Long term impact on crude oil prices due to the First Gulf War
To analyse any long term impact of the First Gulf War on crude oil prices, we compare the crude oil prices in a decade prior to war with crude oil prices in the decade after the First Gulf War.
We have chosen a period of ten years on either side to mitigate the effects of cyclical economy, sudden increase or decrease in crude oil prices due to new wells coming in operation or change in OPEC production limits.
The table 3 shows the average annual crude oil prices. The average price in the decade prior to the First Gulf War from 1980 to 1989 was $25.51 per barrel The highest and lowest prices observed in this period were $37.42 and $14.44 per barrel in 1980 and 1986 respectively. We can see that there was a wide variation in the prices in one decade only. The standard deviation in crude oil prices from 1980 to 1989 was $8.12 per barrel.
We now analyse the crude oil prices from 1991 to 2000. The average price in the decade after the First Gulf War from 1991 to 2000 was $18.36 per barrel. The highest and lowest prices observed in this period were $27.39 and $11.91 per barrel in 2000 and 1998 respectively. The standard deviation in crude oil prices during the decade was $3.84 per barrel, much less than observed in the decade prior to the First Gulf War indicating more stability in prices after the First Gulf War.
The average price of crude oil declined by 28 percent in the decade after the First Gulf War. This significant drop in crude oil prices indicates it is unlikely that the First Gulf War resulted in an upward movement in crude oil prices in the long term.
On the contrary, the data suggests that the First Gulf War resulted in significant decline in crude oil prices. It would also be wrong to assume to that the First Gulf War was responsible to for the downward crude oil prices in the longer term. War in Middle East would lead to curtailment in oil supplies, if the reduction in oil production in Middle East is not matched by similar increase in oil production and export by other countries. Even if other countries increase their production, it is normally only for the duration of war to meet short supplies. Once a war is over, production from different sources return to their normal levels.
The earlier half of eighties saw very high crude oil prices because of energy shock in late seventies and early eighties. The crude oil prices in 1980 and 1981 were particularly high at $37.42 and $35.75 per barrel respectively. The crude oil prices came down in the decade prior to the First Gulf War but the initial high prices have resulted in significantly higher average crude oil prices in eighties. If we take price from 1985 to 1989 only, then the average crude oil price was $18.46 per barrel.
The five-year average price prior to the First Gulf War at $18.46 per barrel is very close to the 10 year average of $1836 per barrel after the First Gulf War. This indicates that the First Gulf War didn’t have significant impact on crude oil prices over the longer term.
The inflation adjusted long term world oil prices is $19.41 per barrel (Source: Wtrg). This price is also close to the average price in the decade after the First Gulf War. This again confirms that there was not a sustainable upward shift in crude oil due to the First Gulf War. Hence any change in the crude oil prices because of the First Gulf War was only a temporary phenomenon.
The reason for return to long term average price post First Gulf War is the non-perishable nature of oil. Oil as a commodity will only be depleted by its consumption. War or any disruption in oil production or transportation cause only a temporary delay in delivery not lead to loss of oil. Companies can easily block or reduce oil production and then it can easily be re-instated to normal levels.
Iraqi’s retreating armed forces set Kuwait oil wells on fire. The effect of this act on Kuwait’s oil production was long lasting. Before the war, Kuwait was producing about 1.8 m barrels a day. This amounted to 3 percent of total world consumption. Initial estimates reckoned that the country lost about 2 percent of proven oil reserves in oil well fires (Burned Out, 1991). It took about three years for Kuwait to bring back the oil production to pre-war levels. The slow return of Kuwait oil in to world markets resulted in gradual decline of oil prices.
Tags: crude oil prices, first gulf war, oil production, opec production
