The world uses a vast amount of oil, and has done for decades now. Its price has gone up and down like a yoyo over the years. What made it do all this in the past when 'peak oil' was not yet upon us?
Until the very late 1960s the oil production capactiy of the US was in excess of demand. This had been true since the opening of the East Texas oil field in 1930, so under the juristiction of the Texas Railroad comission wells were only allowed to pump on certain days of the week to prevent over production. Until 1973 the price of oil was very low and relatively stable.
In 1971 the lower 48 states of the US hit peak production and went into decline and the pumping restrictions were removed. By this time the Saudi Arabia's oil fields, most notably the utterely gianormous Ghawar, had come into production and were now the global swing producer. OPEC had been formed. As the US had lost excess capacity to bring online it no longer acted as a swing producer. In 1973 the Yom Kippur war was fought and Israel recieved a great deal of direct help from the US. In responce Saudi led OPEC in a boycott of oil production. There was no spare capactity to bring online so bidding for oil on the markets went through the roof. The price of oil spiked enormously and there were severe supply shortfalls in the US. In the aftermath OPEC tried to maintain higher prices but competition between members meant they slowly increased market share and new oil provinces came online (such as North Sea), this increased the availablity of oil lowering demand.
The second great oil shock was in 79 when Iran went through a revolution and lost much of its production then Iraq invaded. The aftermath of the 79 oil shock meant that conservation that had been being explored before 79 went into overdrive and world oil consumption fell markedly. New fields in the Soviet Union also came online and as the fields of Iran and Iraq returned to production the price fell as supply outstripped demand. Saudi kept cutting production in the post 80 period to try to maintain a high oil price while other producers increased, then in 85 Saudi calculated that it had sufficient spare capacity that it could simply gain more money from flooding the market with its oil and just take the lower price. It upped its 'reserves' by about 100 billion barrels (OPEC production quotas are based on reserves) and the price collapsed.
From 85 to 2001 the price of oil was very cheap and than during the American Iraq war of 91.
The low cost of oil helped kill of the Soviet economy. Oil production capacity remained ahead of supply inspite of the depleation of US production capacity (which depleated inspite of Alaska North Slope comming online).
In the mid 90s Russian and FSU supply began increasing again (had peaked mid 80s) due to the availability of secondary and tertiary recovery technologies and new investment in infrastructue from the western majors, this helped maintain the over supply in the 90s.
Into the 2000s things have changed, Chinese demand increase has seen global demand increases remain strong while supply increases tailed off and came to a near end in 2005. Oil has slowly ratcheted up in price about $10 a year since 99. In 99 UK North Sea peaked and went into decline and other major provinces also went over the top (Indonesia is now a net importer and no longer in OPEC). Saudi Arabia had maintained publically that it had over 1.5 million barrels a day of shut in capacity it could flood the market with during this period. However the Saudis had long maintained the need of a stable price of oil to make it profitable for producers to invest in new oil fields but not so high that investment in new energy sources and efficiency increases were necessary (the huge drop in global consumption post 79 nearly bankrupted the kingdom). Saudi loudly and often proclaimed it determined the global price of oil with its shut in oil production (it famously displayed this capacity by turning on the taps in Gulf War I and durning the early part of the Iran Iraq war).
But as the price raised through the 90s and the Saudis did not increase oil production doubts began to emerge, at first the price run up was given as a 'security premium' due to US tensions with and later invasion of Iraq. Then as the price moved above $60 and the Saudis did not act people began charging more and more for there oil, no one was bringing on excess supply to quell the price runup. Buyers became more frantic and poor nations began to get bidded out of the market. By 2007 oil was trading at $80-$90 but there was no collapse of demand or new supply. When Saudi and Iran offered there spare capacity the markets did not want it. It was sulphur rich, low API (low 20s) dirty hard to refine oil, this kind of oil creates maintenance problems with refinaries and is very hard to convert to diesel and petrol.
Then the bull run kicked off in grand style Speculation, probibly, lack of supply, well lack of 30 API plus definenetly, weak dollar: offcourse, every excuse is true to some point. Good for Saudi. Nope. Its killing US airlines and killed US SUV factories. Its killing structural demand.
Where will oil go? Dunno. If I knew that Id be laughing all the way to the bank.
