The Economics of Oil
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The Economics of Oil

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  • As it grew exponentially and engaged in business strategies, tactics and practices that were lawful but drove many smaller businesses under, Standard Oil became widely criticized in the public eye, even as it made Rockefeller the richest man in modern history.On a journalistic note, One of the original "muckrakers" was Ida M. Tarbell, an American author and journalist who worked for a magazine called McClures. She wrote a book called “The History of Standard Oil "and helped usher in the progressive movement.The Sherman Anti Trust act was enacted around the 1890 and broke standard oil up into 34 smaller companies. The act was used against Standard Oil much the same way it was used against Microsoft in the Clinton Administration. Designed to prevent monopolies.
  • Royal Dutch Shell as it is now known, is the largest energy company and the second largest company in the world measured by revenues and is one of the six oil and gas "super majors".Royal Dutch Petroleum Company and the "Shell" Transport and Trading Company Ltd of the United Kingdom merged their operations[6] – a move largely driven by the need to compete globally with the then dominant American petroleum company, John D. Rockefeller's Standard Oil.And obviously the invention of the car, was a game changer for not only the demand of oil, but for the residue spinoff of supply of new products such as plastics, medicine, insulation and amoung many otheres personal hygiene procducts.
  • Saudi oil reserves are the largest in the world, and Saudi Arabia is the world's leading oil producer and exporter. Oil accounts for more than 90% of the country's exports and nearly 75% of government revenues. Proven reserves are estimated to be 263 billion barrels, about one-quarter of world oil reserves.
  • KerrMcGee brings in the first producing oil well on the Outer Continental Shelf off Louisiana. This has huge political and environmental implications as we will later see.Such is the case with the tar sands and the Exxon Valdez
  • Critical Point in Oil Economics
  • 1974 - (March) Arab oil embargo on oil exports to the US lifted. Oil is always said to be a major instrument in US Foreign Policy. It is unfair to suggest that is a one way street with only victims coming from one side.
  • Dropping out of theory and into practice, we see that this is exactly what did happen. The price of Saudi Light oil jumped from under $3 a barrel in 1971 to almost $34 by 1981. A big component to over all price increase of commodities in the basket.
  • Throughout the 1970s and 1980s, OPEC had gained so much power that they were openly engaged in fixing the price of crude oil; consequently its member nations were making incredible sums of wealth much to the dismay of countries in the West, which were quick to vilify the organization.By the 1990s OPEC’s ability to fix prices diminished thanks to a sea-change in the international market , and today oil prices are no longer quite at the mercy of OPEC. Rather, they are regulated in accord with three international exchanges, namely the: New York Mercantile ExchangeInternational Petroleum Exchange (London)Singapore International Monetary Exchange
  • OPEC accomplishes this in part by preventing surplus capacity while consuming countries try and off set OPEC with keeping massive petroleum reserves.
  • The "light of day" economic theory portrayssome 30 “primary oil price volatility spikes”.  Within the 43-year time span, these 30 or so spikes are clustered roughly into 6 groups. The first cluster of spikes is in the early 1970s, corresponding to the period in which US "Peak oil" occurred, and the second, third and fourth clusters are centered on the 1986 "Black Tuesday" spike. the fifth cluster of instability in oil pricing may have started in the mid 1990s, rather than in the early 2000s, which accounts for the economic downturn. And of coarse the latest spike preceeded the great recession with $147 per barrel price for oil...
  • The Kyoto accord of 1997 was supposed to have a great impact on the world wide demand for oil and gas. If the worlds number one consumer of oil and gas won’t abide by it, then there are all sorts of residue political, economic and environmental issues to be wary of. Oil is the number one natural resource that wars are fought over.
  • Price v Profit has been the key strategy paradigm shift for OPEC. By keeping gas prices relatively low, this creates a disincentive for consuming countries to over tax gas and make the lions share of the profit which the OPEC countries believe should be theirs.So in finding a price equilibrium of about $3.00 per gallon, there is enough demand for oil where as producing countries realize the bulk of the profit from the commodity.

The Economics of Oil The Economics of Oil Presentation Transcript

  • The economics of Oil
  • 1870 Standard Oil is Founded
    John D Rockefeller was the single most important figure in shaping the new oil industry.
    By 1877 Standard Oil controlled more than 90% of all American Oil refining.
  • 1895 Invention of Combustion Engine
    1890 Founding of the Royal Dutch Petroleum Company
    1895 Invention of the combustion engine
    1985 Oil discovered in Sumatra by Royal Dutch
    1896 Henry Ford’s first motor car
  • 1933 Modern Day Oil Exploration Begins
    1933 The Saudi government signed a concessionary agreement with Standard Oil of California
    1938 Oil discovered in Kuwait and Saudi Arabia by US geologists.
  • 1950 The Start of North America’s Addiction to Cheap Oil
    Aramco agreement with Saudi Arabia
    Demand for oil was outpaced by growth in production causing prices to stay low.
    This, & America’s new Interstate infrastructure, effectively started America’s reliance on foreign oil. It was a net exporter of oil at this time.
  • 1960 The Formation of The Organization of Petroleum Exporting Countries
    Founded in Baghdad, the
    original members were:
    Saudi Arabia
    Venezuela
    Kuwait
    Iraq
    Iran.
  • Important Dates in North American Oil Exploration
    1901 - Lucas No. 1 well blew near Beaumont, forever changing the Texas economy
    1947 – First off shore drilling of the Louisiana Coast
    1967 - Suncor start drilling in the tar sands, in Northern Alberta giving Canada the 2nd largest oil reserve in the world
    1968 - Oil discovered on Alaska’s north slope
  • 1971 Balance of Power Shifts in the Oil Market
    The Texas Railroad Commission set proration at 100 percent for the first time.  This meant that Texas producers were no longer limited in the volume of oil that they could produce. 
    More importantly, it meant that the power to control crude oil prices shifted from the United States to OPEC. 
    Another way to say it is that there was no more spare capacity in the U.S. and therefore no tool to put an upper limit on prices. A little over two years later OPEC, through the unintended consequence of war, obtained a glimpse of the extent of its power to influence prices.
  • 1973 Arab Oil Embargo to the U.S.
    1973 - Arab oil embargo on oil exports to the US for siding with Israel in the Yom Kippur War - oil prices rise from $2.90 to $11.65 per barrel Since the balance of power in the market was tipped toward sellers, oil prices could be raised at the discretion of governments, which, if they so desired, could increase the rents from
    oil exploitation and force a shift in income and wealth from the consuming countries.
    This set the stage for another critical element of the old political economy of oil--the use of the "oil weapon." Thanks to the overall instability of supply, oil became an instrument of foreign policy for oil-exporting countries
  • Case Study: Lines At The Gas Pumps in the US in 1973
    S2 (after P of crude
    oil increase)
    Price
    S1
    P2
    PC
    P1
    Demand
    Shortage
    Quantity
    QS
    QD
    Q1
  • 1979 -1981 Economic Stagflation
    Oil prices rise from $13.00 to $34.00 In the interim, the economy struggled with stagflation, a combination of high inflation and low growth, and the oil price was a primary cause.
  • 1985 OPEC’s Price System Collapses
    The netback oil pricing experiment of 1985 marked the end of OPEC’s price control and the beginning of the present era of market-related price formula.
    As a result, the market reacted.....
  • 1986 Oil Prices Collapse
    1985 The policies of Paul Volcker, the Chairman of the Federal Reserve would have their effect, and by 1983, oil consumption as a share of the economy had fallen dramatically.
    By 1986, it would fall sufficiently to break the will of OPEC, and Saudi Arabia would abandon its role as swing producer, never to return and accepted a production quota. The price of oil fell, and US oil consumption fell back to 2% of GDP.
    The “Great Moderation” had begun. Equities began their long bull run, inflation would remain tame, and the developed economies would begin a long period of prosperity.
    Until....
  • 1998 The oil crisis was similarly self-inflicted by OPEC
    Oil reaches $17 per barrel after increased oil production from Iraq coincided with the Asian Financial Crisis, which reduced demand
    After the price collapse of 1998 OPEC became more concerned about its own economic performance.
    OPEC rejected the notion that low oil prices were good for everyone.
    OPEC began to see that low oil prices were a subsidy for growth for importing countries and thus decided to shift the burden of price adjustments back onto the oil importing community
  • 2008 Crude Oil Hits $147 per Barrel. High price hikes in oil, historically leads to ....
  • 2010 World Consumption of Oil
    2010The United States consumed a total of 6.9 billion barrels of oil.
    That is about 27% of total world oil consumption.19 million barrels per day
  • History of Gas Prices 1861-2006
  • 2010 BP’s Gulf of Mexico Disaster
    British Petroleum’s Deepwater Horizon rig explosion and fire while drilling in Gulf of Mexico.
    This was the most catastrophic oil spill in history. It’s effect won’t be known for years