Crude oil prices make the news every time there is a large movement. It doesn't matter whether this is a jump or a fall in prices. The bottom line remains that crude oil is one of the most widely watched commodities in the markets.
There are a number of reasons behind this, most importantly, the fact that oil prices remain a key factor when it comes to anticipating economic growth. The general rule of thumb is that in an expanding economy, there is renewed demand for crude oil. But during a recessionary period, demand for crude oil tends to fall, pushing prices lower consequently.
But not everything is as black and white as it seems. Crude oil is one of the rare commodities that requires a broader watch, spanning from geopolitics to the global economy, to regional politics in the Middle east.
Oil has been a reason for war, and while it has helped economies such as Norway to prosper, it has also caused civil unrest in places like Africa. Thus, when it comes to monitoring oil prices, there are a lot of factors to consider.
History abounds with numerous case studies when it comes to the crude oil markets, spanning from around the 1980s when oil prices began to matter. To this day, the US remains the world's largest consumer of crude oil.
Thus, the impact of crude oil is often felt immediately in the US. With the United States being the world's largest economy, oil prices can have rippling effects as a result of this interrelation between the global markets.
This article aims to summarize some of the key findings from different case studies in an effort to summarize the documented evidence of oil price volatility.
Historical timeline of Crude oil price volatility
The above chart is the historical crude oil price timeline from circa 1980 to the current day. Within this historical period, we have eight major events that caused a severe disruption in the crude oil markets.
The eight major events impacting crude oil prices historically can be tabled as below:
| Period | Event |
| 1985 – 86 | Middle east unrest and lack of OPEC unity |
| 1990’s | Iraq’s invasion of Kuwait, triggering the First Gulf War |
| 2008 | Global financial crisis |
| 2011 | Egypt Crisis and the Suez Canal |
| 2014 | Continued demand from China |
| 2015 | OPEC oil war against US Shale |
| 2018 – 2019 | US sanctions on Iran, Russia oil supply |
| 2020 | Covid pandemic |
Although our timeline starts in the 1980s, the first document oil crisis was in the 1970s. This came about due to the emergence of a new normal in the oil markets. Up until then, oil prices were allowed to move freely, adjusting to supply and demand.
However, as the price of imported crude oil in the United States nearly quadrupled in a mere quarter, it created havoc due to policy responses.
Images of the 1970s oil crisis can be seen on the Internet. Prior to 1973, the US had regulated the price of crude oil, creating periods of stable oil prices. But this was largely due to internal spare capacity. When this ended, the US had to eventually abandon its ideal of maintaining oil price stability.
The oil crisis of the 1980s
The early and mid-1980s are seen as the second oil crisis. This was when the price of WTI crude oil was quite volatile. But for a brief period, oil prices actually fell. This was between 1985 and 86. Oil prices were previously at the then historical highs of $30 a barrel.
But weaker demand and output from non-OPEC countries kept prices in check. Mainly, the UK and the US started pumping more oil. This was a direct consequence of a fallout with OPEC nations, which refused to increase production.
However, in response to this increased production, OPEC opted for a strategy to focus on market share, consequently leading to lower prices in a bid to capture a wider bite of the clientele.
While lower oil prices felt like a boon, especially for consumers such as the United States, there was trouble brewing on the horizon. Oil prices fell below $20 a barrel only for a brief period, before starting to rise.
The Gulf War of the ’90s
It was the trouble that soon morphed into a full-fledged geo-political crisis, leading to the Gulf War. The United States got involved in a bid to dissuade Iraq’s intentions to take over Kuwait, its oil-rich neighbour.
The Gulf war saw oil prices surging briefly to $40 a barrel largely due to the uncertainty surrounding the war. The First Gulf War was short-lived, spanning just nine months. And as evident by the price surge, the increase in oil prices to above $40 was only brief.
Following this, oil prices enjoyed another brief spell of stability. Between the periods 1991 to 2002, oil prices were trading between $28 and $10 a barrel respectively. There was a brief increase in oil prices in the year 2000.
This is by and large attributed to higher demand from China. This is evident from the fact that PetroChina actually toppled Exxon Mobile as the world’s largest company by the fall of 2007.
Oil prices rise from 2000 - 2008
For close to eight years, oil prices rose sharply. This was due to a combination of various factors, with some of the oil-producing companies hiking prices and enjoying a windfall from higher prices. At the same time, the higher crude prices also led to increased economic benefits for oil-producing nations, which included countries like Canada, and Russia, besides the OPEC member nations.
In 2001 of course, the US 9/11 attacks kept prices supported to the upside. Following this, the second Gulf War, saw prices rising steadily above $80 a barrel. At the same time, demand from new market players, namely India and China led to increased demand.
However, there is an alternate theory about the price hike in oil markets being a result of speculative trading rather than actual demand. Still, the steady increase in oil prices saw its peak at $127 by June of 2008.
The 2008 global financial crisis
By mid-year 2008, oil prices started to fall. This came on the back of renewed uncertainty in the US, led by the subprime crisis. There were already talks of a recession, but things took a turn as the crisis peaked between April 2008 and 2009. Oil prices fell to lows of $44.60 a barrel, losing close to 68% in just half a year.
When one talks about the crisis in the oil markets it is movements such as these that are a constant. Oil prices can get very volatile and such rapid swings in prices are nothing new for this commodity.
While the world continued to reel in the aftermath of the 2008 crisis, oil prices already formed a bottom and were soon on their way to the upside once again. This is largely due to the Fed’s efforts to evoke financial stability globally.
2011 Egypt Unrest
In 2011, the civil unrest in Egypt proved to be another catalyst for the oil markets. Oil traders were hit by the uncertainty and especially its influence on the Suez Canal. Oil prices touched $100 on the back of this incident.
The unrest started as an uprising against the Egyptian president Hosni Mubarak. Workers threatened to block the Suez Canal if their demands were not met. The Suez Canal is an important global trade route, connecting Asia and the Middle East to Europe and beyond.
As of 2020, the Suez Canal services approximately 12% of global trade. A more detailed take on the Suez Canal can be seen here.
Demand for Oil from China
Meanwhile, China’s economic machine continued to chug ahead. Consequently, during periods of geo-political stability, oil prices continued to remain high. This is largely attributed to increased demand from China.
It was during the years from 2000 that China’s economic might started to take shape. It became the global hub of cheap manufacturing. As a result, its appetite for crude oil grew sharply, which kept prices well above $80 a barrel.
OPEC price war against US Fracking
In the periods following 2014, oil prices once again took a sharp turn. Between the periods 2014 and 2016, oil prices once again fell by 68%. This time, the reason was because of the emergence of the US shale oil industry.
Also known as hydraulic fracking, the oil price in the US and Canada surged, which also benefitted on the back of higher oil prices. To maintain its dominance in the oil markets, OPEC, led by Saudi Arabia embarked on a strategy of oversupply.
Since fracking was considerably more expensive, Saudi's strategy of flooding the market with oil was created to flush out the US fracking companies. However, in hindsight, many consider this to be a failed strategy as it fracking simply resumed when prices were more favourable.
Alongside the oil price wars, reduced global demand, led by a slower growth from China contributed to reduced demand as well, pushing oil prices lower.
US sanctions on Iran – Russia supply
Following the oil war saga, OPEC managed to consolidate its market share. It is estimated that by 2018, OPEC member nations were controlling nearly 72% of the global oil reserves and around 41% of the global oil supply.
The US-led sanctions on Iran, due to the nuclear testing briefly pushing oil prices back to $80 a barrel. This was also on account of Venezuela lowering its production capabilities. Following this, oil prices once again plunged.
This was attributed to the Russian oil supply hitting the markets. In November 2018, oil prices fell a dramatic 30% in a single day and fell over 74% by 2020 with the onset of Covid and the global response.
The covid pandemic
The covid pandemic of 2019 – 2020 is still fresh in memory. The pandemic saw the global economy come to a halt with travel disruptions and businesses staying shut. Consequently, oil prices crashed to negative territory for the first time in history.
In terms of settlement prices, oil prices touched lows of $18 a barrel, last seen in 2001. Storage became a concern due to reduced demand across the globe, putting downward pressure on oil prices.
Since then, oil prices managed to recover as economies gradually began to open by 2021. This led to a sudden increase in demand as businesses scrambled back to make up for the lost years. Consequently, oil prices surged sharply, rising over 500% from the crater in May 2020.
The Russian war in Ukraine also kept prices higher amid heightened global uncertainty and geopolitics.
All in all, if there is one clear pattern when it comes to the oil markets, and geopolitics, OPEC play a huge role in shaping prices. Not to forget the role the United States also plays in the global dynamics.
It is also clearly evident that oil markets experience higher volatility due to the varied nature of the dynamics at play. Thus, the 60% on average rise and fall in oil prices are not something new.
Further reading about Oil markets
Oil dependence and US foreign policy – This timeline article captures the oil market developments from the early 1880s to the current day. It gives a telling narrative of important Oil was to the United States and also documents the various oil crises.
History of OPEC – No story about oil markets can be concluded without at least a mention of OPEC. This article from Energy education outlines key historical moments of OPEC and how the organization came to be. It captures the various members who joined the oil cartel from its early days to the present.
The secret of the Seven Sisters – A youtube documentary by Al Jazeera, the Secret of the Seven Sisters is a four-episode documentary about the emergence of oil and its importance to the global economy. The documentary takes a historical perspective on how the US pursued its foreign policy largely due to oil.
The term Seven Sisters is a colloquial term that reference to the big oil companies.
