Oct
ober
2003
Oct
ober
2004
Oct
ober
0
5
10
15
20
25
30
35
40
45
Discount Rate Federal Fund Rate Oil Prices% $/b
Interest Rates & Oil Prices
Source: EIA and Federal Reserve Board, 2005.
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Changes in Government Expenditures Vs. Changes in Oil Prices
-0.01
-0.008
-0.006
-0.004
-0.002
0
0.002
0.004
0.006
0.008
0.01
0.012
0.014
0.016
0.018
1980
Q1
1981
Q1
1982
Q1
1983
Q1
1984
Q1
1985
Q1
1986
Q1
1987
Q1
1988
Q1
1989
Q1
1990
Q1
1991
Q1
1992
Q1
1993
Q1
1994
Q1
1995
Q1
1996
Q1
1997
Q1
1998
Q1
1999
Q1
2000
Q1
2001
Q1
2002
Q1
2003
Q1
2004
Q1
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
% Change in Government Consumption % Change in Oil Price
Average Increase in Governmnt Consumption
% %
Source: IMF, 2005 and EIA 2005
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
US Per Capita Income vs. Oil Prices
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
1973
q119
74q1
1975
q119
76q1
1977
q119
78q1
1979
q119
80q1
1981
q119
82q1
1983
q119
84q1
1985
q119
86q1
1987
q119
88q1
1989
q119
90q1
1991
q119
92q1
1993
q119
94q1
1995
q119
96q1
1997
q119
98q1
1999
q120
00q1
2001
q120
02q1
2003
q120
04q1
10,000
12,000
14,000
16,000
18,000
20,000
22,000
24,000
26,000
28,000
30,000
Real Oil Prices Real Per Capita incomeLinear (Real Per Capita income) Linear (Real Oil Prices)Price ($/b) Income ($)
Source: EIA and BEA, 2005
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Current and Real Oil Prices ($2000)
Source: EIA, 2005 and the author's calculation
$0
$10
$20
$30
$40
$50
$60
$70
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Real $2000) Current
Year
$/b
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Saudi Real Per Capita Income $ (1999)
25,000
30,000
35,000
40,000
45,000
50,000
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
ريال للفرد
Source: EIA, 2005
SR
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
OPEC’s Current and Real Oil Revenues
0
100
200
300
400
500
600
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Current Realمليار دوالر
Source: EIA, 2005
$ Billion
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Current Real$ per capita
OPEC’s Real Per Capita Oil Revues ($2004)
One-third 1980Real
Current
Source: EIA, 2005
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
$-
$5,000
$10,000
$15,000
$20,000
$25,000
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Current Real (2004)$ per Capita
Saudi Real Per Capita Revenues
One-fifth 1980
Real
Current
Source: EIA, 2005
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Saudi Real Economic Growth (1970-2006)
-15
-10
-5
0
5
10
15
20
25
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
%
11 %5 %
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Saudi Crude Oil Production (mbd)
0
1
2
3
4
5
6
7
8
9
10
11
1973
ر نايي
1974
ر نايي
1975
ر نايي
1976
ر نايي
1977
ر نايي
1978
ر نايي
1979
ر نايي
1980
ر نايي
1981
ر نايي
1982
ر نايي
1983
ر نايي
1984
ر نايي
1985
ر نايي
1986
ر نايي
1987
ر نايي
1988
ر نايي
1989
ر نايي
1990
ر نايي
1991
ر نايي
1992
ر نايي
1993
ر نايي
1994
ر نايي
1995
ر نايي
1996
ر نايي
1997
ر نايي
1998
ر نايي
1999
ر نايي
2000
ر نايي
2001
ر نايي
2002
ر نايي
2003
ر نايي
2004
ر نايي
2005
ر نايي
Source: EIA, 2005
Similar Pattern?
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Future ProspectsShort-term
• Fundamentally Tight Market– No marketable excess capacity– Demand still growing, though at a slower rate.– Hurricane season– Demand will grow if China revalue its currency. – Concerns regarding the adequacy of heating oil in the US during
the 4th quarter.– Stock build is not enough to avoid price spikes:
• 2 days of demand cover for crude (stocks and capacity)• 1 day for products• Not evenly distributed• Crude, mostly heavy
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Future ProspectsMedium-term
• Fundamentally Tight Market with Possibility of Downturn.– Planned capacity expansion is not enough– Slow growth in Russian production with possibility of decline– Continued decline in US crude oil production– Continued decline in North Sea production – Continued maintenance and the planned shut down of nuclear reactors in
Asia (Japan) would increase demand for oil– More nuclear reactors in China will increase its demand for oil– The role of new technology and renewables will be very limited
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
Wars, Oil Crisis, and Economic GrowthReal GDP per Person in the US Economy
3,000
8,000
13,000
18,000
23,000
28,000
33,000
1929
1932
1935
1938
1941
1944
1947
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
Year
Rea
l GD
P pe
r per
son
(199
6 do
llars
)
Great Depression
World War II
Korean War
Vietnam War
First Oil Price Shock
Second Oil Price Shock
Gulf War
Copyright © 2002-2005 Gulf Research Center. All rights reserved.
So…Can the past explain the future?