Where are the conflicts heading? A 60-year review of oil price history

Since the joint military strikes by the United States and Israel against Iran on February 28, the Middle East situation has rapidly escalated, and international oil prices have soared. Last week, WTI crude oil futures rose over 35% in total, Brent crude futures increased nearly 28%, both surpassing $90 per barrel for the first time since 1983 and 1991, respectively, marking the largest weekly gains on record. On the first day of this week (March 9), oil prices continued to surge, with intraday increases exceeding 30%, approaching $120 per barrel, but then fell sharply, erasing all gains.

The conflict between the US, Israel, and Iran is ongoing, and the situation in the Strait of Hormuz, a critical energy choke point, concerns global markets. The US president’s stance has been unpredictable, causing oil prices to fluctuate wildly. Instead of chasing the market’s ups and downs, it’s helpful to review key historical events that impacted oil prices, using history as a guide for decision-making.

We have compiled the effects of seven major events since the 1960s on oil prices.

During the first three Middle East wars (1948, 1956, 1967), oil prices were minimally affected or unaffected at all because the oil pricing power remained in the hands of the Western “Seven Sisters” (Standard Oil of New Jersey, Standard Oil of New York, Standard Oil of California, Texaco, Gulf Oil, Anglo-Persian Oil Company, Shell), and no embargoes or large-scale production cuts were triggered. However, when the Fourth Middle East War broke out in 1973, oil became a weapon of retaliation, causing prices to surge and the price center to permanently rise to around $10 per barrel.

Five years later, in 1978, Iran experienced the Islamic Revolution, sharply reducing its oil exports. Oil prices skyrocketed from around $13 per barrel to a peak of $42, an increase of over 200%. During this period, OPEC, established in 1960, gained negotiating power, gradually taking control of crude oil pricing, ushering in the OPEC era.

In 1990, Iraq invaded Kuwait, triggering the Gulf War. The combined oil production capacity of both countries, totaling 4.3 million barrels per day, was completely disrupted, causing crude prices to jump from about $17 to $34 per barrel, with closing prices on October 9 and 11 exceeding $40. However, with the swift end of the Gulf War, oil prices fell back to around $17 per barrel by February 1991.

During this period, the oil futures market matured, and the determination of international oil prices shifted from OPEC’s unilateral decisions to a market-driven process influenced by OPEC oil demand and international capital, achieving basic market pricing.

The sharp fluctuations in oil prices during these three crises triggered global economic crises, earning them the titles of the First, Second, and Third Oil Crises.

Since the era of futures-based oil pricing began, volatility has increased, with several key events acting as direct catalysts.

In August 2008, the financial crisis erupted after Fannie Mae and Freddie Mac were taken over by the government due to plummeting stock prices. Oil prices plummeted from a high of $132 per barrel to around $42, a decline of over 68% within seven months. In early 2020, the COVID-19 pandemic caused oil prices to fall from $63 to $21 per barrel, with WTI futures even turning negative on April 20, 2020. As the pandemic eased, prices rebounded, and the Russia-Ukraine conflict in February 2022 pushed prices further up, peaking above $116 per barrel.

Historical analysis shows that short-term conflicts often cause sharp oil price swings that tend to normalize after the conflict ends, as seen in the Gulf War. However, when wars or conflicts impact supply structures, their effects on prices tend to be long-lasting, as with the Fourth Middle East War. Additionally, economic crises and sudden health emergencies that alter demand can also cause significant volatility. As for this current conflict, whether it will resolve quickly or worsen further remains uncertain, but the fundamental focus should be on supply and demand changes.