Warren Buffett has recently been investing billions in shares of oil & gas companies such as Occidental Petroleum (NYSE: OXY) and Chevron (NYSE: CVX). I’ve also seen articles and podcasts from oil & gas investors talking about the current supply-and-demand dynamics in the oil market that could lead to sustained high prices for the energy commodity, (the price of WTI Crude is currently around US$93 per barrel). These piqued my interest and led me to research the history of oil prices and what influences it.
What I found was surprising. First, here’s a brief history on major crashes in the price of oil (WTI Crude) over the past four decades:
- 1980 – 1986: From around US$30 to US$10
- 1990 – 1994: From around US$40 to less than US$14
- 2008 – 2009: From around US$140 to around US$40
- 2014 – 2016: From around US$110 to less than US$33
- 2020: From around US$60 to -US$37
As a commodity, it’s logical to think that differences in the level of oil’s supply-and-demand would heavily affect its price movement – when demand is higher than supply, prices would rise, and vice versa. But data from BP (NYSE: BP) – one of the largest oil-producing companies in the world, so there’s no reason to doubt the validity of the data – show otherwise.
BP’s dataset goes back to 1965 and from then to 1980, the consumption of oil (demand) was lower than the production of oil (supply) in every year. From 1981 onwards, the relationship flipped, with demand being higher than supply in every year since. This is shown in Figure 1. What this means is the price of oil has experienced at least five major crashes over the past four decades despite demand for the commodity being higher than supply in every year.
These surprising facts about the oil market bring up three important questions in my mind:
- Are there way more important factors than demand-and-supply dynamics that can move the price of oil?
- What do the facts imply about the future movement of oil prices, given the widely-held view (at least from what I’ve gathered) that oil prices would remain elevated – or climb higher from here – based on the current environment where demand far outstrips supply, and where supply is not able to be increased easily?
- How is it physically possible that consumption of oil can outweigh production for four decades?
I currently don’t have answers to these questions. But if any of you reading this have thoughts to share, please reach out to me – I’ll be happy to discuss!
Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.
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Disclosure: Ser Jing does not own shares in any of the companies mentioned.
