How do current oil market conditions differ from those during the price shocks of the 1970s?

The current oil market landscape contrasts significantly with the conditions during the 1970s price shocks. Then, the global economy heavily relied on oil, and OPEC countries, along with its nationalizing oil assets, dominated the market. Today, several key differences are evident.

Reduced oil dependence

The global economy’s reliance on oil has diminished considerably since the 1970s. For instance, oil intensity, which measures the amount of oil required to produce one unit of GDP, declined from 0.12 tons of oil equivalent (toe) in 1970 to 0.05 toe in 2022. Most of the reduction is the result of significant efficiency improvements in the transport sector due to government-mandated vehicle fuel efficiency standards. In addition, there has been a shift to alternative energy sources to replace oil, notably for heavy fuel oil in power generation.

Diversification of supply sources

Unlike the 1970s, when the global oil market relied heavily on a few producers, especially in the Middle East, oil supplies now come from many sources. For example, following the second oil shock, new sources of supply growth emerged—in Alaska, Mexico, and the North Sea. Similarly, during the period of high prices from 2010-14, there was a surge in supply from higher-cost sources like Canadian oil sands, U.S. shale oil, and biofuels. These three added an estimated 5.6 mb/d during 2010-14 and a substantial 14.9 mb/d to total liquid production in 2010-23. In 1970s, oil producers in the Middle East accounted for an average of 34 percent of global oil supplies (their peak share was 37.4 in 1974). Today, their share is less than 30 percent.

Strategic reserves

Following the oil crises of the 1970s, several large oil-importing countries set up strategic reserves for emergencies. These reserves consist of both crude oil and petroleum products form and are managed in various ways, with some under complete state control and others being held or pledged by private entities. Strategic reserves, usually held by oil importers, complement spare capacity by oil exporters. Currently, there is an estimated spare capacity of over 5 mb/d. As a result, a shortfall in the oil market could in principle be offset by increased production from the countries holding such capacity. The United States, for instance, established the world’s largest Strategic Petroleum Reserve (SPR) in 1975 to mitigate possible supply disruptions. The SPR has held more than 700 million barrels of oil, equivalent to five weeks of U.S. domestic oil consumption or one week of global oil consumption. Some other countries also established similar inventory schemes, mainly as part of the IEA International Energy Programme.

Development of oil futures markets

Oil prices once were officially set both on the supply side (by the oil companies) and on the demand side (by governments). When OPEC nationalized oil company assets in the 1970s and began setting official prices, active spot markets were developed as companies became buyers of crude oil. The introduction of futures contracts—the West Texas Intermediate contract in the United States (a domestic benchmark) in 1983 and the Brent contract (an international benchmark) in 1988—marked a significant change in the oil market. Additional oil futures contracts were subsequently launched, including more recent ones in China and the Middle East. Oil futures contracts, often considered the most liquid of commodity contracts, allow for trading up to more than 10 years ahead. They provide market participants with the ability to engage in price discovery, hedging, and risk transfer.

Establishment of the International Energy Agency

The IEA, an intergovernmental organization with 31 member countries, was founded under the aegis of the OECD shortly after the first oil price shock. It provides policy recommendations, analysis, and comprehensive data on the global energy sector. During several episodes, the IEA has played a key role, including establishing rules on reducing the reliance of its members on oil as well as coordinating the release of emergency reserves by its members during crises. These episodes included the 1990 invasion of Kuwait and the 2019 attack on the Saudi oil facilities. The IEA also helped attenuate market concerns during other significant events, such as when oil prices turned negative due to massive glut and lack of storage early in the COVID-19 pandemic.

Energy transition

The share of oil in world energy consumption has been in steady decline since the 1970s due to expansion of other fuels. In recent years, renewables have experienced the most rapid increase in terms of share, albeit from a small base. The ongoing green transition implies diminishing reliance on fossil fuels, resulting in slower demand growth for oil. Although oil demand is expected to grow by an estimated 6 percent by 2028 (reaching nearly 106 mb/d), oil consumption is expected to peak around 2030. This change is due to the improving efficiency of energy use, the growing use of electric vehicles reducing transport fuel consumption, and the diffusion of renewable technology-based energy supplies substituting for fossil fuels.

In conclusion, today's oil market is more resilient and less susceptible to shocks than during the 1970s. The diversification of supply sources, strategic reserves, advanced market mechanisms, and a global shift towards renewable energy have all contributed to a more stable and sustainable energy landscape. While oil remains a significant energy source, its dominance is gradually diminishing, paving the way for a more diversified and secure energy future.