Further information: Energy crisis
From the mid-1980s to September 2003, the inflation-adjusted price of a barrel of crude oil on NYMEX was generally under $25/barrel. During 2003, the price rose above $30, reached $60 by August 11, 2005, and peaked at $147.30 in July 2008. Commentators attributed these price increases to many factors, including reports from the United States Department of Energy and others showing a decline in petroleum reserves, worries over peak oil, Middle East tension, and oil price speculation.
For a time, geo-political events and natural disasters indirectly related to the global oil market had strong short-term effects on oil prices, such as North Korean missile tests, the 2006 conflict between Israel and Lebanon, worries over Iranian nuclear plans in 2006, Hurricane Katrina, and various other factors. By 2008, such pressures appeared to have a insignificant impact on oil prices given the onset of the global recession. The recession caused demand for energy to shrink in late 2008 and early 2009 and the price plunged as well. However, it surged back in May 2009, bringing it back to November 2008 levels.
New inflation-adjusted records
The price of crude oil in 2003 traded in a range between $20–$30/bbl. Between 2003 and July 2008, prices steadily rose, reaching $100/bbl in late 2007, tying the previous all time inflation-adjusted record set in 1980. A steep rise in the price of oil in 2008 - also mirrored by other commodities - culminated in an all time high of $147.27 during trading on July 11, 2008, more than a third above the previous inflation-adjusted high.
High oil prices and economic weakness contributed to a demand contraction in 2007-2008. In the United States, gasoline consumption declined by 0.4% in 2007, then fell by 0.5% in the first two months of 2008 alone. Record-setting oil prices in the first half of 2008 and economic weakness in the second half of the year prompted a 1.2 million bbl/day contraction in US consumption of petroleum products, representing 5.5% of total US consumption, the largest decline since 1980 at the climax of the 1979 energy crisis.
Possible causes
Demand
World crude oil demand grew an average of 1.76% per year from 1994 to 2006, with a high of 3.4% in 2003-2004. World demand for oil is projected to increase 37% over 2006 levels by 2030, according to the 2007 U.S. Energy Information Administration's (EIA) annual report. In 2007, the EIA expected demand to reach an ultimate high of 118 million barrels per day (18.8 × 10
^6 m 3 /d), from 2006's 86 million barrels (13.7 × 10^6 m 3 ), driven in large part by the transportation sector. A 2008 report from the International Energy Agency (IEA) predicted that although drops in petroleum demand due to high prices have been observed in developed countries and are expected to continue, a 3.7 percent rise in demand by 2013 is predicted in developing countries. This is projected to cause a net rise in global petroleum demand during that period.Transportation consumes the largest proportion of energy, and has seen the largest growth in demand in recent decades. This growth has largely come from new demand for personal-use vehicles powered by internal combustion engines. This sector also has the highest consumption rates, accounting for approximately 68.9% of the oil used in the United States in 2006, and 55% of oil use worldwide as documented in the Hirsch report. Cars and trucks are predicted to cause almost 75% of the increase in oil consumption by India and China between 2001 and 2025. In 2008, auto sales in China have been expected to grow by as much as 15-20 percent, resulting in part from economic growth rates of over 10 percent for 5 years in a row.
Demand growth is highest in the developing world, but the United States is the world's largest consumer of petroleum. Between 1995 and 2005, US consumption grew from 17.7 million barrels a day to 20.7 million barrels a day, a 3 million barrel a day increase. China, by comparison, increased consumption from 3.4 million barrels a day to 7 million barrels a day, an increase of 3.6 million barrels a day, in the same time frame. Per capita, annual consumption by people in the US is 24.85 barrels, 1.79 barrels in China, and .79 barrels in India.
As countries develop, industry, rapid urbanization and higher living standards drive up energy use, most often of oil. Thriving economies such as China and India are quickly becoming large oil consumers. China has seen oil consumption grow by 8% yearly since 2002, doubling from 1996-2006. In 2008, auto sales in China were expected to grow by as much as 15-20 percent, resulting in part from economic growth rates of over 10 percent for 5 years in a row. Although swift continued growth in China is often predicted, others predict that China's export dominated economy will not continue such growth trends due to wage and price inflation and reduced demand from the US. India's oil imports are expected to more than triple from 2005 levels by 2020, rising to 5 million barrels per day (790 × 10
^3 m 3 /d).Another large factor on petroleum demand has been human population growth. Because world population grew faster than oil production, production per capita peaked in 1979 (preceded by a plateau during the period of 1973-1979). The world’s population in 2030 is expected to be double that of 1980.
The role of fuel subsidies
State fuel subsidies have shielded consumers in many nations from the price rises, but many of these subsidies are being reduced or removed as the cost to governments of subsidization increases.
In June 2008, AFP reported that:
In the same month, Reuters reported that:
The Economist reported: "Half of the world's population enjoys fuel subsidies. This estimate, from Morgan Stanley, implies that almost a quarter of the world's petrol is sold at less than the market price." U.S. Secretary of Energy Samuel Bodman stated that around 30 million barrels per day (4,800,000 m 3 /d) of oil consumption (over a third of the global total) is subsidized. But energy analyst Jeff Vail warned that cutting subsidies would do little to reduce global prices.
Supply
Further information: Discussion of petroleum supply's relation to world marketsAn important contributor to price increases has been the slow down in oil supply growth, which has continued since oil production surpassed new discoveries in 1980. The fact that global oil production will decline at some point, leading to lower supply is the main long-term fundamental cause of rising prices. Although there is contention about the exact time at which global production will peak, there are now very few parties who do not acknowledge that the concept of a production peak is valid. However, before the record oil prices of 2008, some commentators argued that global warming awareness and new energy sources would limit demand before the effects of supply could, suggesting that reserve depletion would be a non-issue.
A large factor in the lower supply growth of petroleum has been that oil's historically high ratio of Energy Returned on Energy Invested is in significant decline. Petroleum is a limited resource, and the remaining accessible reserves are consumed more rapidly each year. Remaining reserves are increasingly more technically difficult to extract and therefore more expensive. Eventually, reserves will only be economically feasible to extract at extremely high prices. Even if total oil supply does not decline, increasing numbers of experts believe the easily accessible sources of light sweet crude are almost exhausted and in the future the world will depend on more expensive unconventional oil reserves and heavy oil, as well as renewable energy sources. It is thought by many, including energy economists such as Matthew Simmons, that prices could continue to rise indefinitely until a new market equilibrium is reached at which point supply satisfies worldwide demand.
A prominent example of investment in non-conventional sources is seen in the Canadian tar sands. They are a far less cost-efficient source of heavy, low-grade oil than conventional crude, but when oil trades above $60/bbl, the tar sands become attractive to exploration and production companies. While Canada's tar sands region is estimated to contain as much "heavy" oil as all the world's reserves of "conventional" oil, efforts to economically exploit these resources lag behind the increasing demand of recent years.
Until 2008, CERA (a consulting company wholly owned by energy consultants IHS Energy) did not believe this would be such an immediate problem. However, in an interview with The Wall Street Journal, Daniel Yergin, previously known for his quotes that the price of oil would soon return down to "normal", amended the company's position on May 7, 2008 to predict that oil would reach $150 during 2008, due to tightness of supply This reversal of opinion was significant, as CERA, among other consultancies, provided price projections that were used by many official bodies to plan long term strategy in respect of energy mix and price.
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