Solaqua's Energy Future Project :: Context of the Project

Project Proposal

Section 1.1 Impending Energy Challenges

Section 1.2 The Rising Cost of Energy

Section 1.2.1 Energy Composition

 

 

Petroleum

 

     Oil has been touted as “the most conveniently and widely traded form of energy,” and its price has thus been called the key representative element in valuing energy. The price of oil depends on several factors, from exploration to delivery to market, and depending on global socio-political conditions, can be extremely sensitive to war and economic trends. In its most basic sense, the price of oil is dependent upon supply and demand, as any commodity. But when policy is introduced, the free market dynamics change dramatically. Global policies, such as those introduced and practiced by OPEC, can have tremendous impact on commodity pricing. One way this is done is by influencing supply to control stable prices, which may be completely unstable when left to free market economics. Supply shortages, whether contrived or the result of natural supply barriers, can have dramatic and lasting impacts on global energy markets. Policy is a large component of today’s energy markets as OPEC controls much of global energy supply through policy tools that are agreed upon by member countries. Examples of OPEC’s influence are often cited reminders of how much of an economic impact the United States’ dependence on foreign energy can really have.

In contemporary history the first real taste of the economic impact of a supply shortage was seen in gasoline shortages in the U.S. early in the 1970’s, in an era I call the “realization” period. During the century of oil production before the realization period, from 1869 to 1970, oil prices remained relatively stable and low. In terms of 2004 US dollars, domestic oil only exceeded $20 per barrel one time, excluding the first decade of production from 1869 to 1879. In the years directly preceding the price increases of the early 1970’s, oil prices were on a downward trend, falling from above $16 a barrel to below $13 a barrel (WTRG). During this period, up until 1960, prices were set and controlled primarily by basic market forces. In 1870 John D. Rockefeller created the first supply side economic policy for oil through the inception of his company, Standard Oil Company. Rockefeller’s plan, which he termed ‘Our Plan,’ was set forth to control supply-side components of oil production including transportation and refining processes.

 

This policy tool was effective at stabilizing prices of domestic oil and kept the price steady until early in the next century. Oil was discovered in Texas in 1901 in a volume that impacted the supply enough to drive prices down to below their previous levels of about $1.00 per barrel (in terms of 1900 dollars). The prices remained stable and low for most of the twentieth century and it wasn’t until 1971 when prices really started to change.

 

There were a few exceptions to that price however, not the least of which was the repercussions on domestic supply from post-war demand hikes in 1948. Domestic supplies were unable to keep up with consumption, and for the first time, the US became a net importer of oil.

 

 

Go to OPEC and its Influence on Oil Power