Oil Prices: Overview of Current World Market Dynamics

Publication Date: October 2001

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Economics

Type:

Abstract:

During the past three decades, oil prices have varied widely, rising after the 1973 Arab Oil Embargo, and increasing to nearly $40 per barrel after the 1979 Iranian political upheaval. Prices declined after their 1982 peak, and collapsed in 1985 as a result of declining demand and overproduction by members of the Organization of Petroleum Exporting Countries (OPEC). Oil prices spiked upward when Iraq invaded Kuwait in 1990, but declined after the Gulf Crisis passed. Throughout most of the 1990s, oil prices remained low, declining to $10 a barrel in early 1999. More recently, however, OPEC found the supply-demand balance in world oil markets favorable for raising prices.

The involvement of Middle Eastern terrorists in the recent attacks on the United States has raised concern that oil production in the region might somehow be affected. Crude oil price initially rose following the attacks. OPEC's reaction to the developing situation will be watched closely.

The four instances in which OPEC has succeeded in administering price increases have all been characterized by excess production capacity lying in the range of about 4 to 5 million barrels per day (mbd) or less. Current markets have produced this condition for OPEC, where its members' idle capacity lies in a range where production quotas have previously succeeded. This level of overhanging capacity, coupled with the pain endured during the 1990s' long drift downward to $10, has encouraged OPEC to act with more vigor than in the past. Between the beginning of 1999 and the most recent adjustment taking effect in September 2001, OPEC adjusted quotas eight times to successfully pursue a price range of between $22 and $28 per average barrel produced by the cartel. As it fine tunes its operations, OPEC is currently focused on a more specific $25 target.

OPEC faces several challenges in setting production quotas and trying to administer prices. The most immediate is the drop in demand following the events of September. Additionally, OPEC must make room for oil from Iraq, which began to flow in July. While an OPEC member, Iraq is not included in the quota program. Its exports are regulated by the United Nations under the oil-for-food program; squabbles with UN regulators have halted exports several times. Taken together with several members producing in excess of their national quotas, these factors have caused OPEC crude to fall below $20 per barrel.

At issue is whether OPEC will be able to address these matters and stabilize prices at the $25 target, or if crude oil prices will revert to the trends of the 1990s.