1 INTRODUCTION

The oil prices have three dimensions -their level, their volatility and their trend over time.  Each involves different determinants and each has different implications for producers, consumers and investments in the industry.

The history of each dimension is given in the figures.   Figure 1 shows the general levels since the industry began.  Although oil has been used over thousands of years, the modern industry is conventionally dated from 1859 when the first well was drilled to produce crude.

The figure, in money of the day, clearly shows the two oil price spikes of the 1970s –the first in 1973 associated with the Arab oil embargo and the Yom Kippur War; the second in 1978-81 associated with the Iranian revolution and the Iran-Iraq war.  It also shows the subsequent price collapse of 1986.

Figure 2 shows the monthly average price of the OPEC basket since 1983, which consists of eight different crude oils.  This illustrates the growing volatility of oil prices experienced since 1986.  Figure 3 shows the trend of crude prices since the start of the modern industry while figure 4 shows the more recent trend since 1983. In both cases the trend of price is declining.

The purpose of this paper is to consider what influences will determine the future of price levels, volatility and trend.  However, in order both to understand the complex forces at work and provide an agenda for analysis it is necessary to describe briefly how oil prices are determined.