Crude oil prices – 2006 is shaping up as the year of the seesaw

After soaring to an all-time record high of $78.40 US per barrel in July 2006, the price of light, sweet crude oil sold on the New York Mercantile Exchange plummeted to its lowest level in six months on September 20 when prices fell to $60.47 US a barrel. While analysts attribute the 23 per cent decline to the calming of geopolitical tensions in the Middle East, the absence of hurricane threats in the Gulf of Mexico and the end of the summer driving season, the global crude oil market is a dynamic and somewhat unpredictable entity that is vulnerable to a number of risk factors.

Historical perspective

The buying and selling of crude oil has changed dramatically from the early 1920s when multinational companies bought supplies from large producers, mainly in the Middle East. Back then, contracts were based on a tax formula that guaranteed revenue to host governments in producing countries such as Saudi Arabia.

In 1960, Iran, Iraq, Kuwait, Saudi Arabia and Venezuela formed the Organization of Petroleum Exporting Countries (OPEC) with the aim of influencing world crude oil prices by setting production levels. By 1973, eight other major oil producing nations (Qatar, Indonesia, Libya, United Arab Emirates, Algeria, Nigeria, Ecuador and Gabon) had joined the organization which that year quadrupled the price of crude oil landed in North America from approximately $3 US per barrel to about $12 US per barrel.

In an effort to protect its economy from the shock of the dramatic increases in crude oil prices, the Canadian government of the day decided to set a domestic price for crude oil, at less than world levels. From October 1973 to June 1985, Canada entered a period of regulation and the Canadian price for crude oil was set at substantially less than the international price. In 1978-79, the Shah of Iran was deposed, revolution swept the country, world demand for oil escalated and the price of crude oil rocketed to $40 US per barrel. A year later, Canada introduced the controversial National Energy Program. Periodic increases in the "made in Canada" price for crude oil were intended to bring it to world levels, but that goal was never realized. Over the next few years, the petroleum industry responded to the uncertain market conditions the NEP generated by cutting back or, in some cases, totally withdrawing its investment in Canada’s producing provinces.

"The new government deemed that the period of regulation had a negative effect on Canada’s economy because it was inefficient and sent the wrong signals," explains Cliff Brown, a senior advisor at the National Energy Board. "As a result, in June 1986 the government deregulated the market so that producers could sell crude oil on the international market for the going rate. That continues to be government policy today—free markets."

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