Oil Production and Gas Prices

Paper Summary:

This paper offers a detailed overview on the price of light, sweet crude oil on NYMEX in 2005, noting its highs, lows and its relative cost to previous months and years. It continues to discuss the reasons for the price surges namely, the war in Iraq and hurricane Ivan. The paper highlights that the movement of gas and oil is similar to that of the business cycle. In conclusion, the author of the paper offers an opinion as to why the gas and oil hike will not cause a recession as in 1973.

From the Paper:

"Drilling for crude oil generally moves with oil prices. A closer relationship is more evident prior to 1998. As OPEC pushed prices upward by restricting production in 1999, however, the relationship weakened. The overhang of excess capacity in OPEC created the possibility that oil prices might fall. The result was a muted and delayed response in oil drilling. Oil drilling did not pick up until growing demand pushed OPEC closer to full capacity. The story is similar today. Political uncertainty and OPEC production restraint have pushed world oil prices upward, although excess capacity is nearly 10 percent of world oil consumption at 6 million barrels per day. The overhang of capacity creates the possibility of a sharp oil price decline and adds considerable risk to future oil prices, which discourages exploration and development activities."

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