Oil prices can be historically divided into four phases following World War II. Tim McMahon of InflationData.com has run the numbers and adjusted the monthly averages of nominal oil prices for inflation. It’s mostly a story of long periods of price stability, followed by brief interludes of price volatility.
The History of Oil Prices
From 1946 until the early 1970s oil prices hovered around $20 per barrel, on an inflation adjusted price. During this time, cars got bigger, heavier, and faster – and oil demand accelerated. But in 1973 came the Oil Crisis, the embargo and long lines at gas stations. Prices soared throughout the mid to late 70s, peaking in December 1979 at a monthly average of more than $115.
Oil prices then declined to a range-bound $30 to $40 through the mid 1980s until the early 2000s. As prices once again began their steady climb, cars got smaller, lighter and slower. Fuel efficiency became a major concern, as oil prices escalated to a June 2008 high of $134.
The global financial crisis popped the oil bubble as inflation-adjusted prices astoundingly fell to below $40. And since that time, as the world economy has begun to heal, oil prices have once again taken a rough ride to the $100 range.
Forecasting Future Oil Prices
According to Harvard research, global oil production is likely to grow to 110 million barrels per day by 2020 — the largest increase in a single decade since the 1980s. According to the study, the surge in oil production capacity will occur almost everywhere, with the largest increases in Iraq, the United States, Canada, Brazil, and Venezuela.
The shale oil boom is fueling the rise in production around the world — and particularly in the U.S. — moving America up the ladder in the global standings of producing countries. Already, North American production has been boosted by 5 million barrels a day, which is more than 5% of today’s global demand. It is reported that the North Dakota Bakken/Three Forks formation has as much untapped shale/tight oil as a Persian Gulf country.
Had shale oil production not come into existence, analysts say oil prices would be much higher today. In fact, with increasing production and a global focus on energy efficiency, industry experts say oil prices could fall significantly — perhaps even collapse. But George L. Perry of the Brookings Panel on Economic Activity says that oil prices are hard to forecast. There are simply too many wild cards, due to shocks in both global demand and supply.
Oil prices are limited on the downside by production costs, especially considering the high costs associated with producing shale oil. But there is no barrier on how high prices can rise, except perhaps the laws of supply and demand.
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