Changes in Crude Oil Pricing
Many won’t even believe today that volatility and crude oil prices were not synonyms some 60 years back. In fact between the periods immediately after the Second World War and till end of 1960s, crude oil only ranged between $ 2.5 and $ 3.0 per barrel. The prices were very stable and one could bank upon them while budgeting for this commodity. However we all have witnessed a very different story in the near past.
If we analyze this trend, with US dollar parity value in year 2008, we would see prices fluctuated between $17 & $19 from post World War II till 1970. This price change in percentage terms is around 20%, which can be considered a nominal price hike. If analysed in real terms (considering inflation during this period) we can conclude that actually the prices went down rather than going up. The suppliers of crude actually lost their realizations in real terms during this time period. To make things even worse for these suppliers the realizations in their local currencies even suffered more due to a weaker US Dollar in the years 1971 and 1972.
In the year 1960 OPEC (Organization of Petroleum Exporting Countries) was formed with its five founding members. Saudi Arabia, Iran, Iraq, Kuwait and Venezuela got together and formed a cartel with a view to improve their realizations out of crude sale. However it took over ten years for OPEC to exert some kind of the influence on international crude prices. OPEC members initially studied The Texas Railroad Commission’s report of influencing prices through limiting supply. In 1971 six other members were admitted to OPEC; Indonesia, Libya, Qatar, United Arab Emirates, Algeria and Nigeria.
1972 will be regarded as the pivotal year in deciding post World War II crude pricing. It was in this year that the Texas Railroad Commission abolished the norms of limiting the production of the crude oil. What this meant was that now there was no upper limit in crude production in America and hence no spare capacity available in their hands. Around this time in year 1972 the demand for crude improved all around the world, moving its prices upwards. Amongst all this the most important thing which emerged was the power base for crude oil shifted from Texas, America to OPEC. OPEC gained in strength after that and never looked back. Still today OPEC remains the major influential organization which governs international crude oil pricing strategy.
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