A funny thing happened as oil prices climbed in July 2007: the cost of gasoline went down.
Across the country, gas prices declined by as much as 10 cents a litre in the middle of the month. In southern Ontario, gasoline cost less than a dollar a litre for the first time since a fire in a refinery in Nanticoke on the shores of Lake Erie disrupted supplies in February.
In the four months after that fire, gasoline prices had stuck stubbornly at more than a dollar a litre across the country even as the price of oil rose and then fell and rose again. By April 2007, a barrel of oil — or 159 litres — had snuck above $70 US. Oil prices were nearing the heights reached in the fall of 2005, after Hurricane Katrina disrupted oil production and distribution along the U.S. Gulf Coast.
Yet even as gas prices declined in July, there were warning signs that the relief would be short-lived. CIBC World Markets predicted that triple-digit oil prices were on the horizon, warning that it could be permanent as oil-producing countries in the developing world would cut exports to meet growing demand at home.
By July 18, 2007, the price of a barrel was back up over $75.
It wasn't always that way.
Oil prices were stable for most of the 100 years before 1973 at well under $5 a barrel. Expressed in today's dollars, the price was closer to $10 a barrel, hitting highs of about $15 and lows of close to $8.
Even as the world economy boomed in the decades following the Second World War, prices remained fairly stable. That's mainly because the United States held most of the clout in the oil industry — and the U.S. government regulated the price of oil.
From 1958 to 1970, prices hovered at about $3 per barrel, but in real terms the price of crude oil declined to below $12 per barrel from above $15. The decline in the price of crude — when adjusted for inflation — was further exacerbated in 1971 and 1972 by the weakness of the U.S. dollar.
But in the early 1970s, the situation changed. The Organization of Petroleum Exporting Countries had become a force and in 1973, the first major oil shock hit the world as Arab nations refused to sell to countries that had expressed support for Israel in the Yom Kippur War of October 1973.
Within a few months, the price of oil climbed from around $3 a barrel to about $12. That may sound like a bargain, compared with just over $75 in July 2007. But expressed in today's dollars, the price went from around $10 a barrel to $40 a barrel. It was a huge increase — and the impact on the global economy was devastating.
By 1979, the world was in for another oil shock as unrest in Iran led to the toppling of the Shah — a friend of the West — and the rule of the ayatollahs. Oil went from a little less than $15 a barrel to around $35. In today's dollars, that's like boosting the price of oil from about $40 a barrel to $80.
Over the next few years, the price of oil crashed. OPEC continued to pump it out but underestimated the severity of the economic recession of the early 1980s and the resulting collapse in demand. Oil prices dived to just over $20 a barrel in today's dollars.
The price fluctuated through a fairly narrow band, spiking again at $30 a barrel when Iraq invaded Kuwait in 1990. But after the 1991 Gulf War, the price again headed south, hitting a low of close to $10 a barrel in the late 1990s. Since then, the price has been going up steadily, except for a brief dip after the U.S. invasion ousted Saddam Hussein and created the expectation that the war in Iraq would be brief.
The CIBC World Markets report was far from the first to predict a steep rise in the price of oil — to $80 sometime in 2007 and as high as $100 by the end of 2008.
Industry analysts have been suggesting $100-a-barrel oil for a few years, especially with much of the world's oil lying under territory prone to unrest. As well, rapidly growing demand from countries like India and China will keep the pressure on prices heading higher.
Still, many economists are predicting that the world's economy might not feel much of a pinch from rising prices until oil breaks the $100 barrier. Strong growth continued as oil surged past $50 and $60 a barrel — and beyond $70.
