WWII & Price of Oil

WWII & Price of Oil

Crude oil prices behave much as any other commodity with wide price swings in times of shortage or oversupply. The crude oil price cycle may extend over several years responding to changes in demand as well as OPEC and non-OPEC supply.

Crude Oil prices ranged between $2.50 and $3.00 from 1948 through the end of the 1960s. The price oil rose from $2.50 in 1948 to about $3.00 in 1957. When viewed in 2008 dollars an entirely different story emerges with crude oil prices fluctuating between $17 and $19 during most of the period.  The apparent 20% price increase in nominal prices just kept up with inflation. 

From 1958 to 1970, prices were stable near $3.00 per barrel, but in real terms the price of crude oil declined from above $19 to $14 per barrel.  The decline in the price of crude when adjusted for inflation for the international producer suffered the additional effect in 1971 and 1972 of a weaker US dollar. Established in 1960 OPEC, with five founding members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, took over a decade to establish its influence in the world market.  Two of the representatives at the initial meetings had studied the the Texas Railroad Commission's methods of influencing price through limitations on production. By the end of 1971, six other nations had joined the group: Qatar, Indonesia, Libya, United Arab Emirates, Algeria and Nigeria.  From the foundation of the Organization of Petroleum Exporting Countries through 1972 member countries experienced steady decline in the purchasing power of a barrel of oil.

Throughout the post war period exporting countries found increasing demand for their crude oil but a 40% decline in the purchasing power of a barrel of oil.  In March 1971, the balance of power shifted.  That month 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 (Texas, Oklahoma and Louisiana) 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.

In 1972, the price of crude oil was about $3.00 per barrel.  By the end of 1974, the price of oil had quadrupled to over $12.00. The Yom Kippur War started with an attack on Israel by Syria and Egypt on October 5, 1973. The United States and many countries in the western world showed support for Israel. Because of this support, several Arab exporting nations and Iran imposed an embargo on the countries supporting Israel. While these nations curtailed production by 5 million barrels per day other countries were able to ...