Two decades ago, I was covering energy when oil moved above the $20-$30 a barrel range, where it had trodden water for years, and headed above $40. At the time, few analysts thought it would stay there and I don’t remember any believing it could top $50. As we now know, oil kept rising – with some volatility – to trade consistently in the $90-$110 range from 2011 to 2014.
In hindsight, nobody fully predicted the impact of rising demand in emerging markets, especially China, where it went from 4.6 million barrels a day (mb/d) in 2000 to 9.3mb/d by 2010. An oversight like that should make us wary about predicting too confidently what recent events – from Saudi Arabia saying it will raise output and drop its $100 target price, to the risk of war in the Middle East – will mean. Still, the history of the oil price may give us a few clues about what to watch.
Oil prices over the years
In the 1950s and 1960s, oil was abundant, but the oil price was carefully controlled and fairly stable (equivalent to about $30 in today’s terms). However, the power of Middle East exporters was rising as rapid demand growth swallowed up spare capacity in the US. In 1973, prices soared as these producers announced an embargo on exports to countries that had supported Israel during the Yom Kippur War. A second spike followed in 1979 after the Iranian Revolution and as the Iran-Iraq War disrupted production.
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High prices drove rapid growth from new sources – eg, the North Sea and Alaska – and crude declined steadily. Saudi Arabia tried cutting production to defend higher prices. Its output fell from around over 10mb/d in 1980 to under 3mb/d in 1985, when it got tired of this and ramped up again to regain market share. Prices briefly fell 50% before spending most of the next decade fairly steady (barring a spike in the Gulf War).
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Then we had a demand slump in emerging markets crisis in 1997 and 1998; the recovery and the boom of the 2000s; a brief collapse during the global financial crisis; and then a rebound to what looked like a permanently higher era. This sparked the US shale oil boom. Saudi Arabia increased production to try to crush it, halving prices again. The pandemic, which hit demand, and sanctions on Russia after it invaded Ukraine, which disrupted supply, bring us up to date.
The balancing act now is US shale versus Saudi Arabia. US firms needed a breakeven price of $64 to drill a new well earlier this year, according to a survey by the Federal Reserve Bank of Dallas; existing wells needed $39 to cover costs. If that’s broadly right, shale supply should be squeezed if Saudi Arabia takes prices below $60, as wells run down (shale wells decline faster than conventional ones) and new ones aren’t drilled. Conversely, get to $90 and they’ll throw everything at it.
So that seems a logical – if volatile – range over the medium-term. Still, the tail risks go every possible way: a Middle East regional war that locks in capacity, a peak and decline in US shale, a faster transition to renewables, an economic crisis (eg, in China), or even, on the bull side, demand that rises faster than expected in India.
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