Industrial Plant 101: Global Oil Prices (Part 2)
by Yunki Jo | CEO
In the previous blog, I explained the emergence of the crude oil futures market through the first and second oil crisis, along with definitions of related terms. In this follow-up post, I will share with you in simple terms the world historical events that have affected oil prices since the oil shocks of the 1970s to the present day, and why oil prices have been affected.
First, let’s take a look at the first oil shock that started in 1973, which marked the beginning of the event.
1973 — First oil shock
In 1973, the Middle East conflict entered its fourth and final war, which had occurred four times since the establishment of Israel in 1948 until 1973. The fourth Middle East War, also known as the “Yom Kippur War” or the “Ramadan War,” began when Egypt and Syria, among the Arab nations that had suffered consecutive defeats in the previous three wars, launched a surprise attack against Israel.
The reason why the Ramadan War caused the first oil crisis was that OPEC used oil as a political weapon. During that period, the Middle East did not possess the technological expertise to extract oil, and thus generated revenue by granting oil majors mining rights (also referred to as “Oil Weapon” or “Arab Oil Weapon”).
Since the early 1970s, OPEC had been advocating for an increase in revenue from oil concessions. However, with the eruption of the Ramadan War, OPEC made the decision to use oil as a political weapon, announcing that crude oil production would be reduced by 5% each month compared to the previous month until Israel withdrew from the Arab occupation zone and Palestinian rights were restored. This announcement marked the beginning of the first oil crisis.
Following the outbreak of the war in October 1973, OPEC raised oil prices from $5.1 to $11.6 per barrel in January 1974, with prices more than tripling in just three months. The decision-making power over oil prices, previously held by oil majors, was completely transferred to OPEC in the aftermath of the first oil crisis, during which oil prices had quadrupled over the past year.
The scarcity of oil, coupled with soaring prices, resulted in production disruptions, inflation, and a recessionary environment (economists commonly refer to this as “stagflation”). This global recession was felt across all countries, both developed and developing.
1978–2nd Oil Crisis
Although the first oil crisis gave OPEC power in the oil market, it was difficult to discern the impact as crude oil prices surged in the midst of massive inflation. As a result, in December 1978, OPEC decided to increase oil prices again. Around the same time, Iran’s “Islamic Revolution” began in 1978, overthrowing the corrupt monarchy and establishing the Islamic Republic. The revolution resulted into bloody riots, causing Iran, the world’s second-largest oil exporter, to lose oil. As a result, the second oil crisis began with a total ban on exports from Iran. During this period, oil prices surged past the $20 mark.
Following that, in 1980, a war broke out between Iran and Iraq due to border issues, causing oil prices to skyrocket from the $20 level to $30. In the following year, the price of oil surged to $40 following Saudi Arabia’s announcement that it will “weaponize oil” as a countermeasure against potential European or American sanctions or as a means to exert pressure on other nations.
The world fell into recession again, and the damage to developed and developing countries was a little different from the first oil crisis. During the first oil crisis, developed countries, whose main business was the heavy chemical industry, suffered considerable damage. However, developing countries like Korea, which were just beginning to develop their heavy chemical industry, were less impacted by the shock. However, during the second oil crisis, developing countries with a growing heavy chemical industry suffered significant damage, while advanced countries that had prepared for the shock after the first oil crisis shifted their focus to new industries and were able to mitigate the impact. Developing countries were hit much harder in terms of inflation rates, with consumer price inflation reaching 32.0% compared to the 10.3% in developed countries.
1985~1995 — Saudi production increase, Gulf War, long-term low oil prices era
The oil prices, which had surged due to the second oil crisis, remained in the $30 range and then plummeted by half in the mid-1980s. This was because Saudi Arabia, which was trying to increase its market share, increased production. Consequently, the oil prices remained low throughout the mid 90s.
1997 Asian Financial Crisis
The prolonged era of low oil prices persisted through the 1990s and skyrocketed once again in 1997, triggered by the IMF crisis in Korea and swept across Asia. As a result, the economies and industries in Asia were paralyzed, causing the four successful Asian tigers to tumble like mudfish.
1999 — OPEC Production Cuts
In the late 1990s, the Asian economy started to recover, led by Korea, which had successfully graduated from the IMF program at an exceptional pace. As expected, there was an increase in demand for oil. Consequently, in 1999, OPEC countries, struggling with persistently low oil prices since 1997, agreed to reduce oil production for one year.
The article is getting very long (I wanted to write more but you might end up not reading it). Next week, I will talk about the history of the oil market since the 2000s.
Yunki Jo is the CEO of Market of Material (Steelboso).
