Part I - Supply-Demand or Boom-Bust (Same Thing) Oil Quiz

oil-rigsmall.gifThe fear surrounding oil shortage and price fluctuation are even older than my grandma. We may all remember the following unravelling of the world events as described by Time Magazine, "Prices break, and OPEC scrambles to keep them from going into a free fall From Europe to the Middle East, harried members of the Organization of Petroleum Exporting Countries huddled through the week. The structure of bloated oil prices that OPEC had erected over the past decade, condemning rich and poor nations alike to recurrent bouts of inflation and stagnation, was shaking wildly. Prices had broken and were threatening to go into a free fall. To prevent that from happening, the oil ministers of Saudi Arabia and several of its oil-rich Persian Gulf neighbors agreed to lower the official OPEC..." in 1983. described by Time Magazine, "Prices break, and OPEC scrambles to keep them from going into a free fall From Europe to the Middle East, harried members of the Organization of Petroleum Exporting Countries huddled through the week. The structure of bloated oil prices that OPEC had erected over the past decade, condemning rich and poor nations alike to recurrent bouts of inflation and stagnation, was shaking wildly. Prices had broken and were threatening to go into a free fall. To prevent that from happening, the oil ministers of Saudi Arabia and several of its oil-rich Persian Gulf neighbors agreed to lower the official OPEC..." in 1983.

Let's see when the following statements were made or events occurred:

Question 1: "The price of crude oil increased nine-fold within a few months, reaching a level that in real terms has never been equaled," He continues:
"In a rerun of the mining mania, new companies were formed at little or no cost, fraudulent claims to oil rich land were incorporated into companies with inflated capitalizations, and petroleum stocks were heavily manipulated. Shares were run up to a great height before the petroleum bubble evaporated into thin air."

Question 2: He became the First Lord of the Admiralty. He aggressively initiated military reforms, including development of naval aviation, tanks, and the switch in fuel from coal to oil, a massive engineering task, also reliant on securing Mesopotamia's oil rights, bought through the secret service using the Royal Burmah Oil Company as a front company. All this would prove decisive in his country's pre-eminent position in the world politics at that time. However, he had lot of skeptics when he undertook such bold steps, and putting country's defenses dependent on the fuel that was not home-based, like coal. Who was he?

Question 3: USGS (United States Geological Survey) has predicted the oil supplies will last less than a decade.

Question 4: Japan - almost totally reliant on imported oil, is upset and acts upon.

Question 5: Recently, the price of oil went as low as $10/ barrel ($6/ barrel if one adjusted for inflation). Petroleum is again as inexpensive as bottled water. What years are we talking about?

Answers

Answer 1: Edward Chancellor about the 1865 oil frenzy in his book on speculation, Devil Take the Hindmost

Answer 2: Winston Churchill in pre-World War I

Answer 3: 1919-1920

Answer 4: Some historians believe that in part Japanese attack on Pearl Harbor was in response to United States limiting oil supplies in 1941. Same is the reasoning for attack on oil-rich Dutch Indonesian islands.

Answer 5: 1998-1999

For a historical perspective, please check the price of oil in last 30 years.

More interestingly, let us look at a longer time view of oil prices within the historical context.

If you go even further back to 1860s, and do inflation adjustment, oil is much cheaper in present-era than it used to be then, and in the 19th century boom-bust cycles were more wild and ruthless.

Recently, the price of oil has been closely linked to war and peace in Middle East.

In the words of Daniel Yergin, "This is not the first time that the world has "run out of oil." It's more like the fifth. Cycles of shortage and surplus characterize the entire history of the oil industry. A similar fear of shortage after World War I was one of the main drivers for cobbling together the three easternmost provinces of the defunct Ottoman Turkish Empire to create Iraq. In more recent times, the "permanent oil shortage" of the 1970s gave way to the glut and price collapse of the 1980s."In the words of Daniel Yergin, "This is not the first time that the world has "run out of oil." It's more like the fifth. Cycles of shortage and surplus characterize the entire history of the oil industry. A similar fear of shortage after World War I was one of the main drivers for cobbling together the three easternmost provinces of the defunct Ottoman Turkish Empire to create Iraq. In more recent times, the "permanent oil shortage" of the 1970s gave way to the glut and price collapse of the 1980s."

You start noticing that oil and gas business and politics is not for faint-hearted. In futures market trading for oil and natural gas, political instability, tight supply-demand situation, lack of glutted inventories, and supply-demand chain being quite fragile plays an absolute havoc amongst traders. Sometimes, the risks are real, and sometimes, they are just only perception.

Note: Just a refresher quiz in oil economics and politics but are we ready to make changes in our lifestyle and bite the bulletas Part I. Coming soon are Part -II (How I learned to stop worrying and love the Peak Oil?) and Part-III (Challenges for future: Energy for tomorrow). Acknowledgements to Saheli Datta for invitation to join a lively debate on Peak Oil. The write-up is mix of my own synthesis, along with with expert analysis quoted in original form.

Courtesy: Image from www.ucl.com.

Navies built, armies waging wars in distant lands - all for a fickle....