Of all the oligopolies that controlled the oil price, the reign of OPEC was the shortest and most anarchic. At peak production OPEC controlled over half the market but by 1975 it was a shrinking market with a surplus of world oil. Only predictions of coming shortages stopped a total price collapse and there was a small but growing spot market where buyers would pay over the OPEC odds to guarantee supply. Every time the spot market went up, hawkish producers like Iran, Iraq and Libya demanded OPEC hike up its prices. A second oil shock was coming.
The catalyst was the 1978 revolt against the Iranian Shah. Pahlavi’s brutal regime imposed martial law against protesters but that only brought 17 million people out on the street. The dying Shah was convinced his time was up and he left the country in January 1979, sending the oil world into panic over the future of the world’s fourth largest producer. The Three Mile Island nuclear disaster of that year also helped inflate oil prices as Ayatollah Khomeini’s regime inspired Islamic radicals everywhere.
World tensions climaxed with the Soviet invasion of Afghanistan at the end of 1979 causing the US president to issue the Carter Doctrine: “Any attempt by outside forces to gain control of the Persian Gulf would be regarded as an assault on the vital interests of the US”. The US would use military force to defend those interests. Yet Carter was powerless to end the US embassy siege in Tehran as scientists predicted peak oil was coming.
Not for the first or last time, they were wrong. In 1980 world demand dropped abruptly as oil finally proved to be price sensitive. The previous high prices had enabled profitable investment in otherwise hard to reach areas such as the North Sea and Alaska while the USSR also upped its production to become the largest in the world. Saudi Arabia decided to become a swing producer as OPEC slashed production to keep its prices high but Iran, engulfed in war with Iraq, refused to throttle its output. The first West Texas Intermediate oil future market at New York’s Nymex, launched in 1983, served as an objective frame of reference for all oil pricing and unchained from distortive psychology, spot transactions drove prices down.
By 1986 a tidal wave of oil hit the market causing prices to collapse. Free market economics had far-reaching effects on the seven sisters. Thatcher’s public floating of BP saw the Kuwaiti Investment Office buy one fifth of the company while Gulf was taken over by Chevron. Oil became just another commodity, subject to the vagaries of world demand and the iron laws of economics. Saddam Hussein further destroyed OPEC’s credibility with Iraq’s invasion of Kuwait in 1990. After defeat by a US-led coalition in 1991 , Iraq’s production went down to one fifth of its pre-war total until Saddam finally accepted a UN Oil for Food program.
Even the end of the Soviet Union had no effect on oil prices as demand stayed sluggish. It took renewed discipline by OPEC at the end of the 20th century to stabilise supply and finally increase prices. The problems of the Middle East were brought home to Americans with the 9/11 attacks and the failures of the Israel-Palestine peace process. The hawkish Bush administration used 9/11 as an excuse to invade Iraq, though it made the politics of the region – and oil supply – more unpredictable. With no new exploration finds, the price soared after 2003. Once again the prophets of doom spoke of the end of the oil era. Once again they were wrong. Russia and Venezuela stepped up production to meet increased demand.
Outside the Gulf, the story of the 21st century has been the growth of third world consumption, led by China. The price which stayed below $25 a barrel from the 1980s to 2003, began to skyrocket reaching $147 in 2008, with record profits for the oil majors. It took a decision by President Bush to lift the ban on oil drilling to end the rises and the GFC that struck later that year sent prices plummeting again. It rose steadily again as the Arab Spring affected output in the Middle East and a faltering US economy kept the dollar low.
By 2015, the barrel price was one third what it was in 2008 and by the end of the year had slipped from $50 to $38. The low price has acted as a dampener on exploration of shale oil and gas but predictions of peak oil seem as far fetched as ever they were in the last 50 years. The concept of peak oil is based on the scientific model of Marion King Hubbert dating from 1956 (and not invented by the “green left” as ludicrously claimed in today’s Australian by Judith Sloan) from his observations of the production bell curve of known oil provinces. Hubbert correctly predicted peak oil in US fields (which were the most well-researched) around 1970.
Recoverable oil supplies are finite and demand is high. However Hubbert’s models don’t take into account scientific innovations such as fracking, limited knowledge of geology and hydrocarbon exploration or political motivations. When Hubbert tried to apply his model to world supply he predicted peak in the mid 1980s with a massive drop off by the end of the century. Of course that proved hopelessly wrong with over twice as much oil drilled in 2000 as Hubbert predicted. The International Energy Agency says production has ratcheted up from 75 mbd (million barrels a day) then to 97 mbd by end 2015 and a forecast average demand of 96 mbd next year. Indeed Hubbert failed to foresee that the US itself would contribute most of the increases through its shale oil supply which came online in 2008.
Certainly continued low prices will act as a dampener on investment in new oil and LNG fields and the world climate agreement will further reduce incentives. But long term the iron laws of supply and demand will govern the price of crude and China will continue to drive demand. Sometime in the next 10 to 20 years solar and wind power will become cheaper alternatives but until that time oil will remain the black gold driving the world’s ongoing obsession with energy as it has done for the last 150 years.