![Natural gas prices](https://upload.wikimedia.org/wikipedia/commons/0/03/Natural_gas_prices.webp)
From the mid-1980s to September 2003, the inflation-adjusted price of a
barrel
A barrel or cask is a hollow cylindrical container with a bulging center, longer than it is wide. They are traditionally made of wooden staves and bound by wooden or metal hoops. The word vat is often used for large containers for liquids, ...
of
crude oil
Petroleum, also known as crude oil, or simply oil, is a naturally occurring yellowish-black liquid mixture of mainly hydrocarbons, and is found in geological formations. The name ''petroleum'' covers both naturally occurring unprocessed crude ...
on
NYMEX
The New York Mercantile Exchange (NYMEX) is a commodity futures exchange owned and operated by CME Group of Chicago. NYMEX is located at One North End Avenue in Brookfield Place in the Battery Park City section of Manhattan, New York City.
...
was generally under US$25/barrel in 2008 dollars. During 2003, the price rose above $30, reached $60 by 11 August 2005, and peaked at $147.30 in July 2008.
Commentators attributed these price increases to many factors, including
Middle East
The Middle East ( ar, الشرق الأوسط, ISO 233: ) is a geopolitical region commonly encompassing Arabian Peninsula, Arabia (including the Arabian Peninsula and Bahrain), Anatolia, Asia Minor (Asian part of Turkey except Hatay Pro ...
tension, soaring demand from China,
[ the falling value of the U.S. dollar, reports showing a decline in ]petroleum reserves
Oil and gas reserves denote ''discovered'' quantities of crude oil and natural gas (oil or gas fields) that can be profitably produced/recovered from an approved development. Oil and gas reserves tied to approved operational plans filed on the ...
, worries over peak oil
Peak oil is the hypothetical point in time when the maximum rate of global oil production is reached, after which it is argued that production will begin an irreversible decline. It is related to the distinct concept of oil depletion; while ...
, and financial speculation.
For a time, geopolitical events and natural disasters had strong short-term effects on oil prices, such as North Korean missile tests
There have been a number of North Korean missile tests. North Korea has also fired a number of short-range missiles into the Sea of Japan, in what have been interpreted as political gestures.
, North Korea has carried out 147 tests of strategi ...
, the 2006 conflict between Israel and Lebanon, worries over Iranian nuclear plans in 2006, Hurricane Katrina
Hurricane Katrina was a destructive Category 5 Atlantic hurricane that caused over 1,800 fatalities and $125 billion in damage in late August 2005, especially in the city of New Orleans and the surrounding areas. It was at the time the cost ...
, and various other factors.[
] By 2008, such pressures appeared to have an insignificant impact on oil prices given the onset of the global recession
A global recession is recession that affects many countries around the world—that is, a period of global economic slowdown or declining economic output.
Definitions
The International Monetary Fund defines a global recession as "a decline i ...
. The recession caused demand for energy to shrink in late 2008, with oil prices collapsing from the July 2008 high of $147 to a December 2008 low of $32. However, it has been disputed that the laws of supply and demand
In microeconomics, supply and demand is an economic model of price determination in a Market (economics), market. It postulates that, Ceteris paribus, holding all else equal, in a perfect competition, competitive market, the unit price for a ...
of oil could have been responsible for an almost 80% drop in the oil price within a 6-month period. Oil prices stabilized by August 2009 and generally remained in a broad trading range between $70 and $120 through November 2014, before returning to 2003 pre-crisis levels by early 2016, as US production increased dramatically. The United States went on to become the largest oil producer by 2018.
New inflation-adjusted peaks
The price of crude oil in 2003 traded in a range between $20–$30/bbl.[
] Between 2003 and July 2008, prices steadily rose, reaching $100/bbl in late 2007, coming close to the previous inflation-adjusted peak set in 1980. A steep rise in the price of oil in 2008 – also mirrored by other commodities – culminated in an all-time high of $147.27 during trading on 11 July 2008, more than a third above the previous inflation-adjusted high.
High oil prices and economic weakness contributed to a demand contraction in 2007–2008. In the United States, gasoline consumption declined by 0.4% in 2007, then fell by 0.5% in the first two months of 2008 alone. Record-setting oil prices in the first half of 2008 and economic weakness in the second half of the year prompted a /day contraction in US consumption of petroleum products, representing 5.8% of total US consumption, the largest annual decline since 1980 at the climax of the 1979 energy crisis
The 1979 oil crisis, also known as the 1979 Oil Shock or Second Oil Crisis, was an energy crisis caused by a drop in oil production in the wake of the Iranian Revolution. Although the global oil supply only decreased by approximately four per ...
.[
]
Possible causes
Demand
World crude oil demand
In economics, demand is the quantity of a good that consumers are willing and able to purchase at various prices during a given time. The relationship between price and quantity demand is also called the demand curve. Demand for a specific item ...
grew an average of 1.76% per year from 1994 to 2006, with a high of 3.4% in 2003–2004. World demand for oil is projected to increase 37% over 2006 levels by 2030, according to the 2007 U.S. Energy Information Administration
The U.S. Energy Information Administration (EIA) is a principal agency of the U.S. Federal Statistical System responsible for collecting, analyzing, and disseminating energy information to promote sound policymaking, efficient markets, and publ ...
's (EIA) annual report.[
] In 2007, the EIA expected demand to reach an ultimate high of , from 2006's , driven in large part by the transportation
Transport (in British English), or transportation (in American English), is the intentional movement of humans, animals, and goods from one location to another. Modes of transport include air, land (rail and road), water, cable, pipeline, ...
sector.[
] A 2008 report from the International Energy Agency
The International Energy Agency (IEA) is a Paris-based autonomous intergovernmental organisation, established in 1974, that provides policy recommendations, analysis and data on the entire global energy sector, with a recent focus on curbing carb ...
(IEA) predicted that although drops in petroleum demand due to high prices have been observed in developed countries and are expected to continue, a 3.7 percent rise in demand by 2013 is predicted in developing countries. This is projected to cause a net rise in global petroleum demand during that period.
Transportation consumes the largest proportion of energy, and has seen the largest growth in demand in recent decades. This growth has largely come from new demand for cars and other personal-use vehicles powered by internal combustion engine
An internal combustion engine (ICE or IC engine) is a heat engine in which the combustion of a fuel occurs with an oxidizer (usually air) in a combustion chamber that is an integral part of the working fluid flow circuit. In an internal combus ...
s.[
] This sector also has the highest consumption rates, accounting for approximately 55% of oil use worldwide as documented in the Hirsch report
The Hirsch report, the commonly referred to name for the report Peaking of World Oil Production: Impacts, Mitigation, and Risk Management, was created by request for the US Department of Energy and published in February 2005.
Some information was ...
and 68.9% of the oil used in the United States in 2006.[
] Cars and trucks are predicted to cause almost 75% of the increase in oil consumption by India
India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the seventh-largest country by area, the second-most populous country, and the most populous democracy in the world. Bounded by the Indian Ocean on the so ...
and China
China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's most populous country, with a population exceeding 1.4 billion, slightly ahead of India. China spans the equivalent of five time zones and ...
between 2001 and 2025.[
] In 2008, auto sales in China were expected to grow by as much as 15–20 percent, resulting in part from economic growth rates of over 10 percent for five years in a row.[
]
Demand growth is highest in the developing world
A developing country is a sovereign state with a lesser developed industrial base and a lower Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no clear agreem ...
,[
] but the United States is the world's largest consumer of petroleum. Between 1995 and 2005, US consumption grew from a day to a day, an increase of a day. China, by comparison, increased consumption from a day to a day, an increase of a day, in the same time frame. Per capita, annual consumption is by people in the US, in China, and in India.
As countries develop
Develop or DEVELOP may refer to:
* ''Develop'' (magazine), a trade publication for the video game industry
* ''Develop'' (Apple magazine), a technical magazine formerly published by Apple Computer
* Develop (chess), moving a piece from its origina ...
, industry, rapid urbanization and higher living standards drive up energy use, most often of oil. Thriving economies such as China
China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's most populous country, with a population exceeding 1.4 billion, slightly ahead of India. China spans the equivalent of five time zones and ...
and India
India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the seventh-largest country by area, the second-most populous country, and the most populous democracy in the world. Bounded by the Indian Ocean on the so ...
are quickly becoming large oil consumers.[Oil price 'may hit $200 a barrel']
, BBC News, 7 May 2008. China has seen oil consumption grow by 8% yearly since 2002, doubling from 1996–2006.
Although swift continued growth in China is often predicted, others predict that China's export-dominated economy will not continue such growth trends due to wage and price inflation and reduced demand from the US. India's oil imports are expected to more than triple from 2005 levels by 2020, rising to .[
]
Another large factor on petroleum demand has been human population growth
Population growth is the increase in the number of people in a population or dispersed group. Actual global human population growth amounts to around 83 million annually, or 1.1% per year. The global population has grown from 1 billion in 1800 to ...
. Because world population
In demographics, the world population is the total number of humans currently living. It was estimated by the United Nations to have exceeded 8 billion in November 2022. It took over 200,000 years of human prehistory and history for the ...
grew faster than oil production, production per capita peaked in 1979 (preceded by a plateau during the period of 1973–1979). The world’s population in 2030 is expected to be double that of 1980.[
]
Role of fuel subsidies
State fuel subsidies
Energy subsidies are measures that keep prices for customers below market levels, or for suppliers above market levels, or reduce costs for customers and suppliers. Energy subsidies may be direct cash transfers to suppliers, customers, or rel ...
shielded consumers in many nations from higher market prices, but many of these subsidies were reduced or removed as the governmental cost rose.
In June 2008, AFP reported that:
In the same month, Reuters reported that:
''The Economist
''The Economist'' is a British weekly newspaper printed in demitab format and published digitally. It focuses on current affairs, international business, politics, technology, and culture. Based in London, the newspaper is owned by The Econo ...
'' reported: "Half of the world's population enjoys fuel subsidies. This estimate, from Morgan Stanley, implies that almost a quarter of the world's petrol is sold at less than the market price." U.S. Secretary of Energy Samuel Bodman stated that around of oil consumption (over a third of the global total) was subsidized.[
]
Supply
An important contributor to the price increase was the slowdown in oil supply growth, which has been a general trend since oil production surpassed new discoveries in 1980. The likelihood that global oil production will decline at some point, leading to lower supply, is a long-term fundamental cause of rising prices. Although there is contention about the exact time at which global production will peak, a majority of industry participants acknowledge that the concept of a production peak is valid. However, some commentators argued that global warming
In common usage, climate change describes global warming—the ongoing increase in global average temperature—and its effects on Earth's climate system. Climate change in a broader sense also includes previous long-term changes to E ...
awareness and new energy sources would limit demand before the effects of supply could, suggesting that reserve depletion would be a non-issue.
A large factor in the lower supply growth of petroleum has been that oil's historically high ratio of Energy Returned on Energy Invested
In energy economics and ecological energetics, energy return on investment (EROI), also sometimes called energy returned on energy invested (ERoEI), is the ratio of the amount of usable energy (the ''exergy'') delivered from a particular energy re ...
is in significant decline. Petroleum is a limited resource, and the remaining accessible reserves are consumed more rapidly each year. Remaining reserves are increasingly difficult to extract and therefore more expensive. Eventually, reserves will only be economically feasible to extract at extremely high prices. Even if total oil supply does not decline, increasing numbers of experts believe the easily accessible sources of light sweet crude are almost exhausted and in the future the world will depend on more-expensive unconventional oil
Unconventional oil is petroleum produced or extracted using techniques other than the conventional method (oil well). Industry and governments across the globe are investing in unconventional oil sources due to the increasing scarcity of conventio ...
reserves and heavy crude oil
Heavy crude oil (or extra heavy crude oil) is highly-viscous oil that cannot easily flow from production wells under normal reservoir conditions.
It is referred to as "heavy" because its density or specific gravity is higher than that of light cru ...
, as well as renewable energy sources. It is thought by many, including energy economists such as Matthew Simmons
Matthew Roy Simmons (April 7, 1943 – August 8, 2010) was founder and chairman emeritus of Simmons & Company International, and was a prominent figure in the field of peak oil. Simmons was motivated by the 1973 energy crisis to create an invest ...
, that prices could continue to rise indefinitely until a new market equilibrium is reached at which point supply satisfies worldwide demand.
Timothy Kailing, in a 2008 ''Journal of Energy Security'' article, pointed out the difficulty of increasing production in mature petroleum regions, even with vastly increased investment in exploration and production. By looking at the historical response of production to variation in drilling effort, he claimed that very little increase of production could be attributed to increased drilling. This was due to a tight quantitative relationship of diminishing returns with increasing drilling effort: As drilling effort increased, the energy obtained per active drill rig was reduced according to a severely diminishing power law
In statistics, a power law is a Function (mathematics), functional relationship between two quantities, where a Relative change and difference, relative change in one quantity results in a proportional relative change in the other quantity, inde ...
. This analysis suggested that even an enormous increase of drilling effort was unlikely to lead to significantly increased oil and gas production in a mature petroleum region like the United States.
A prominent example of investment in non-conventional sources is seen in the Canadian oil sands
Oil sands, tar sands, crude bitumen, or bituminous sands, are a type of unconventional petroleum deposit. Oil sands are either loose sands or partially consolidated sandstone containing a naturally occurring mixture of sand, clay, and wate ...
. They are a far less cost-efficient source of heavy, low-grade oil than conventional crude; but when oil trades above $60/bbl, the tar sands become attractive to exploration and production companies. While Canada's oil sands region is estimated to contain as much "heavy" oil as all the world's reserves of "conventional" oil, efforts to economically exploit these resources lag behind the increasing demand of recent years.
Until 2008, CERA (a consulting company wholly owned by energy consultants IHS Energy) did not believe this would be such an immediate problem. However, in an interview with ''The Wall Street Journal
''The Wall Street Journal'' is an American business-focused, international daily newspaper based in New York City, with international editions also available in Chinese and Japanese. The ''Journal'', along with its Asian editions, is published ...
,'' Daniel Yergin
Daniel Howard Yergin (born February 6, 1947) is an American author, speaker, energy expert, and economic historian. Yergin is vice chairman of S&P Global. He was formerly vice chairman of IHS Markit, which merged with S&P in 2022. He founded Ca ...
, previously known for his quotes that the price of oil would soon return down to "normal", amended the company's position on 7 May 2008 to predict that oil would reach $150 during 2008, due to tightness of supply. This reversal of opinion was significant, as CERA, among other consultancies, provided price projections that were used by many official bodies to plan long-term strategy in respect of energy mix and price.
Other major energy organisations, such as the International Energy Agency
The International Energy Agency (IEA) is a Paris-based autonomous intergovernmental organisation, established in 1974, that provides policy recommendations, analysis and data on the entire global energy sector, with a recent focus on curbing carb ...
(IEA), had already been much less optimistic in their assessments for some time. In 2008, the IEA drastically accelerated its prediction of production decline for existing oilfields, from 3.7% a year to 6.7% a year, based largely on better accounting methods, including actual research of individual oil field production throughout the world.[George Monbiot asks Fatih Birol, chief economist of IEA, when will the oil run out?](_blank)
, The Guardian,
Terrorist and insurgent groups have increasingly targeted oil and gas installations, and succeeded in stopping a substantial volume of exports during the 2003–2008 height of the American occupation of Iraq. Such attacks are sometimes perpetrated by militias in regions where oil wealth has produced few tangible benefits for the local citizenry, as is the case in the Niger Delta
The Niger Delta is the delta of the Niger River sitting directly on the Gulf of Guinea on the Atlantic Ocean in Nigeria. It is located within nine coastal southern Nigerian states, which include: all six states from the South South geopolitical ...
.
Many factors have resulted in possible and/or actual concerns about the reduced supply of oil. The post-9/11
The September 11 attacks, commonly known as 9/11, were four coordinated suicide terrorist attacks carried out by al-Qaeda against the United States on Tuesday, September 11, 2001. That morning, nineteen terrorists hijacked four commercial ...
war on terror
The war on terror, officially the Global War on Terrorism (GWOT), is an ongoing international Counterterrorism, counterterrorism military campaign initiated by the United States following the September 11 attacks. The main targets of the campa ...
, labor strikes, hurricane threats to oil platforms, fires and terrorist threats at refineries, and other short-lived problems are not solely responsible for the higher prices. Such problems do push prices higher temporarily, but have not historically been fundamental to long-term price increases.
Investment/speculation demand
Investment demand for oil occurs when investors purchase ''futures contract
In finance, a futures contract (sometimes called a futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset ...
s'' to buy a commodity at a set price for future delivery. "Speculators are not buying any actual crude. ... When hecontracts mature, they either settle them with a cash payment or sell them on to genuine consumers."
Several claims have been made implicating financial speculation as a major cause of the price increases. In May 2008 the transport chief for Germany's Social Democrats estimated that 25 percent of the rise to $135 a barrel had nothing to do with underlying supply and demand.[
] Testimony was given to a U.S. Senate
The United States Senate is the upper chamber of the United States Congress, with the House of Representatives being the lower chamber. Together they compose the national bicameral legislature of the United States.
The composition and powe ...
committee in May indicating that "demand shock
In economics, a demand shock is a sudden event that increases or decreases demand for goods or services temporarily.
A positive demand shock increases aggregate demand (AD) and a negative demand shock decreases aggregate demand. Prices of goods ...
" from "institutional investor
An institutional investor is an entity which pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, government-linked co ...
s" had increased by over the previous five years, almost as much as the increased physical demand from China (). The influence of institutional investors, such as sovereign wealth fund
A sovereign wealth fund (SWF), sovereign investment fund, or social wealth fund is a state-owned investment fund that invests in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such ...
s, was also discussed in June 2008, when Lehman Brothers
Lehman Brothers Holdings Inc. ( ) was an American global financial services firm founded in 1847. Before Bankruptcy of Lehman Brothers, filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Gol ...
suggested that price increases were related to increases in exposure to commodities by such investors. It claimed that "for every $100 million in new inflows, the price of West Texas Intermediate
West Texas Intermediate (WTI) is a grade or mix of crude oil; the term is also used to refer to the spot price, the futures price, or assessed price for that oil. In colloquial usage, WTI usually refers to the WTI Crude Oil futures contract tr ...
, the U.S. benchmark, increased by 1.6%." Also in May 2008, an article in ''The Economist
''The Economist'' is a British weekly newspaper printed in demitab format and published digitally. It focuses on current affairs, international business, politics, technology, and culture. Based in London, the newspaper is owned by The Econo ...
'' pointed out that oil futures transactions on the New York Mercantile Exchange
The New York Mercantile Exchange (NYMEX) is a commodity futures exchange owned and operated by CME Group of Chicago. NYMEX is located at One North End Avenue in Brookfield Place in the Battery Park City section of Manhattan, New York City.
...
(NYMEX), nearly mirrored the price of oil increases for a several-year period; however, the article conceded that the increased investment might be following rising prices, rather than causing them, and that the nickel market value
Market value or OMV (Open Market Valuation) is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with ''open market value'', ''fair value'' or ''fair market value'', although the ...
had halved in the year between May 2007 and May 2008 despite significant speculative interest. It also reminded readers that "Investment can flood into the oil market without driving up prices because speculators are not buying any actual crude... no oil is hoarded or somehow kept off the market," and that prices of some commodities which are not openly traded have actually risen faster than oil prices.[
] In June 2008, OPEC
The Organization of the Petroleum Exporting Countries (OPEC, ) is a cartel of countries. Founded on 14 September 1960 in Baghdad by the first five members (Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela), it has, since 1965, been headquart ...
's Secretary General Abdallah Salem el-Badri stated that current world consumption of oil at 87 million bpd was far exceeded by the "paper market" for oil, which equaled about 1.36 billion bpd, or more than 15 times the actual market demand.
An interagency task force on commodities markets was formed in the U.S. government to investigate the claims of speculators' influence on the petroleum market. The task force concluded in July 2008 that "market fundamentals" such as supply and demand provided the best explanations for oil price increases, and that increased speculation was not statistically correlated with the increases. The report also noted that increased prices with an elastic supply would cause increases in petroleum inventories. As inventories actually declined, the task force concluded that market pressures were most likely to blame. Other commodities that were not subject to market speculation (such as coal, steel, and onions) saw similar price increases over the same time period.
In June 2008 U.S. energy secretary Samuel Bodman
Samuel Wright Bodman III (November 26, 1938 – September 7, 2018) was an American businessman, engineer, and politician who served as the 11th United States Secretary of Energy during the George W. Bush administration, from 2005 to 2009. He wa ...
said that insufficient oil production, not financial speculation, was driving rising crude prices. He said that oil production had not kept pace with growing demand. "In the absence of any additional crude supply, for every 1% of crude demand, we will expect a 20% increase in price in order to balance the market," Bodman said. This contradicted earlier statements by Iran
Iran, officially the Islamic Republic of Iran, and also called Persia, is a country located in Western Asia. It is bordered by Iraq and Turkey to the west, by Azerbaijan and Armenia to the northwest, by the Caspian Sea and Turkmeni ...
ian OPEC governor Mohammad-Ali Khatibi indicating that the oil market was saturated and that an increase in production announced by Saudi Arabia was "wrong".
In September 2008, Masters Capital Management released a study of the oil market, concluding that speculation did significantly impact the price. The study stated that over $60 billion was invested in oil during the first six months of 2008, helping drive the price per barrel from $95 to $147, and that by the beginning of September, $39 billion had been withdrawn by speculators, causing prices to fall.
Effects
There is debate over what the effects of the 2000s energy crisis will be over the long term. Some speculated that an oil-price spike could create a recession comparable to those that followed the 1973
Events January
* January 1 - The United Kingdom, the Republic of Ireland and Denmark enter the European Economic Community, which later becomes the European Union.
* January 15 – Vietnam War: Citing progress in peace negotiations, U.S. ...
and 1979 energy crises or a potentially worse situation such as a global oil crash. Increased petroleum prices are reflected in a vast number of products derived from petroleum, as well as those transported using petroleum fuels.
Political scientist George Friedman
George Friedman ( hu, Friedman György, born February 1, 1949) is a Hungarian-born U.S. geopolitical forecaster, author, and strategist on international affairs. He is the founder and chairman of ''Geopolitical Futures'', an online publication t ...
has postulated that if high prices for oil and food persist, they will define the fourth distinct geopolitical regime since the end of World War II, the previous three being the Cold War
The Cold War is a term commonly used to refer to a period of geopolitical tension between the United States and the Soviet Union and their respective allies, the Western Bloc and the Eastern Bloc. The term '' cold war'' is used because the ...
, the 1989–2001 period in which economic globalization
Economic globalization is one of the three main dimensions of globalization commonly found in academic literature, with the two others being political globalization and cultural globalization, as well as the general term of globalization.
Econom ...
was primary, and the post-9/11 "war on terror
The war on terror, officially the Global War on Terrorism (GWOT), is an ongoing international Counterterrorism, counterterrorism military campaign initiated by the United States following the September 11 attacks. The main targets of the campa ...
".
In addition to high oil prices, from year 2000 volatility in the price of oil has increased notably and this volatility has been suggested to be a factor in the financial crisis which began in 2008.
The perceived increase in oil price differs internationally according to currency market fluctuations and the purchasing power of currencies. For example, excluding changes in relative purchasing power of various currencies, from 1 January 2002 to 1 January 2008:
* In US$, oil price rose from $20.37 to nearly $100, about ''4.91'' times as expensive;
* In the same period, the Taiwanese dollar gained value over the U.S. dollar to make oil in Taiwan ''4.53'' times as expensive;
* In the same period, the Japanese Yen
The is the official currency of Japan. It is the third-most traded currency in the foreign exchange market, after the United States dollar (US$) and the euro. It is also widely used as a third reserve currency after the US dollar and the ...
gained value over the U.S. dollar to make oil in Japan ''4.10'' times as expensive;
* In the same period, the Euro gained value over the U.S. dollar to make oil in the Eurozone
The euro area, commonly called eurozone (EZ), is a currency union of 19 member states of the European Union (EU) that have adopted the euro (€) as their primary currency and sole legal tender, and have thus fully implemented EMU policies ...
2.94 times as expensive.
On average, oil prices roughly quadrupled for these areas, triggering widespread protest activities. A similar price surge for petroleum-based fertilizers contributed to the 2007–08 world food price crisis and further unrest.
In 2008, a report by Cambridge Energy Research Associates Cambridge Energy Research Associates (CERA) is a consulting company in the United States that specializes in advising governments and private companies on energy markets, geopolitics, industry trends, and strategy. CERA has research and consulting s ...
stated that 2007 had been the year of peak gasoline usage in the United States, and that record energy prices would cause an "enduring shift" in energy consumption practices. According to the report, in April gas consumption had been lower than a year before for the sixth straight month, suggesting 2008 would be the first year U.S. gasoline usage declined in 17 years. The total miles driven in the U.S. began declining in 2006.
In the United States, oil prices contributed to inflation averaging 3.3% in 2005–2006, significantly above the average of 2.5% in the preceding 10-year period. As a result, during this period the Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
steadily raised interest rates
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
to curb inflation.
High oil prices typically affect less-affluent countries first, particularly the developing world with less discretionary income. There are fewer vehicles per capita, and oil is often used for electricity generation as well as private transport. The World Bank
The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Interna ...
has looked more deeply at the effect of oil prices in the developing countries. One analysis found that in South Africa a 125 percent increase in the price of crude oil and refined petroleum reduces employment and GDP by approximately 2 percent, and reduces household consumption by approximately 7 percent, affecting mainly the poor.
OPEC's annual oil export revenue surged to a new record in 2008, estimated around US$800 billion.
Forecasted prices and trends
According to informed observers, OPEC, meeting in early December 2007, seemed to desire a high but stable price that would deliver substantial needed income to the oil-producing states, but avoid prices so high that they would negatively impact the economies of the oil-consuming nations. A range of US$70–80 per barrel was suggested by some analysts to be OPEC's goal.
In November 2008, as prices fell below $60 a barrel, the IEA warned that falling prices could lead to both a lack of investment in new sources of oil and a fall in production of more-expensive unconventional reserves such as the oil sands
Oil sands, tar sands, crude bitumen, or bituminous sands, are a type of unconventional petroleum deposit. Oil sands are either loose sands or partially consolidated sandstone containing a naturally occurring mixture of sand, clay, and wate ...
of Canada. The IEA's chief economist warned, "Oil supplies in the future will come more and more from smaller and more-difficult fields," meaning that future production requires more investment every year. A lack of new investment in such projects, which had already been observed, could eventually cause new and more-severe supply issues than had been experienced in the early 2000s according to the IEA. Because the sharpest production declines had been seen in developed countries, the IEA warned that the greatest growth in production was expected to come from smaller projects in OPEC
The Organization of the Petroleum Exporting Countries (OPEC, ) is a cartel of countries. Founded on 14 September 1960 in Baghdad by the first five members (Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela), it has, since 1965, been headquart ...
states, raising their world production share from 44% in 2008 to a projected 51% in 2030. The IEA also pointed out that demand from the developed world may have also peaked, so that future demand growth was likely to come from developing nations such as China, contributing 43%, and India and the Middle East, each about 20%.
End of the crisis
By the beginning of September 2008, prices had fallen to $110. OPEC Secretary General El-Badri said that the organization intended to cut output by about a day, which he saw as correcting a "huge oversupply" due to declining economies and a stronger U.S. dollar.[Crude Oil Rises After OPEC Agrees to Trim Excess Production]
By Margot Habiby and Alexander Kwiatkowski. Bloomberg L.P.
Bloomberg L.P. is a privately held financial, software, data, and media company headquartered in Midtown Manhattan, New York City. It was co-founded by Michael Bloomberg in 1981, with Thomas Secunda, Duncan MacMillan (Bloomberg), Duncan MacMi ...
Published 10 September 2008. On 10 September, the International Energy Agency
The International Energy Agency (IEA) is a Paris-based autonomous intergovernmental organisation, established in 1974, that provides policy recommendations, analysis and data on the entire global energy sector, with a recent focus on curbing carb ...
(IEA) lowered its 2009 demand forecast by to a day.[
As many countries throughout the world entered an economic recession in the third quarter of 2008 and the global banking system came under severe strain, oil prices continued to slide. In November and December, global demand growth fell, and U.S. oil demand fell an estimated 10% overall from early October to early November 2008 (accompanying a significant drop in auto sales).
In their December meeting, OPEC members agreed to reduce their production by per day, and said their resolution to reduce production in October had an 85% compliance rate.
Petroleum prices fell below $35 in February 2009, but by May 2009 had risen back to mid-November 2008 levels around $55. The global economic downturn left oil-storage facilities with more oil than in any year since 1990, when Iraq's invasion of Kuwait upset the market.]
In early 2011, crude oil rebounded above US$100/bbl due to the Arab Spring
The Arab Spring ( ar, الربيع العربي) was a series of Nonviolent resistance, anti-government protests, Rebellion, uprisings and Insurgency, armed rebellions that spread across much of the Arab world in the early 2010s. It began in T ...
protests in the Middle East and North Africa, including the 2011 Egyptian revolution
The 2011 Egyptian revolution, also known as the 25 January revolution ( ar, ثورة ٢٥ يناير; ), began on 25 January 2011 and spread across Egypt. The date was set by various youth groups to coincide with the annual Egyptian "Police ho ...
, the 2011 Libyan civil war
The First Libyan Civil War was an armed conflict in 2011 in the North African country of Libya that was fought between forces loyal to Colonel Muammar Gaddafi and rebel groups that were seeking to oust his government. It erupted with the Liby ...
, and steadily tightening international sanctions against Iran
There have been a number of sanctions against Iran imposed by a number of countries, especially the United States, and international entities. Iran was the most sanctioned country in the world until it was surpassed by Russia following its inva ...
. The oil price fluctuated around $100 through early 2014.
By 2014–2015, the world oil market was again steadily oversupplied, led by an unexpected near-doubling in U.S. oil production from 2008 levels due to substantial improvements in shale
Shale is a fine-grained, clastic sedimentary rock formed from mud that is a mix of flakes of clay minerals (hydrous aluminium phyllosilicates, e.g. kaolin, Al2 Si2 O5( OH)4) and tiny fragments (silt-sized particles) of other minerals, especial ...
"fracking
Fracking (also known as hydraulic fracturing, hydrofracturing, or hydrofracking) is a well stimulation technique involving the fracturing of bedrock formations by a pressurized liquid. The process involves the high-pressure injection of "frack ...
" technology. By January 2016, the OPEC Reference Basket
The OPEC Reference Basket (ORB), also referred to as the OPEC Basket, is a weighted average of prices for petroleum blends produced by OPEC members. It is used as an important benchmark for crude oil prices. OPEC has often attempted to keep the p ...
fell to US$22.48/bbl – less than one-sixth of its record from July 2008 ($140.73), and back below the April 2003 starting point ($23.27) of its historic run-up. OPEC
The Organization of the Petroleum Exporting Countries (OPEC, ) is a cartel of countries. Founded on 14 September 1960 in Baghdad by the first five members (Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela), it has, since 1965, been headquart ...
production was poised to rise further with the lifting of Iranian sanctions, at a time when markets already appeared to be oversupplied by at least 2 million barrels per day.
Possible mitigations
Attempts to mitigate the impacts of oil price increases include:
* Increasing the supply of petroleum
* Finding substitutes for petroleum
* Decreasing the demand for petroleum
* Attempting to reduce the impact of rising prices on petroleum consumers
* Better urban planning with more emphasis on bike lanes, public transit, and high dense residential zoning.
In mainstream economic theory, a free market
In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any o ...
rations an increasingly scarce commodity by increasing its price. A higher price should stimulate producers to produce more, and consumers to consume less, while possibly shifting to substitutes. The first three mitigation strategies in the above list are, therefore, in keeping with mainstream economic theory, as government policies can affect the supply and demand for petroleum as well as the availability of substitutes. In contrast, the last type of strategy in the list (attempting to shield consumers from rising prices) would seem to work against classical economic theory, by encouraging consumers to overconsume the scarce quantity, thus making it even scarcer. To avoid creating outright shortage
In economics, a shortage or excess demand is a situation in which the demand for a product or service exceeds its supply in a market. It is the opposite of an excess supply ( surplus).
Definitions
In a perfect market (one that matches a sim ...
s, attempts at price control
Price controls are restrictions set in place and enforced by governments, on the prices that can be charged for goods and services in a market. The intent behind implementing such controls can stem from the desire to maintain affordability of good ...
may require some sort of rationing
Rationing is the controlled distribution of scarce resources, goods, services, or an artificial restriction of demand. Rationing controls the size of the ration, which is one's allowed portion of the resources being distributed on a particular ...
scheme.
Alternative propulsion
Alternative fuels
Economists say that the substitution effect
In economics and particularly in consumer choice theory, the substitution effect is one component of the effect of a change in the price of a good upon the amount of that good demanded by a consumer, the other being the income effect.
When a g ...
will spur demand for alternate fossil fuels, such as coal or liquefied natural gas
Liquefied natural gas (LNG) is natural gas (predominantly methane, CH4, with some mixture of ethane, C2H6) that has been cooled down to liquid form for ease and safety of non-pressurized storage or transport. It takes up about 1/600th the volu ...
and for renewable energy
Renewable energy is energy that is collected from renewable resources that are naturally replenished on a human timescale. It includes sources such as sunlight, wind, the movement of water, and geothermal heat. Although most renewable energy ...
, such as solar power
Solar power is the conversion of energy from sunlight into electricity, either directly using photovoltaics (PV) or indirectly using concentrated solar power. Photovoltaic cells convert light into an electric current using the photovoltaic e ...
, wind power
Wind power or wind energy is mostly the use of wind turbines to electricity generation, generate electricity. Wind power is a popular, sustainable energy, sustainable, renewable energy source that has a much smaller Environmental impact of wi ...
, and advanced biofuel
Second-generation biofuels, also known as advanced biofuels, are fuels that can be manufactured from various types of non-food biomass. Biomass in this context means plant materials and animal waste used especially as a source of fuel.
First-gene ...
s.
For example, China and India are currently heavily investing in natural gas and coal liquefaction
Coal liquefaction is a process of converting coal into liquid hydrocarbons: liquid fuels and petrochemicals. This process is often known as "Coal to X" or "Carbon to X", where X can be many different hydrocarbon-based products. However, the most c ...
facilities. Nigeria is working on burning natural gas to produce electricity instead of simply flaring the gas, where all non-emergency gas flaring will be forbidden after 2008. Outside the U.S., more than 50% of oil is consumed for stationary, non-transportation purposes such as electricity production where it is relatively easy to substitute natural gas for oil.
Oil companies including the supermajor
Big Oil is a name used to describe the world's six or seven largest publicly traded and investor-owned oil and gas companies, also known as supermajors. The term, particularly in the United States, emphasizes their economic power and influence ...
s have begun to fund research into alternative fuel. BP has invested half a billion dollars for research over the next several years. The motivations behind such moves are to acquire the patent rights as well as understanding the technology so vertical integration
In microeconomics, management and international political economy, vertical integration is a term that describes the arrangement in which the supply chain of a company is integrated and owned by that company. Usually each member of the suppl ...
of the future industry could be achieved.
Electric propulsion
The rise in oil prices caused renewed interest in electric cars, with several new models hitting the market, both hybrid and purely electric. The most successful among the former being the Toyota Prius
The is a car built by Toyota which has a Hybrid vehicle drivetrain, hybrid drivetrain, combining an internal combustion engine with an electric motor. Initially offered as a four-door Sedan (automobile), sedan, it has been produced only as ...
and among the latter the cars of companies like Tesla. Several countries also incentivized the use of electric cars through tax-breaks or subsidies or by building charging stations.
High speed rail
In a similar vein as the original TGV that was switched from gas turbine to electric propulsion after the 1973 oil crisis, several countries have renewed and increased their efforts for electric propulsion in their rail systems, specifically high-speed rail
High-speed rail (HSR) is a type of rail system that runs significantly faster than traditional rail, using an integrated system of specialised rolling stock and dedicated tracks. While there is no single standard that applies worldwide, lines ...
. In the time since 2003, the global High speed rail network almost doubled and there are plans globally that amount to the network being doubled again within the next ten to twenty years, based on current constructions. China in particular went from having no high-speed rail whatsoever in 2003 to having the longest network in the world in 2015.
Bioplastics and bioasphalt
Another major factor in petroleum demand is the widespread use of petroleum products such as plastic. These could be partially replaced by bioplastics, which are derived from renewable plant feedstocks such as vegetable oil, cornstarch
Corn starch, maize starch, or cornflour (British English) is the starch derived from corn (maize) grain. The starch is obtained from the endosperm of the kernel. Corn starch is a common food ingredient, often used to thicken sauces or soups, ...
, pea starch, or microbiota
Microbiota are the range of microorganisms that may be commensal, symbiotic, or pathogenic found in and on all multicellular organisms, including plants. Microbiota include bacteria, archaea, protists, fungi, and viruses, and have been found t ...
. They are used either as a direct replacement for traditional plastics or as blends with traditional plastics. The most common end use market is for packaging materials. Japan has also been a pioneer in bioplastics, incorporating them into electronics and automobiles.
Bioasphalt Bioasphalt is an asphalt alternative made from non-petroleum based renewable resources.
These sources include sugar, molasses and rice, corn and potato starches, natural tree and gum resins, natural latex rubber and vegetable oils, lignin, cel ...
can also be used as a replacement of petroleum asphalt.
United States Strategic Fuel Reserve
The United States Strategic Petroleum Reserve could, on its own, supply current U.S. demand for about a month in the event of an emergency, unless it were also destroyed or inaccessible in the emergency. This could potentially be the case if a major storm were to hit the Gulf of Mexico
The Gulf of Mexico ( es, Golfo de México) is an oceanic basin, ocean basin and a marginal sea of the Atlantic Ocean, largely surrounded by the North American continent. It is bounded on the northeast, north and northwest by the Gulf Coast of ...
, where the reserve is located. While total consumption has increased, the western economies are less reliant on oil than they were twenty-five years ago, due both to substantial growth in productivity and the growth of sectors of the economy with little oil dependence such as finance and banking, retail, etc. The decline of heavy industry and manufacturing in most developed countries has reduced the amount of oil per unit GDP; however, since these items are imported anyway, there is less change in the oil dependence of industrialized countries than the direct consumption statistics indicate.
Fuel taxes
One recourse used and discussed in the past to avoid the negative impacts of oil shocks in the many developed countries which have high fuel taxes has been to temporarily or permanently suspend these taxes as fuel costs rise.
France, Italy, and the Netherlands lowered taxes in 2000 in response to protests over high prices, but other European nations resisted this option because public service finance is partly based on energy taxes. The issue came up again in 2004, when oil reached $40 a barrel causing a meeting of 25 EU finance ministers to lower economic growth forecasts for that year. Because of budget deficits in several countries, they decided to pressure OPEC
The Organization of the Petroleum Exporting Countries (OPEC, ) is a cartel of countries. Founded on 14 September 1960 in Baghdad by the first five members (Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela), it has, since 1965, been headquart ...
to lower prices instead of lowering taxes. In 2007, European trucker
A truck driver (commonly referred to as a trucker, teamster, or driver in the United States and Canada; a truckie in Australia and New Zealand; a HGV driver in the United Kingdom, Ireland and the European Union, a lorry driver, or driver in ...
s, farmers, and fishermen
A fisher or fisherman is someone who captures fish and other animals from a body of water, or gathers shellfish.
Worldwide, there are about 38 million commercial and subsistence fishers and fish farmers. Fishers may be professional or recreat ...
again raised concerns over record oil prices cutting into their earnings, hoping to have taxes lowered. In the United Kingdom, where fuel taxes were raised in October and were scheduled to rise again in April 2008, there was talk of protests and roadblock
A roadblock is a temporary installation set up to control or block traffic along a road. The reasons for one could be:
*Roadworks
*Temporary road closure during special events
* Police chase
*Robbery
*Sobriety checkpoint
In peaceful circumstances ...
s if the tax issue was not addressed. On 1 April 2008, a 25 yen per liter fuel tax in Japan was allowed to lapse temporarily.
This method of softening price shocks is even less viable to countries with much lower gas taxes, such as the United States.
Locally decreasing fuel tax can decrease fuel prices, but globally prices are set by supply and demand, and therefore fuel tax decreases may have no effect on fuel prices, and fuel tax increases might actually decrease fuel prices by reducing demand. But this depends on the price elasticity of demand
A good's price elasticity of demand (E_d, PED) is a measure of how sensitive the quantity demanded is to its price. When the price rises, quantity demanded falls for almost any good, but it falls more for some than for others. The price elastici ...
for fuel which is -0.09 to -0.31, meaning that fuel is a relatively inelastic commodity, i.e. increasing or decreasing prices have overall only a small effect on demand and therefore price change.
Demand management
Transportation demand management has the potential to be an effective policy response to fuel shortages or price increases and has a greater probability of long term benefits than other mitigation options.
There are major differences in energy consumption for private transport between cities; an average U.S. urban dweller uses 24 times more energy annually for private transport as a Chinese urban resident. These differences cannot be explained by wealth alone but are closely linked to the rates of walking, cycling, and public transport use and to enduring features of the city including urban density
Urban density is a term used in urban planning and urban design to refer to the number of people inhabiting a given urbanized area. As such it is to be distinguished from other measures of population density. Urban density is considered an importan ...
and urban design.
For individuals, remote work
Remote work, also called work from home (WFH), work from anywhere, telework, remote job, mobile work, and distance work is an employment arrangement in which employees do not commute to a central place of work, such as an office building, ware ...
provides alternatives to daily commuting
Commuting is periodically recurring travel between one's place of residence and place of work or study, where the traveler, referred to as a commuter, leaves the boundary of their home community. By extension, it can sometimes be any regul ...
and long-distance air travel for business. Technologies such as videoconferencing
Videotelephony, also known as videoconferencing and video teleconferencing, is the two-way or multipoint reception and transmission of audio signal, audio and video signals by people in different locations for Real-time, real time communication. ...
, e-mail, and corporate wiki
Wiki software (also known as a wiki engine or a wiki application), is collaborative software that runs a wiki, which allows the users to create and collaboratively edit pages or entries via a web browser. A wiki system is usually a web application ...
s, continue to improve. As the cost of moving human workers continues to rise, while the cost of moving information electronically continues to fall, presumably market forces should cause more people to substitute virtual travel for physical travel. Matthew Simmons
Matthew Roy Simmons (April 7, 1943 – August 8, 2010) was founder and chairman emeritus of Simmons & Company International, and was a prominent figure in the field of peak oil. Simmons was motivated by the 1973 energy crisis to create an invest ...
explicitly calls for "liberating the workforce" by changing the corporate mindset from paying people to show up physically to work every day, to paying them instead for the work they do, from any location. This would allow many more information workers to work from home either part-time or full-time, or from satellite offices or Internet cafe
The Internet (or internet) is the global system of interconnected computer networks that uses the Internet protocol suite (TCP/IP) to communicate between networks and devices. It is a '' network of networks'' that consists of private, pub ...
s near to where they live, freeing them from long daily commutes to central offices. However, even full adoption of remote work
Remote work, also called work from home (WFH), work from anywhere, telework, remote job, mobile work, and distance work is an employment arrangement in which employees do not commute to a central place of work, such as an office building, ware ...
by all eligible workers might only decrease energy consumption by about 1% (with present energy savings estimated at 0.01–0.04%). By comparison, a 20% increase in automobile fuel economy would save 5.4%.
Political action against market speculation
The price rises of mid-2008 led to a variety of proposals to change the rules governing energy markets and energy futures markets, in order to prevent rises due to market speculation.
On 26 July 2008, the United States House of Representatives
The United States House of Representatives, often referred to as the House of Representatives, the U.S. House, or simply the House, is the Lower house, lower chamber of the United States Congress, with the United States Senate, Senate being ...
passed the Energy Markets Emergency Act of 2008 (H.R. 6377),Energy Markets Emergency Act of 2008
, Opencongress.org which directs the Commodity Futures Trading Commission
The Commodity Futures Trading Commission (CFTC) is an independent agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures, swaps, and certain kinds of options.
The Commodity Exchange Ac ...
(CFTC) "to utilize all its authority, including its emergency powers, to curb immediately the role of excessive speculation in any contract market within the jurisdiction and control of the Commodity Futures Trading Commission, on or through which energy futures or swaps are traded, and to eliminate excessive speculation, price distortion, sudden or unreasonable fluctuations or unwarranted changes in prices, or other unlawful activity causing major market disturbances that prevent the market from accurately reflecting the forces of supply and demand for energy commodities."
See also
* 2000s commodities boom
* 2020s commodities boom
* 1970s commodities boom
The 1970s commodities boom refers to the rise of many commodity prices in the 1970s. Excess demand was created with money supply increasing too much and supply shocks that came from Arab–Israeli conflict, initially between Israel and Egypt. Th ...
* 2021–present global energy crisis
* 1970s energy crisis
The 1970s energy crisis occurred when the Western world, particularly the United States, Canada, Western Europe, Australia, and New Zealand, faced substantial petroleum shortages as well as elevated prices. The two worst crises of this period wer ...
Notes
External links
U.S. DOE EIA energy chronology and analysis
{{DEFAULTSORT:2000s Energy Crisis
2003 in economics
2004 in economics
2005 in economics
2006 in economics
2007 in economics
2008 in economics
History of the petroleum industry
Economic bubbles
Peak oil
Petroleum economics
Presidency of Barack Obama
Presidency of George W. Bush
Great Recession