The Main Forces Driving the Market for Oil

The first spike in the price of oil occurred in 1974 when the price of oil shot up to more than $10 a barrel as a result of the Arab embargo on oil owing to the Arab-Israeli war in September 1973. This was a significant event in the history of oil, as it demonstrated the power of oil in its impact on world economics and politics. (Williams, L.J. Oil Price History and Analysis).

The period from 1974 to 1978 world oil prices remained more or less stable and turbulence-free. Prices remained in the $12 to $14 a barrel range. (Williams, L.J. Oil Price History and Analysis). However, two political incidents were soon to disturb this period of calmness. The Shah of Iran was deposed in 1979 and a theocratic government with a strong anti-American stance emerged from this revolution in Iran. This was enough to trigger a sharp rise in the price of oil around the world and was compounded by the Iraqi invasion of Iran in 1980 and as result oil prices jumped to $40 a barrel. (Sjuggerud, S. Dr History of Oil: The Single Greatest Prize in All History).

This spurt in oil prices was to have two reactions. Exploration for oil in countries outside the OPEC (Organization of Petroleum Exporting Countries) became more frenetic on one side and the OPEC countries increased production to stabilize prices leading to a drop in prices and by mid 1986 prices of oil dipped to as low as $10 a barrel with the increased production of oil outside the OPEC countries and within the OPEC countries. (Williams, L.J. Oil Price History and Analysis).

In an effort to raise the low prices of oil, OPEC brought in a quota of production for the member countries and fixed a price objective of $18 a barrel in December 1986. This self-enforced discipline by OPEC showed signs of failing even by early 1987, with member countries overshooting the production quotas accepted by them, leading to a drop in prices of oil below the $18 a barrel objective.&nbsp.&nbsp.