The Price of Oil

With events in North Africa and the Middle East putting oil in the news recently, it's perhaps time to say a few words about the oil price.

Here's a graph of the movement of the daily oil price (Brent)  over the last 20 years or so.

By looking at the annual price over the same time period, we can smooth out some of the fluctuations in the graph as shown in the next plot.

We can see that the annual price of oil has been increasing steadily since 2004. There was a peak in the oil price at an annualised rate of around $100 and a fall to an annualised price of around $60 per barrel in 2009. In 2010, the annual price was up to $80.

Zooming in to the price over the last 6 months we can see a linear increase in price most of which preceeds the current unrest in the Middle East and North Africa.

The oil price started 2011 at $95 per barrel. Recent unrest in Libya has caused the oil price to increase to well above $110 per barrel.  If the oil price is in this range or higher for the rest of 2011, the annualised price for the year will be higher than the $80 per barrel figure of 2010 and possibly higher than the figure of around $100 in 2008.

It is thought that some of the increase in oil price since 2004 is due to world exports of oil peaking around 2005. It is believed that world oil exports will continue to decline and, unless there is a reduction in demand for oil, global oil prices will continue to be volatile.

In an interview with David Strahan in October 2007 Sadad al-Huseini, former head of exploration and production at Saudi Aramco, said that oil production had reached a structural ceiling determined by geology rather than geopolitics, and that the technical floor (the cost of producing oil excluding factors such as geopolitical risk and hedge fund speculation)  for the oil price would rise by $12 annually for the next 4 to 5 years as new fields become increasingly costly to exploit. At that time, just under three and a half years ago, al-Huseini is quoted as saying that the technical floor was $70 a barrel. Add three and a half times $12 and we get a technical floor price of $112 - which is almost exactly what the oil price is today. The oil price history with al-Huseini's projection of the technical floor price is shown in the final graph.

After the disruption of the financial crisis, is the price of oil back on the trend that Sadad al-Huseini suggested in 2007?