Oil has dictated the financial gains and fails of many countries across the world in the past. The lessons learned from the world oil crisis during the 1960s and 70s, meant that international oil companies controlled the supply of oil and dictated the price of crude oil to the countries that produced the product. As you consider investment in oil companies, you will be at a great advantage when understanding how oil prices are controlled across the world so that your investment decisions are fully informed.
You’ve Heard of OPEC; What Is It?
To remove the control of oil prices from international oil companies OPEC was formed to provide a high level of control for the countries that produced oil. The Organization of Petroleum Exporting Countries (OPEC) was designed to shift the power behind the oil industry. Were you to place an investment in oil companies after OPEC was formed, you would have seen oil prices increased by 100% during the 1970s and 80s.
International oil companies still controlled the industrial operations that refined the oil into a variety of products. They also managed and controlled the technology within the majority of countries that produced oil. OPEC tried to make arrangements with refineries, but failed to agree risk-free guarantees and by the mid-1980s the price of oil was back down to US$10 per barrel.
Essentially, OPEC controlled the reserves of oil, while the international oil companies controlled the supply chain from producer to end-user.
Who Has Control?
While the oil producers and the oil companies believe they have a large element of control over oil production throughout the world, neither can work without the other.
The shift in oil prices, mostly downwards between 2014 and 2016, has mostly been related to an oversupply of oil, while demand has fallen. The Middle East, parts of South America and Russia continues to supply oil, while the US requires less oil from overseas, except for purchases from Canada.
The fall in the price of oil has caused tremendous problems for some oil producing countries like Venezuela. While holding tremendous stock levels, they cannot sell oil at a price sufficient for the country to benefit, leading to financial strife, which currently appears never-ending.
For investment in oil companies your guide is a balancing act between supply and demand for oil and the expectations of price rises in the future. While many wish to appear as experts, no one really knows the price of oil, per barrel, next year, or the year after, but most do believe that price will increase gradually.
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