Trends in crude oil prices

Crude oil prices have been capturing many news headlines worldwide, be they are falling or rising. Crude oil has been demonstrating a sense of its importance to global consumers for the past couple of years. In the past, many economies had failed to adeptly face crude oil price shocks of 1974 and again in 1979. This time around the shock was building up steadily. Most economies, developed and developing, had the knowledge of this built-up and had prepared to face this shock.

Between 2001 and 2004, the OPEC Reference Basket of crude oil was in the range of US$20 and US$40 a barrel. In 2006, it rose to over US$70 a barrel before receding to current level of US$55 a barrel. Though it should be noted that in real term these crude oil prices are still below those heralded in the early 1980s, when the crude oil basket had reached US$85 a barrel at today’s prices. In July 2006, the US light crude oil touched an all time high of US$78.40 a barrel. Analysts and experts, both from industry and commodity investors, had predicted crude oil to even touch US$105 a barrel, if the pace of increase persisted.

The crux of the rise in crude oil prices is the mismatch between supply and demand of refinery products. Refining capacities have not commensurately kept pace with the rise in demand. Crude oil, as such, was in ample supplies and this was time and again asserted by OPEC itself. The OPEC was also determined to increase output if crude oil prices continue to spurt. It did so in 2006 to rein in rising prices. Now that crude oil prices have touched the year’s low, and have lost almost 30% of its peak, OPEC have cut output in November and have indicated that crude oil output will be further cut if the current free fall in crude oil prices continue.


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