The oil shocks of the century

Smita Mishra

The oil prices are skyrocketing and no specific economic mantra can explain it today. The phenomenon of high prices is being blamed equally upon betting, hedging of oil investments to reduce future risk, soaring demand for oil, paucity of resources and the monstrous need created in developing countries like India and China. But the oil shock that the world is reeling under now has caused tremors in the past too. Lets examine how and when-

1973: Israel War -Triggered by the Arab Israel war, the year saw the first oil shock which at that time no one imagined would become a recurring phenomenon of the new century. OPEC responded to Israeli gains in war by imposing Arab oil embargo, resulting in skyrocketing prices (as high as 400%). The year is significant as for the first time oil was used as a political weapon to tame Israel which was forced to accept UN mediation.

1979- Civil war in Iran-The worsening political condition within Iran, the civil war and long tiresome turmoil within the state which ultimately led to the exile of the Iranian King and the establishment of Iranian Republic, resulted in a situation marked by uncertain and dwindling oil production. There was a practical halt for a while in oil supply from Iran, world’s 4th largest oil producer. The other oil producing states had to step up supply and raise prices to meet the crisis.

1980- Iraq’s invasion of Iran-The year saw the invasion by Iraqi forces on war ravaged and battered Iran which had very recently suffered the pangs of a revolution. War between the world’s two largest oil producers severely affected production in both the countries resulting in a major supply crisis across the world. There was nearly 10% reduction in oil production and the obvious result was an unwelcome two-fold price rise.

1985-86- Price crash- There was a crash in oil prices due to fall in demand. The reason was the consumers’ inability to sustain the burden of continuous high prices. As a consequence the users began to look for alternative options, method to save energy and increased explorations in new horizons. Saudi Arabia too increased its production (which it was forced to reduce earlier due to OPEC quotas) and the oil prices came down to $10 a barrel.

1990- Iraq’s invasion of Kuwait- The Kuwait war was one of the most ill timed wars in the history of oil prices. It occurred at a time when the world was basking in the comfort of very reasonable oil rates from nearly half a decade.

But Iraq’s ambition to command the reigns of world’s third largest oil producer and the desire to become a global leader and manipulator of oil supply to the world became the motivation behind its attack on Kuwait. The result -as would have been was the sudden shoot in prices due to uncertainty of production.

1991-Gulf War – The situation in Kuwait came under control after a UN backed coalition of 34 nations (led by US and UK) entered the Gulf. The result of the Gulf war was the steady decline in oil prices over a long happy period that lasted 21 years.

1997- Asian economic crisis- fall in prices – After a period of rapid economic growth, there was a sudden recession in most Asian economies causing grave financial situation in most of them. The result was a slowdown in growth and production and the consequential slowdown in the consumption of oil that contributed to the sinking of oil prices throughout the world.

2001: Prices plummet again – The coming of Vladmir Putin to power in Russia in 2000 was the beginning of an overall change. One of the first being perhaps, the augmentation of oil production resulting in the lowering of the global prices. The fall, which further plummeted after 9/11 had an adverse impact on the US economy, which seemed to move towards hibernation. Finally OPEC had to intervene by cutting down production to stop the tumbling prices.

2003-US invasion of Iraq – Initially the world reacted to US invasion of Iraq as a war prompted by America’s hunger for oil. But the result was not as it was anticipated then. There would have been lowering of oil prices after American companies established control over Iraqi oil wells, but the consequence was uncertain production and hence the spiraling prices.

2006- Israel-Lebanon war – A new high of $78 a barrel was reached after oil production became uncertain with the launch of Israeli attacks over Lebanon. The war sent shocks across Middle East resulting in soaring prices.

2008-Nothing seems more – The oil prices in 2008 have reached a point where no price seems too much. Who is to be blamed for this phantom surge seems to be the question of the decade. Manipulators, speculators, developed or the developing, demand, supply or the sinking resources-the reason of this astronomical rise of oil prices seems elusive.

The one thing that astonishes is the consumer’s reaction. A world which had panicked at $40 a barrel in 1980 just flinches and winces at the soaring oil price graph and talks casually about $200 a barrel tag!