Oil Influences

A century has passed since the Standard Oil conglomerate was abolished under the Sherman Antitrust Act.  Incidentally, America’s economy uses a variety of sources to fill its energy quota.  However, even with a push for more renewable energy, the US economy is still driven by oil.  Cotton may have been king in the South, but the price of oil remains a dominating factor in many sectors of our economy.  

Agricultural producers are extremely sensitive to any rise in the price of oil.  Although their demand does not decrease from the spike, higher oil prices translate into tighter margins.  In an industry that already operates at near the margin levels, a rise in oil could mean the difference between making a profit and barely breaking even.  Equipment has to run to get the crops planted in the spring, harvested in the fall, and finally, shipped to market.  Incidentally, all of this takes fuel, and fuel prices have continued to rise. 

Oil is a traded commodity, similar to our agricultural products, and is subject to similar market volatility from supply and demand forces.  What makes oil unique from other commodities are the organizations involved in monitoring and even limiting production.

The key player in oil is no longer the infamous Standard Oil, but the Organization of Petroleum Exporting Countries, commonly referred to as OPEC.  Founded in 1960, OPEC consists of leading oil producing countries: Algeria, Qatar, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia and United Arab Emirates, Venezuela.  However, it was not until 1971 that OPEC realized its power in controlling world oil production. 

Up until then, the pricing power laid in the US, mainly with the Texas Railroad Commission.  When the Texas Railroad Commission allowed 100% production, producers in Texas, Oklahoma, and Louisiana were no longer restricted in their output.  Restricted output means less supply, which translates into higher prices.  Higher prices translate into higher profits when the commodities demand is relatively inelastic.  And there are only few substitutes in the market for oil. 

The following charts from WRTG Economics “Oil Price History and Analysis” provide a visual guide behind some of the volatility in oil prices.

Note that the Texas Railroad Commission and OPEC are not the only factors driving the price of oil.  Also, OPEC has not always been successful in controlling market prices. Unless there are methods to enforce guidelines, individual countries have an incentive to cheat, producing more than their quota and then capturing higher returns.  However, if every countries overproduces, the supply will increase, lowering price, and likewise, lowering returns. Because of the incentive to cheat, OPEC has experienced varied success in controlling oil prices.  

As rising oil prices continue to influence the market, and concerns on oil scarcity grow, the demand for other energy sources will also grow.  The current energy consumption is an intricate combination of various sources; time will tell how long the combination will use oil as the main component.