Risk challenges and uncertainties have increased significantly
Definition of crude oil
In today’s era, crude oil is more closely related to human daily life, and the fluctuation of crude oil price is more frequent and violent. Therefore, the analysis of crude oil price changes should be carried out under the framework of macroeconomic, geopolitical, supply and demand fundamentals and financial markets.
From a long-term perspective, we can find that there have been three price peaks in the history of crude oil price in the past century, and each one witnesses the rise and prosperity of a big country. This paper regards oil price as the context, focuses on restoring the historical picture of three price peaks, and explores whether the rise of big powers has led to the soaring oil price, or whether the rise of oil prices has promoted the prosperity of big powers. Taking history as a lesson, this paper provides a brand-new macro perspective and ideas for judging the current trend of oil prices.
Talking about history, we should first define the concept of crude oil. Crude oil is a kind of oil which is extracted from strata and treated by simple dewatering but not processed by refineries. Because it is the main trade variety in international trade, crude oil is often associated with the concepts of output, price and financial market.
Crude oil has a broad meaning. The oil extracted from strata is called crude oil. The petrol, diesel and kerosene obtained by refining are called crude oil. Even the oil obtained by dry distillation from coal, oil shale and other raw materials is also called crude oil. Crude oil is more a general term for all kinds of oil products. When it comes to the whole petrochemical industry, it can be called crude oil. When it comes to accurate concepts such as output and price, it is more appropriate to substitute crude oil.
The following chart shows the annual price trend of crude oil from 1861 to 2018. The period spans 157 years. The unit of valuation is U.S. dollar/barrel. The thick line is the historical real price, and the thin line is the converted price after considering inflation.
The Way of American Crude Oil Industry Development: A Century of Vicissitudes
It is no coincidence that the world’s first oil well appeared in the United States. After the War of Independence and the Mexican-American War, the United States possessed vast land resources from the eastern Pacific coast to the western Atlantic coast. Immigration policy also provided it with a large number of human resources. The spirit of exploration and adventure in the western region stimulated the vitality of the whole society. In the 1950s, the Northern and Central States of the United States had completed the Industrial Revolution. Industrial production ranked fourth in the world. The unique natural and social conditions laid a good foundation for the success of the United States in catching up with the Second Industrial Revolution. The first oil well drilled in Pennsylvania in 1959 was mechanized drilling, mechanized oil recovery and mechanized oil control powered by steam engines. The well’s smooth oil injection was recognized as the beginning of the modern crude oil industry.
At that time, crude oil was mainly used to extract kerosene for lighting. Because of its superiority in quality and price, kerosene extracted from coal, animals and plants was soon pushed out of the market. The demand for crude oil expanded rapidly all over the world, and the price of crude oil rose sharply, ushering in a 10-year peak period. The United States was in the leading position in this industrial transformation, once occupying 90% of the global market share of lighting oil. Crude oil exports brought huge wealth to the United States and rapidly expanded its strength. It was not until the 1980s, when the large-scale development of the Russian Baku Oilfield and the opening of the Baku-Batumi Oil Transport Railway, that Russian crude oil began to hit the global crude oil market. The Russian government also achieved a basic balance of revenue and expenditure in the last 10 years of the 19th century because of its “crude oil wealth”.
As a symbolic invention of the Second Industrial Revolution, the internal combustion engine has once again expanded the use of crude oil. Automobiles, aircraft and ships all over the world need gasoline and diesel as fuel. In contrast, the market for lighting oil has begun to shrink under the influence of the electricity market. In 1911, gasoline sales exceeded kerosene for the first time. Between 1920 and 1930, the proportion of crude oil in total energy consumption increased from 10% to 25%, and gasoline grew the fastest, more than four times. Driven by fuel demand, world crude oil production rose rapidly, from 69 million barrels in 1920 to 2.150 billion barrels in 1940. The United States still accounts for half of the world’s total oil production, accounting for 71.5% in 1923, 63.6% and 60.2% in 1930 and 1935, respectively, and 62.9% in 1940.
The two world wars have intensified the demand for crude oil and fuel. Crude oil has become an important strategic and military resource, especially in the Second World War. Whether for the Allied Forces or for Germany and Japan, ensuring crude oil supply is at the core of the military plan. At that time, Middle East crude oil had not been exploited on a large scale, and the United States played an important role in the crude oil industry. Most of the coalition’s gasoline was supplied by the United States, and even a large part of German and Japanese crude oil fuel was imported from the United States before the war. In this way, with the expansion of crude oil demand and production, the United States, which has the strongest crude oil industry, has stepped onto the road of superpower with the help of oil extraction, refining and crude oil trade.
The Rise and Fall of Soviet Hegemony: Chengye Crude Oil and Lost Crude Oil
Since the end of World War II, the Middle East has gradually replaced the United States as the largest oil producing region in the world with its huge reserves, shallow burial and excellent quality crude oil. However, the European and American oil giants headed by New Jersey Standard Oil, New York Standard Oil, Chevron, Texaco, Gulf Oil, British Persian Oil Company and Shell Company partitioned the crude oil resources and profits in the Middle East through concessions and other means, which historically called the “Seven Sisters of Crude Oil” monopoly stage. In 1960, Saudi Arabia, Kuwait, Iran, Iraq and Venezuela established the Organization of Crude Oil Exporting Countries (OPEC) in Baghdad, and began to gradually recover their own crude oil assets and pricing rights.
In 1973, when the fourth Middle East War broke out, OPEC Member States imposed a crude oil embargo on western countries that supported Israel and raised the price of crude oil. The price of crude oil soared from $3 per barrel to $11 per barrel before the war, which is historically called the first crude oil crisis. In 1978, the Islamic Revolution broke out in Iran. In 1980, the Iranian-Iraqi war broke out, crude oil production in Iran and Iraq almost completely stopped, crude oil supply in the world crude oil market suddenly decreased. With the advent of the second crude oil crisis, oil prices soared to $42 per barrel at one time and remained at a high level of about $35 per barrel for a long time.
From 1973 to 1985, the peak oil price came from the struggle between OPEC oil-producing countries and Western countries, as well as the struggle among OPEC member countries. The western countries entered stagnation and recession with heavy losses, but OPEC oil-producing countries did not make profits. The biggest gainer was the Soviet Union.
The crude oil embargo imposed by OPEC on Western countries is at the cost of active and passive production cuts at the expense of OPEC’s fiscal revenue and global market share. The Soviet Union has made up part of the gap in time and has brought closer relations with Western Europe. In 1973, OPEC’s annual crude oil production dropped from 1.5 billion tons to 1.3 billion tons in 1980, and by 1985, it had dropped to 780 million tons. At the same time, the production of oil fields in the Siberian region of the Soviet Union began to blowout. In 1973, the annual production of crude oil in the Soviet Union was 430 million tons. By 1985, the annual production had risen to 600 million tons. In 1979, the Soviet Union produced 11.8 million barrels of crude oil a day, formally becoming the world’s largest crude oil producer.
After World War II, the Soviet Union was restricted by economic, scientific, technological and military forces, and was on strategic defense for a long time. The Cuban missile crisis in 1962 finally ended in a compromise between the Soviet Union and the United States, which is also a testimony of the comparison of forces between the United States and the Soviet Union. In the 1970s, the Soviet Union ushered in two advantages: soaring international oil prices and soaring Siberian crude oil production. Soviet crude oil exports increased by 22%, crude oil revenue increased by 280%, and crude oil exports earned almost 70% of Soviet foreign exchange earnings. The abundant fiscal revenue was invested in military construction. The Soviet Union began to overwhelm the United States and its national strength reached its peak. Crude oil was the foundation of all this. At the same time, the Soviet Union took crude oil as its diplomatic resource, consolidated its economic and military integration with Eastern Europe, developed its energy ties with Western Europe, alleviated the containment and squeeze of the United States on the Soviet Union, and maintained its influence and status in Europe. Crude oil gave the Soviet Union capital and gas. The Soviet Union entered the strategic offensive and began to expand. Large-scale military projects continued to mount, increasing the number of overseas military bases and garrisons, and in 1979, it sent troops to Afghanistan and was deeply trapped in it for 10 years.
The Soviet Union was able to dominate not because of its nuclear arsenal and steel torrents, but simply because it had caught up with the peak of oil prices. Soviets did not have a deep understanding of this view, but Americans saw it clearly. In 1985, the United States launched the operation, and then President Reagan exerted diplomatic pressure on Saudi Arabia to increase its crude oil production, which rose from 3.6 million barrels a day in 1985 to 7.1 million barrels a day in 1990. A great deal of crude oil has been pouring into the world crude oil market with sluggish demand. The international crude oil price has fallen from $30 per barrel to $12 per barrel in just five months, and has been hovering around $15 per barrel for a long time.
Saudi Arabia is still profitable at this price, but Soviet crude oil is produced in Siberia, which is difficult to exploit in bad weather, and the more expensive it is, the more it is exploited, the more it loses money. Moreover, in the era of high oil prices, the Soviet Union has become accustomed to being a low-end energy supplier. It pushed crude oil directly to the international market, did not invest a large amount of capital in the downstream areas such as refining and fine chemical industry, and the downstream high-value-added petrochemical field was basically monopolized by the United States, Europe and Japan.
Therefore, when oil prices went down, Soviet talent found that they had been swimming naked without any effective means of resisting and hedging low oil prices. The Soviet Union, whose crude oil revenue has declined sharply, has to spend a large amount of foreign exchange to buy food every year and support the war in Afghanistan. The financial situation has deteriorated, and ultimately it is overburdened. It collapsed in 1991. Soviet Union, Xingye crude oil, also crude oil.
China’s crude oil industry: expanding global influence
In the 21st century, China joined the WTO and formally became the world’s factory. A large number of orders poured into China. Manufacturing investment, infrastructure investment and real estate investment boosted commodity prices. China’s demand for crude oil was growing. The anchor of crude oil price turned to the East and began to fluctuate with the pulsation of China’s economy. 。
In 2003, China produced 170 million tons of crude oil and imported 190 million tons of crude oil. By 2018, China’s crude oil production reached 190 million tons, basically at a pace, but its imports had soared to 464 million tons, and its external dependence had reached 71%. Crude oil prices climbed from $25 per barrel in 2003 to nearly $150 per barrel in 2008, and soared nearly six times in five years.
In 2008, the subprime mortgage crisis spread in the United States, the global market suffered from systemic financial risk looting, the western developed countries’economy slipped into recession and long-term recovery was weak, and oil prices fell sharply. At this critical moment, China has made great efforts to pull back the storm again. The “four trillion” plan was launched, and the policy leveraged GDP growth rate “guaranteed 8″, serving as the locomotive of the global economy to continue to advance at a high speed. Crude oil prices are sensitive to China’s economic response, rising rapidly from $35 per barrel in 2009 to a high oscillation near $110 per barrel in 2011. Afterwards, influenced by the slowdown of China’s economic growth and the adjustment of industrial structure, oil prices fell at a high level in 2014 and have oscillated between US$50 and US$80 per barrel so far.
At present, both financial practitioners and investors are very concerned about the future of oil prices. Looking at the large cycle of oil price in history, we find that the long cycle fluctuation of oil price is always associated with the national transportation of big countries. Crude oil is not only the blood of industry, the source of power and the lifeblood of national economy, but also the tool of wealth transfer. The United States became a superpower by means of crude oil to complete its capital accumulation, and the Soviet Union became prosperous by means of crude oil. Of course, the rise of the United States and the Soviet Union is the result of a combination of factors, such as land, population, science and technology, economic, military and cultural factors, but energy factors are indispensable. Energy industry and national economy are closely linked. Any superpower must be an energy power, crude oil as the most important. Important energy has contributed to the rise of the United States and the Soviet Union.
What is more interesting is that the countries or organizations that used the boom of crude oil in history were oil exporting countries or organizations, such as the United States, the Soviet Union and OPEC. The first two peaks of crude oil prices in history were caused by the supply-driven rise of oil prices by controlling production or forming monopoly prices of industrial cartels and trusts. But the third peak of oil price is different from the previous two. It is driven by the demand for crude oil brought by the high-speed running of China’s economic locomotive, and the demand-driven rise is more lasting. From an economic point of view, changes in supply can influence the temporary rise and fall of commodities, but demand is the ultimate determinant of commodity prices. Producers can increase prices by reducing supply, but there is no market for commodities without demand. False high prices will still be returned to their original form.
Crude oil is not only a commodity, with the development of financial market, it has evolved into a financial instrument embedded in various derivatives. The characteristics of three-component commodity attribute and seven-component financial attribute make the fluctuation cycle of crude oil more frequent and the fluctuation range more intense. It can also be seen from the historical chart that the first and second oil price peaks are 110 years apart, and the second and third oil price peaks are only 30 years apart. According to this Law of evolution, crude oil will reappear in the near future.
And it can be predicted that the catalyst for the next peak in oil prices will still be China’s economy. China is vigorously promoting the construction of seven world-class petrochemical industrial bases, including Changxing Island in Dalian, Caofeidian in Hebei, Lianyungang in Jiangsu, Caojing in Shanghai, Zhoushan in Zhejiang, Gulei in Fujian and Huizhou in Guangdong, to promote the development of China’s petrochemical industry in the direction of large-scale installation, integration of refining and chemical industry and industrial cluster. The industrial layout extends downstream to the crude oil industry chain, enters the high-end fine chemical industry field, enhances the competitiveness of high-value-added petrochemical products, and strives to build a number of world-class chemical enterprises. Crude oil will play an increasingly important role in the process of China’s economic development. It is not only the energy source of accelerating the vitality of the national economy, but also China. Fostering the pillar industry – the source of raw materials for chemical industry.
Therefore, we have confidence in China’s development and in China’s huge consumer market. What we need to do is to take precautions, expand the sources of crude oil imports, speed up the construction of crude oil futures market, vigorously develop new energy resources, and strive to control oil prices in an acceptable range during the next peak period.
China’s rejuvenation will be the most important thing in the 21st century. China’s road to a big country has just begun. The world’s eyes are turning to the east. After the painful period of industrial restructuring, China’s economy will shift gears and take off again. Crude oil, as the most important energy and industrial raw material, is closely related to macro-economy.