Crude oil prices: A historical perspective

Crude oil prices have affected the Philippine economy adversely in the course of decades since the 1970s. Last week’s discussion of electricity price has shown this.

A full review of what drives crude oil prices is vital. Factors that cause crude oil prices to fluctuate are mainly political in character. Of course, many other developments – economic and otherwise in nature – could also initiate short run fluctuations.

‘The world view of oil supply and demand.’ The world supply and demand for crude might look like plain economics in motion. What lies behind these economic outcomes is the struggle for control of resources by the big industrial and economic powers.

The politics and economic developments in the smaller nations where oil is produced are embroiled and disturbed by these large forces of competition and struggle. The wars and instabilities in the Middle East, for instance, are not only the result of the narrow interests of individual countries or of autocratic leaders playing themselves against those of others in the region. Powerful nations – whether they are directly involved or just observing from the side – try to drive the outcomes of these conflicts so that they preserve their respective national interests.

Today, US involvement in the Middle East is obvious. The fluctuations in oil prices have moved up and down because of developments arising from the tensions among the countries (Arab-Israeli problems), inside the countries (revolutions in Egypt, Libya, Tunisia; civil war in Syria; and most of all, nuclear ambition of Iran: war developments in Iraq and Afghanistan, etc.), and so on.

‘Days of empires.’ In the beginning, political and economic empires ruled in the world of supplies of natural resources and raw materials. Before World War II, world political forces were maintained by a balance through which the British Empire ruled the seas over its large expanse colonies with those of other colonial European nations like France and other challengers like Germany, Italy and Japan.

In the days of political empires – before the Second World War – crude oil prices were relatively stable because the rulers controlled the politics of the supplier nations. England, France, Germany controlled their territories and sustained their supplies. Japan sought and expanded her empire.

The challenge arising from the search for resources of other rising nations (Germany, Japan, and others) led to the two great world wars of the past. At that time, the US could not care less. It did not feel threatened for it consumed its own plentiful domestic supplies of petroleum.

‘Pax Americana.’ The aftermath of World War II brought about the breakup of political empires and the emergence of the United States as the dominant world power. It became responsible for the world economic order, with other Western powers helping out to make the United Nations as the main instrument. New nations emerged out of the breakup of the colonial empires.

In the beginning, the control of price and supplies of crude oil was achieved through the dominance of great multinational oil companies that had contracts and production facilities in the countries with crude oil. These were the so-called “Seven Sisters,” the private oil corporations with multinational reach that act as surrogates of state power.

But by the 1950s, the newly independent nations began asserting their own individual will. They began nationalizing (confiscating, some with compensation, others by force) the oil facilities owned by the Western oil companies. Gradually during the next two decades, the Seven Sisters lost their pre-eminent position.

State diplomacy of the big powers took the place of the corporate sisters. This was partly to enforce discipline on behavior of these nations, to derive rightful compensation for the property rights of their corporate citizens, or to exercise raw power when all else failed.

This is the present state of the world. Powerful countries interact with the smaller (if not weaker) countries through the art of diplomacy and use of economic and political power to create if not to impose some balance between various interests to achieve stability in supply and demand for crude oil.

‘Oil prices through the decades for the Philippines.’ Throughout American colonial days in the Philippines, crude oil prices were relatively stable although they also fluctuated up and down. Crude prices reflected local American prices except for transportation shipping charges from the United States across the Pacific.

When US military occupation was established in 1899, crude price was $1.29 per barrel. By the time civilian colonial administration was imposed, in the early 1900, crude oil prices had fallen through under a dollar, influenced by large oil discoveries in the US.

Crude oil price was $1.19 per barrel in 1901 and, in 1916 just one year before US entry as protagonist in the First World War, it was $1.1 per barrel. But during the years between, crude prices were in the range of $.62 to $0.74 per barrel from 1905 to 1912.

When Manuel Quezon ran for president of the Philippine Commonwealth (the first year of almost total self-government) in 1936, crude oil price was just slightly over $1 per barrel. (During the war years of 1941 to 1945 in the country, the price of crude was irrelevant. Petroleum disappeared from use in the civilian market.)

After independence, crude oil prices inched toward, but still under $2 per barrel for more years until the 1970s. Crude oil prices would rise immensely during the 1970s, especially after 1973.

The value of the dollar has changed immensely over this long period. Peso conversion against the dollar has also changed. When all these are converted into the prices that are relevant to the present day, a picture presents itself. Even taking these changes into account, today’s crude prices, when adjusted for inflation and exchange rates are still many times higher than they were for Filipinos since 1970s and even more so before the independence.

(To be continued next week.) “More on Electricity price … Reaction from readers.” The essay on electricity prices provoked reactions from a number of readers, aside from those whose comments appeared in the print edition.

The most vocal reactions came from those who are afraid of the nuclear option’s potential consequence for safety. [Earl Louis de la Pena, Orly Rivera, CJ Castillo] The nuclear option has its dangers. When nations take into account the state of technology and the national need, some of them will decide that acceptable risks can be taken. When the richer nations discover cheaper alternatives to nuclear power, they will convert to the latter.

Wind power, solar power, biopower and all other sources are still far from future competitive commercial application against nuclear power. They remain as expensive alternatives. The noise against nuclear power is high, but the actual decision against its future is not yet rendered.

One reader asked how long term contracts for electricity generated resulted to high prices.(James Mangat) As a fast-track solution to the energy crisis, the government agreed to pay for produced electricity at a given price which was at a high price, whether the electricity was used or not.

One energy expert added other factors that account for the high price of electricity: the fact that our island geography renders it difficult to distribute electricity at optimum scale for cheaper electricity generation and that we do not have sufficient indigenous resources. [Sebastian Lacson].

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