Oil Prices: Past, Present, & Future - Mafhoum · Oil Prices: Past, Present, & Future Gulf Research Center November 23, 2005 ... Iranian Revolution Saddam becomes president Start of

Copyright © 2002-2005 Gulf Research Center. All rights reserved.

Oil Prices: Past, Present, & Future

Gulf Research CenterNovember 23, 2005

*A. F. Alhajji, PhD is also George Patten Chair of Business and Economics, College of Business Administration, Ohio Northern University, USA

Gulf Energy Program - ModeratorGulf Research Center

Dubai, UAE

A. F. Alhajji*, PhD


Outline

• Historical Overview of Oil Prices• Recent Development

– Short Term Factors– Long Term Factors

• Future Prospects


Politics and Oil Prices

0

5

10

15

20

25

30

35

40

45

50

1973

Jan

1974

Jan

1975

Jan

1976

Jan

1977

Jan

1978

Jan

1979

Jan

1980

Jan

1981

Jan

1982

Jan

1983

Jan

1984

Jan

1985

Jan

1986

Jan

1987

Jan

1988

Jan

1989

Jan

1990

Jan

1991

Jan

1992

Jan

1993

Jan

1994

Jan

1995

Jan

1996

Jan

1997

Jan

1998

Jan

1999

Jan

2000

Jan

2001

Jan

2002

Jan

2003

Jan

2004

Jan

2005

Jan

2006

Jan

$/b

Embargo

IranianRevolution

Saddam becomespresident

Start of Iraq-Iran War

Saudisincreaseproduction

Major destructionto Iraqi and Iranianoil facilities

Invasion of Kuwait The Gulf War

Iraq-Iranwar ends

Iraq & UNOil-for-Food

The Asian Crisis

Oil-for Food

IraqNigeriaIndonesia

September 11

IraqVenezuela

Invasionof Iraq

Terror

IraqRussiaVenezuela


Two conclusions

• This is the only time in history when oil prices increased substantially without a major political event

• Minor political events lead to daily price volatility• Political events exist even with low oil prices


The Impact of Iraq in 2001

15

17

19

21

23

25

27

29

31

33

35

2/1

11/1

1/23 2/

1

2/12

2/22 3/

5

3/14

3/23 4/

3

4/12

4/24 5/

3

5/14

5/23

4/6/

2001

6/13

/01

6/22

/01

3/7/

2001

7/13

/01

7/24

/01

2/8/

2001

8/13

/01

8/22

/01

8/31

/01

9/17

/01

9/26

/01

5/10

/200

1

10/1

6/01

10/2

5/01

5/11

/200

1

11/1

4/01

11/2

6/01

5/12

/200

1

12/1

4/01

12/2

6/01

Arab Light Brent WTI

Bush Threatens Iraq

Attack on Iraq

Increase in IraqiExports

Iraq

Return of IraqiExports

The Terrorists' Attack

Return of IraqiExports

Bush Threatens Iraq

IraqBush orders f illing the SPR

Iraq

Data source: IEA, 2002


Politics & Oil Prices in 2003

20

22

24

26

28

30

32

34

36

38

40

12/3

1/02

1/14

/03

1/28

/03

2/11

/03

2/25

/03

3/11

/03

3/25

/03

4/8/

03

4/22

/03

5/6/

03

5/20

/03

6/3/

03

6/17

/03

7/1/

03

7/15

/03

7/29

/03

8/12

/03

8/26

/03

9/9/

03

9/23

/03

Brent WTI

Bush issues ultimatum to Saddam

Start of the invasion

Some Iraqi Resistance

The fall of Baghdad

The Official end of war OPEC announces

production cutPipeline explosions

Labor strike in Nigeria

Terrorist attack in Jakarta

OPEC maintainsquotas

Iraq resumesproduction in the north

$/b


Daily Spot Oil Prices in 2004

262830

323436384042

4446485052

545658

1/1

1/16

1/31

2/15 3/1

3/16

3/31

4/15

4/30

5/15

5/30

6/14

6/29

7/14

7/29

8/13

8/28

9/12

9/27

10/1

2

10/2

7

11/1

1

11/2

6

12/1

1

12/2

6

OPEC Brent WTI$/b

Source: EIA and OGJ


812162024283236404448525660646872

1/2/

1998

4/2/

1998

7/2/

1998

10/2

/199

8

1/2/

1999

4/2/

1999

7/2/

1999

10/2

/199

9

1/2/

2000

4/2/

2000

7/2/

2000

10/2

/200

0

1/2/

2001

4/2/

2001

7/2/

2001

10/2

/200

1

1/2/

2002

4/2/

2002

7/2/

2002

10/2

/200

2

1/2/

2003

4/2/

2003

7/2/

2003

10/2

/200

3

1/2/

2004

4/2/

2004

7/2/

2004

10/2

/200

4

1/2/

2005

4/2/

2005

7/2/

2005

10/2

/200

5

Brent WTI$/b

Daily Spot Oil Prices (1998-Present)

Source: EIA, 2005

The Invasion


Short-term vs. Long-term

• Short-term factors are those political, economic, technical, and natural factors that cause short term fluctuations in oil prices around their average.

• They do not determine the long-term direction of oil prices.

• They determine the upper and lower limits in the short run.

• Examples: Pipeline explosions, changes in weekly stocks, hurricanes, ..etc

• Long-term factors are those political, economic, technical, and natural factors that determine the long-term direction of oil prices.

• They shift the average of prices for an extended period of time.

• They do NOT determine the upper and lower limits

• Examples: Major wars sanctions, oil market collapse, new technology ..etc


Short-Term Factors

• Political Factors– Iraq– Venezuela– Nigeria– Russia– Terrorism


Short-Term Factors

• Economic Factors– Economic Growth– OPEC– Inventories– Speculation– Price of Natural Gas– Labor Strikes– The US Strategic Petroleum Reserve


Increase in Economic Growth Rates

Sٍource: International Monetary Fund, World Economic Outlook Database, April 2005.

0123

456789

101112

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Adv. economiesEuro area WorldChinaIndiaUnited States

%


Change in World Petroleum Consumption

0

500

1000

1500

2000

2500

3000

1998 1999 2000 2001 2002 2003 2004

000 b/d

Source: IEA, 2005


Why Demand Increased?

• China– Economic Growth– Migration of IT Companies to China (transferred

demand)– Electricity Sector and Private Generation

• United States– Economic Recovery– Rise of Price of Natural Gas– SUVs– SPR


Why Demand Increased?

• Japan– Maintenance of nuclear power plants

• Europe– Economic recovery– The increase in the value of the Euro


Oil Prices in Dollar and Euro

0

10

20

30

40

50

60

1/4/

1999

4/4/

1999

7/4/

1999

10/4

/199

9

1/4/

2000

4/4/

2000

7/4/

2000

10/4

/200

0

1/4/

2001

4/4/

2001

7/4/

2001

10/4

/200

1

1/4/

2002

4/4/

2002

7/4/

2002

10/4

/200

2

1/4/

2003

4/4/

2003

7/4/

2003

10/4

/200

3

1/4/

2004

4/4/

2004

7/4/

2004

10/4

/200

4

1/4/

2005

WTI in $ Brent in Euro$-€ /b

$

€

Source: EIA and Federal Reserve Board, 2005.


0

5

10

15

20

25

30

35

40

45

Oct

-73

Oct

-74

Oct

-75

Oct

-76

Oct

-77

Oct

-78

Oct

-79

Oct

-80

Oct

-81

Oct

-82

Oct

-83

Oct

-84

Oct

-85

Oct

-86

Oct

-87

Oct

-88

Oct

-89

Oct

-90

Oct

-91

Oct

-92

Oct

-93

Oct

-94

Oct

-95

Oct

-96

Oct

-97

Oct

-98

Oct

-99

Oct

-00

Oct

-01

Oct

-02

Oct

-03

Oct

-04

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

$ Oil Price Oil Price¥$/b ¥/b

Oil Prices in Dollar and Yen


$

¥


Short-Term Factors

• Technical factors– Refinery outages– Adjustment for new environmental laws– The UN Shipping and Port Security Code


Short-Term Factors

• Natural Factors– Storms in the US and Europe– Hurricanes in the Gulf of Mexico– Sandstorms in Iraq– High wind in the North Sea


In the Long Run

• Major Political Events– The Iraq-Iran War (1980-1988)– The Iraqi Invasion of Kuwait (1990)– The Gulf War (1991)– The War on Terrorism (2001-present)– The US Occupation of Iraq (2003-present)– Economic sanctions on oil producing countries (Iraq, Iran,

Libya, Myanmar, Sudan, and Syria)


In the Long Run

• Major Economic Events– The price collapse of 1986– The price collapse of 1998– Growth in IT Technology– Dollar depreciation (2002-present)– Predictions of growth in non-OPEC production


World Excess Capacity Vs. Oil Prices

0

1

2

3

4

5

6

7

8

9

10

11

12

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Dec

2004

Jan

2004

June

2004

Aug

2004

Oct

2004

Dec

2005

Feb

2005

Apr

2005

June

0

5

10

15

20

25

30

35

40

45

50

World Excess Capacity Nominal Price Price ($)mb/d

Embargo

The IranianRevolution

Invasionof Kuwait

Economic sanctions

Strengthening the sanctions


Additions to Reserves

5523562037.3

24455.2

91529.4

18692.0

0

20000

40000

60000

80000

100000

120000

1972-1981 1982-1991 1992-199

Middle EastLatin America

000 b

ME

LA

ME

ME


The Future??


The Future

• Macroeconomic variables in the consuming countries• Expansion of production capacity in the producing countries


0

5

10

15

20

25

1973

Oct

ober

1974

Oct

ober

1975

Oct

ober

1976

Oct

ober

1977

Oct

ober

1978

Oct

ober

1979

Oct

ober

1980

Oct

ober

1981

Oct

ober

1982

Oct

ober

1983

Oct

ober

1984

Oct

ober

1985

Oct

ober

1986

Oct

ober

1987

Oct

ober

1988

Oct

ober

1989

Oct

ober

1990

Oct

ober

1991

Oct

ober

1992

Oct

ober

1993

Oct

ober

1994

Oct

ober

1995

Oct

ober

1996

Oct

ober

1997

Oct

ober

1998

Oct

ober

1999

Oct

ober

2000

Oct

ober

2001

Oct

ober

2002

Oct

ober

2003

Oct

ober

2004

Oct

ober

0

5

10

15

20

25

30

35

40

45

Discount Rate Federal Fund Rate Oil Prices% $/b

Interest Rates & Oil Prices



Changes in Government Expenditures Vs. Changes in Oil Prices

-0.01

-0.008

-0.006

-0.004

-0.002

0

0.002

0.004

0.006

0.008

0.01

0.012

0.014

0.016

0.018

1980

Q1

1981

Q1

1982

Q1

1983

Q1

1984

Q1

1985

Q1

1986

Q1

1987

Q1

1988

Q1

1989

Q1

1990

Q1

1991

Q1

1992

Q1

1993

Q1

1994

Q1

1995

Q1

1996

Q1

1997

Q1

1998

Q1

1999

Q1

2000

Q1

2001

Q1

2002

Q1

2003

Q1

2004

Q1

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

% Change in Government Consumption % Change in Oil Price

Average Increase in Governmnt Consumption

% %

Source: IMF, 2005 and EIA 2005


US Per Capita Income vs. Oil Prices

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

1973

q119

74q1

1975

q119

76q1

1977

q119

78q1

1979

q119

80q1

1981

q119

82q1

1983

q119

84q1

1985

q119

86q1

1987

q119

88q1

1989

q119

90q1

1991

q119

92q1

1993

q119

94q1

1995

q119

96q1

1997

q119

98q1

1999

q120

00q1

2001

q120

02q1

2003

q120

04q1

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

26,000

28,000

30,000

Real Oil Prices Real Per Capita incomeLinear (Real Per Capita income) Linear (Real Oil Prices)Price ($/b) Income ($)

Source: EIA and BEA, 2005


Current and Real Oil Prices ($2000)

Source: EIA, 2005 and the author's calculation

$0

$10

$20

$30

$40

$50

$60

$70

71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

Real $2000) Current

Year

$/b


Saudi Real Per Capita Income $ (1999)

25,000

30,000

35,000

40,000

45,000

50,000

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

ريال للفرد

Source: EIA, 2005

SR


OPEC’s Current and Real Oil Revenues

0

100

200

300

400

500

600

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Current Realمليار دوالر

Source: EIA, 2005

$ Billion


-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Current Real$ per capita

OPEC’s Real Per Capita Oil Revues ($2004)

One-third 1980Real

Current

Source: EIA, 2005


$-

$5,000

$10,000

$15,000

$20,000

$25,000

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Current Real (2004)$ per Capita

Saudi Real Per Capita Revenues

One-fifth 1980

Real

Current

Source: EIA, 2005


Saudi Real Economic Growth (1970-2006)

-15

-10

-5

0

5

10

15

20

25

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

%

11 %5 %


Saudi Crude Oil Production (mbd)

0

1

2

3

4

5

6

7

8

9

10

11

1973

ر نايي

1974

ر نايي

1975

ر نايي

1976

ر نايي

1977

ر نايي

1978

ر نايي

1979

ر نايي

1980

ر نايي

1981

ر نايي

1982

ر نايي

1983

ر نايي

1984

ر نايي

1985

ر نايي

1986

ر نايي

1987

ر نايي

1988

ر نايي

1989

ر نايي

1990

ر نايي

1991

ر نايي

1992

ر نايي

1993

ر نايي

1994

ر نايي

1995

ر نايي

1996

ر نايي

1997

ر نايي

1998

ر نايي

1999

ر نايي

2000

ر نايي

2001

ر نايي

2002

ر نايي

2003

ر نايي

2004

ر نايي

2005

ر نايي

Source: EIA, 2005

Similar Pattern?


Future ProspectsShort-term

• Fundamentally Tight Market– No marketable excess capacity– Demand still growing, though at a slower rate.– Hurricane season– Demand will grow if China revalue its currency. – Concerns regarding the adequacy of heating oil in the US during

the 4th quarter.– Stock build is not enough to avoid price spikes:

• 2 days of demand cover for crude (stocks and capacity)• 1 day for products• Not evenly distributed• Crude, mostly heavy


Future ProspectsMedium-term

• Fundamentally Tight Market with Possibility of Downturn.– Planned capacity expansion is not enough– Slow growth in Russian production with possibility of decline– Continued decline in US crude oil production– Continued decline in North Sea production – Continued maintenance and the planned shut down of nuclear reactors in

Asia (Japan) would increase demand for oil– More nuclear reactors in China will increase its demand for oil– The role of new technology and renewables will be very limited


Wars, Oil Crisis, and Economic GrowthReal GDP per Person in the US Economy

3,000

8,000

13,000

18,000

23,000

28,000

33,000

1929

1932

1935

1938

1941

1944

1947

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

Year

Rea

l GD

P pe

r per

son

(199

6 do

llars

)

Great Depression

World War II

Korean War

Vietnam War

First Oil Price Shock

Second Oil Price Shock

Gulf War


So…Can the past explain the future?

Documents

Oil Prices: Past, Present, & Future - Mafhoum · Oil Prices: Past, Present, & Future Gulf Research Center November 23, 2005 ... Iranian Revolution Saddam becomes president Start of