The oil industry in history: demand, supply and prices

Oil is a commodity — a standard raw material that is traded all over the world. It is produced in dozens of countries, shipped by tanker and pipeline, and sold at prices tied to a few benchmark crudes (reference grades of oil whose prices the other grades follow), above all Brent, WTI and Dubai. A single company, however large, usually cannot move the world price and has to take it as given. Only countries with large production can influence the price, and even they can do so only if they act together.

Demand for oil depends on economic growth, on transport (gasoline, diesel and jet fuel), on petrochemicals and on the price itself. Supply has two parts: production from the fields that already work, which falls over time, and new fields, which take years to bring into production. Tengiz was discovered in 1979, and its integrated process trains (the plant lines that treat the oil and gas) started up in 1991. Kashagan was discovered in 2000 and produced its first oil in 2013 (phased start-up).

The main feature of the market is this: in the short run, within months, neither demand nor supply responds much to the price. The vehicles, aircraft and plants have already been bought, and they need as much oil as before. The wells have already been drilled. Only a producer with spare production capacity can add output quickly. This is production that can be started within 30 days and kept up for at least 90 days (the definition of the US Energy Information Administration, EIA). Most of the world's spare capacity is in the countries of OPEC (the Organization of the Petroleum Exporting Countries), and historically most of all in Saudi Arabia.

How strongly the quantity responds to the price is shown by price elasticity. It is the ratio of the percentage change in quantity to the percentage change in price. For demand it is negative (the more expensive the oil, the less is bought); for supply it is positive. A demand elasticity of −0.1 means that a 10% rise in price reduces consumption by about 1%.

Suppose that a share $s$ of world supply suddenly leaves the market, because of a war, an accident or a decision by producers. The price rises until consumption has fallen and production elsewhere has grown enough to close the gap. If the elasticities are constant, we can find the new price exactly (the derivation is in the advanced section at the end of the lesson):

Buffers. A disruption is met first from stocks. Commercial stocks sit in tanks, pipelines and tankers; emergency stocks are held by governments. The member countries of the International Energy Agency (IEA), created in 1974 after the first oil shock, hold emergency oil stocks. By joint decision they have released them to the market six times: in 1991, 2005 and 2011, twice in 2022, and in 2026. Spare capacity is used next. Both buffers are limited, and if the disruption drags on, it is the price that restores the balance.

The long run. Over years the price is pulled towards the cost of the most expensive barrel that is still needed to meet demand. If the price stays above this cost for a long time, companies invest more in exploration and development, and a few years later new oil reaches the market. If it stays below, they cut investment, and years later there is not enough supply (the investment cycle of companies). The lesson on unit costs shows how the cost per barrel relates to the break-even price of a project. The lesson Market, financial and regulatory uncertainty shows how project appraisal takes price uncertainty into account.

We cannot compare the price of 1970 directly with the price of 2025: since then the dollar has lost so much of its value that it buys many times less. So the prices of different years are converted into real terms, that is, into the money of a single year. For this we use the consumer price index, which shows how the prices of everyday goods and services change (money of the day and real terms).

Annual averages smooth out the swings of the market: within a single year the range can be much wider. The Brent spot price (“Europe Brent Spot Price FOB” in the EIA series) reached $143.95/bbl on 3 July 2008 and $33.73 on 26 December of the same year.

People knew about oil earlier, but the start of commercial production is usually dated to 27 August 1859. On that day Edwin Drake struck oil with a well about 21 m deep, near the town of Titusville in Pennsylvania. The main product then was kerosene, a fuel for lamps, which replaced whale oil. New wells kept flooding the market, and the price rose and fell several times over: in 2025 dollars, from $170/bbl in 1864 to $34 in 1874.

John Rockefeller brought order to the chaos in his own way. His company, Standard Oil, was founded in 1870 as a refiner. It bought up its competitors and became a trust in 1882 (a group of companies run as one). It controlled US refining and pipelines almost like a monopoly (a single seller). On 15 May 1911 the US Supreme Court ordered it to break up under the antitrust law, the law against monopolies. More than 30 independent companies emerged from the trust. The heirs of some of them, ExxonMobil and Chevron, are still among the world's largest oil companies today.

Around the turn of the century oil began to flow in many countries. On 10 January 1901 a gusher (a well that spouts oil under its own pressure) on the Spindletop salt dome in Texas produced, according to estimates, about 100 thousand bbl/d. A salt dome is a dome-shaped mass of salt that can trap oil. The future major companies Texaco and Gulf grew on Texas oil. In May 1908 the first commercial oil in the Middle East was struck at Masjed Soleyman in Persia. In 1909 the Anglo-Persian Oil Company, the predecessor of today's BP, was created to produce it (the D'Arcy concession; a concession is the right, given by a government, to produce oil in an area). In Kazakhstan the first oil gusher came from a well at the Karashungul area in 1899 (see the section on Kazakhstan below). As the automobile spread, gasoline became the main product, and navies began to switch from coal to oil fuel. In 1914 the British government bought a controlling stake in the Anglo-Persian company to secure oil for the fleet. Oil was becoming a strategic raw material.

Why was the industry so drawn to agreements? Finding and developing a field is expensive, while producing from wells that are already drilled is cheap. When there is too much oil, each producer is ready to sell at almost any price above its running costs, and the price falls so low that the investments already made do not pay back. The way out was sought in limiting supply.

In 1928 the largest companies made two agreements. In the Red Line Agreement, the partners in the Turkish (later Iraq) Petroleum Company promised not to develop fields on the lands of the former Ottoman Empire except together. The partners were the Anglo-Persian company, Royal Dutch Shell, the French CFP and a group of American companies. In the “As-Is” agreement, made at Achnacarry Castle in Scotland, the heads of the Anglo-Persian company, Shell and Standard Oil of New Jersey agreed to keep their existing market shares.

More important was the experience of Texas. The huge East Texas field was discovered on 3 October 1930. By the middle of summer 1931 it was producing about 900 thousand bbl/d, and the field price of oil fell from 99 cents to 13 cents a barrel. The governor declared martial law in the field. The Railroad Commission of Texas, which regulated production in the state, began to limit it with quotas set according to demand. In 1935 a federal law banned the shipment between states of oil produced above the quotas. This is how a regulator appeared that managed the price through the volume of production. OPEC and OPEC+ would later act in a similar way, by limiting production.

Producing countries also began to take oil under their own control. On 18 March 1938 Mexico took over the property of foreign oil companies (expropriated it) and created the state monopoly PEMEX. In the same year, 1938, commercial oil was found in Saudi Arabia, at the “Dammam No. 7” well, under the concession granted in 1933 to Standard Oil of California.

After the Second World War oil consumption grew rapidly. From 1965 to 1973 world consumption rose from 30.9 to 56.1 million bbl/d (the example in the next section calculates the growth rate). At the same time oil became cheaper: in 2025 dollars a barrel cost $15–27, and in 1970 $15, less than in any year since 1931. Almost half of the growth in world production in 1965–1973 came from the Middle East, with its huge fields that are cheap to develop. Its share rose from 27 to 37%.

Most of the oil outside the US and the USSR was produced and sold by seven international companies — the “Seven Sisters” (the name is credited to Enrico Mattei, the head of the Italian company ENI): Standard Oil of New Jersey, Socony-Vacuum, Standard Oil of California, Gulf, Texaco, Royal Dutch Shell and Anglo-Iranian. Since then, mergers have left four of them: ExxonMobil, Chevron, Shell and BP. They owned the concessions, pipelines, tankers and refineries, and decided for themselves where and how much to produce (concessions).

The taxes and payments of the host countries (the countries where the companies worked) were worked out from the posted price, a price that the companies announced themselves. When there was too much oil, the companies began to cut the posted prices, and with them the incomes of the producing countries. The latest cut came in August 1960. The producing countries answered it with a meeting in Baghdad on 10–14 September, where Iran, Iraq, Kuwait, Saudi Arabia and Venezuela founded the Organization of the Petroleum Exporting Countries (OPEC).

Step by step, the producing countries took control of their oil away from the concession holders. Iran nationalised its oil industry (took it into state ownership) in 1951. In the 1970s governments bought out shares in the concessions: the Saudi government took 25% of Aramco in 1973, 60% in 1974 and 100% by 1980. This is how the largest state-owned (national) oil companies appeared. Today they own most of the reserves (types of oil companies).

US crude oil production reached its maximum in 1970, at 9.6 million bbl/d, and then began to decline, while world demand kept growing. In October 1973, during the Arab–Israeli war, the Arab oil-exporting countries cut production and declared an embargo (a ban on supplying oil) against the US and several other countries. By January 1974 the price had quadrupled, from about $2.90 to $11.65/bbl. The embargo was lifted in March 1974, but the price stayed high.

The second shock came from the revolution in Iran: by January 1979 production there had fallen by 4.8 million bbl/d, about 7% of world production. From April 1979 to April 1980 the price more than doubled. The annual average price of 1980 was $37.9/bbl, about $148 in 2025 money.

The shocks changed everyone's behaviour. The consuming countries created the IEA in 1974 and began to hold emergency stocks. Consumers used less oil and switched to other fuels: world oil consumption fell from 64.3 million bbl/d in 1979 to 58.0 in 1983 and returned to the 1979 level only in 1988. According to a World Bank estimate, by 2015 the oil intensity of the world economy (the oil used per unit of output) had fallen by almost half compared with the 1970s.

The high price made expensive oil outside OPEC profitable. From 1973 to 1983 the North Sea and the Gulf of Mexico added about 6 million bbl/d. OPEC tried to hold the price by cutting production: its supplies fell from 30 million bbl/d in 1979 to 16 million in 1985, and Saudi Arabia's production fell about threefold between 1980 and 1985. Even so, the price kept falling in real terms. At the end of 1985 OPEC gave up defending the price and raised its supplies from 13.7 million bbl/d in June to 18 million in December. In 1986 the annual average price fell by almost half, from $27.3 to $14.8/bbl. Cheap oil lasted for almost two decades.

After 1986 the market itself began to set the price. Oil is sold on formulas tied to benchmark crudes, and the prices of the benchmark crudes are formed in daily trading, including on exchanges. For example, WTI futures (contracts to buy oil on a future date at a price fixed today) have traded on the New York Mercantile Exchange since 1983. The price became transparent, and just as volatile (it swings widely). In August 1990, after Iraq's invasion of Kuwait, the Brent spot price more than doubled in two months, from $19.93/bbl on 1 August to $41.45 on 27 September. In December 1998, after the Asian financial crisis, it fell as low as $9.10.

In the 2000s demand grew rapidly in the developing countries, above all China. China's oil consumption rose from 2.2 million bbl/d in 1990 to 9.3 million in 2010 and 17.4 million in 2025. Since 2013 the countries outside the OECD have used more oil than the OECD countries. The price rose almost without a break and reached $143.95/bbl on 3 July 2008. Then the global financial crisis knocked it down to $33.73 by the end of December. From 2011 to the middle of 2014 the average price of the three benchmark crudes (Brent, WTI and Dubai) stayed at about $105/bbl. According to a World Bank estimate, the fall of 2014 brought to an end the commodity “supercycle” (a long period of high prices for raw materials) that had begun in the early 2000s.

High prices paid for a new technology. Horizontal wells with multistage hydraulic fracturing (cracking the rock by pumping in fluid at high pressure; Horizontal wells, Hydraulic fracturing: purpose and well selection) made it possible to produce oil from tight rocks, which let fluid through only very slowly (rocks of low permeability). This is tight oil, which is more often called shale oil. US crude oil production had been falling since 1970, but it grew from 5.0 million bbl/d in 2008 to 13.7 million in 2025. According to an EIA estimate, in 2018 the US overtook Saudi Arabia and Russia and became the world's largest producer of crude oil. In December 2015 the US lifted the ban on exports of its crude oil that had been in force since 1975.

Shale oil has different economics. A shale well goes from the start of its development to almost complete depletion in 2.5–3 years, and the investment in a single well is small. So shale production responds to the price much faster than an offshore field, which takes many years to prepare for production. Shale production costs a lot, but it is flexible. It has become the new “regulator” of the market: when the price is high it is quickly built up, and when the price is low drilling is quickly cut.

By 2014 supply had outrun demand. In November 2014 OPEC decided not to cut production but to keep it at 30 million bbl/d. In practice, it gave up supporting the price to protect its market share. The Brent spot price fell from $115.19/bbl on 19 June 2014 to $26.01/bbl on 20 January 2016. On 10 December 2016 the OPEC countries and 11 countries outside the organisation, including Russia and Kazakhstan, agreed to cut production together. The group called OPEC+ dates from this Declaration of Cooperation.

In 2020 the COVID-19 pandemic cut world oil consumption by about 9% — from 98.6 to 89.8 million bbl/d. On 20 April 2020 the exchange price of the WTI contract with the nearest delivery date fell below zero for the first time since trading began. Contract holders had nowhere to put the oil: at Cushing, Oklahoma, the delivery point, almost no free storage was left. In April 2020 OPEC+ agreed on a record production cut, by 9.7 million bbl/d from May.

In February 2022 Russia's war against Ukraine began; on 8 March the Brent spot price rose to $133.18/bbl, and the IEA countries released emergency stocks twice in the year. Then the market calmed down: in 2025 the annual average price of Brent was about $69/bbl, and world oil consumption was a record 103.0 million bbl/d.

The share of oil in world primary energy consumption (all fuels and other energy sources, before conversion) is declining: about 50% in the mid-1970s, 40.6% in 2000 and 33.5% in 2025 (according to the Energy Institute). Gas, renewables and electric cars are growing. According to an IEA estimate, more than 20 million electric cars were sold in the world in 2025, a quarter of all new passenger cars. By the same estimate, the world's fleet of electric cars saved about 1.7 million bbl/d of oil in 2025. But in absolute numbers oil consumption is still growing, and in 2025 it was a record.

Nobody knows when growth will give way to decline, or how fast the decline will be. The forecasts of different organisations differ widely, and so do the scenarios of a single organisation. For a project that will produce oil for 20–30 years, this means uncertainty about price and demand. Project appraisal handles it with scenarios and ranges of values (scenarios, Market, financial and regulatory uncertainty).

2026 gave a fresh lesson about buffers. The armed conflict in the Middle East that began on 28 February 2026 almost halted oil exports through the Strait of Hormuz. According to an IEA estimate of 11 March, exports of oil and oil products through the strait fell below 10% of the pre-conflict level. In 2025 about 20 million bbl/d had passed through it, roughly a quarter of world seaborne oil trade. On the same day the IEA countries agreed to release 400 million barrels of emergency stocks to the market, the sixth and the largest such release since 1974. According to an EIA estimate, the crude oil production that was shut in peaked in May at 10.9 million bbl/d. The Brent spot price rose to $138.21/bbl on 7 April 2026.

The first oil gusher on the territory of Kazakhstan came in 1899 from well No. 7 at the Karashungul area in what is now the Atyrau Region. The history of oil production in the country is dated from this event. The search for oil in the Emba area began as early as 1892. The Dossor field was discovered in April 1911, Makat produced its first oil in 1915, and in 1922 the Embaneft trust was created to develop them. By the end of 1940 the fields of the Ural–Emba region were producing 750 thousand tonnes of oil a year, and by the end of the 1940s about 1 million tonnes.

A new stage began in Mangyshlak. In 1961 Uzen and Zhetybai were discovered, and in 1964 an oilfield administration was created to develop Uzen. Today it is Ozenmunaigas, which has produced more than 400 million tonnes of oil in 60 years. Mangyshlak oil contains a lot of wax: it solidifies even at temperatures above zero, so it is heated when it is gathered and pumped (waxes). In 1979 the giant fields Tengiz and Karachaganak were discovered in the Pre-Caspian Basin, and in 1984 Kumkol in the South Turgay Basin (petroleum basins of Kazakhstan). In 1985 the Kazakh SSR produced 22.7 million tonnes of crude oil and condensate, and in 1991 26.6 million tonnes.

In the first years of independence production declined, and in 1994 it fell to 20.3 million tonnes. To develop the largest fields the country brought in foreign companies. The Tengizchevroil joint venture was created in 1993, and in 1997 production sharing agreements were signed for the North Caspian and for Karachaganak (in such an agreement the state and the company share the oil produced; how the rules on the subsoil changed, Licences and contracts for subsoil use). In 2000 Kashagan was discovered offshore, on the shelf of the North Caspian.

Producing oil is not enough: it has to be exported, and Kazakhstan has no access to the open sea. In 2001 the pipeline of the Caspian Pipeline Consortium (CPC) started operating. It is more than 1500 km long and runs from the fields of Western Kazakhstan to a marine terminal near Novorossiysk on the Black Sea. Most of the exports still go through it today. In 2006 the Atasu–Alashankou oil pipeline, a section of the Kazakhstan–China pipeline, opened a direct route for oil to China. With the new routes production grew: 35.3 million tonnes in 2000 and 79.7 million tonnes in 2010.

The national company KazMunayGas was created in 2002 (the companies of Kazakhstan's oil industry). Kashagan produced its first oil in 2013, but production had to be stopped. It was resumed only in 2016, after the pipelines were replaced (offshore development). Since 2016 Kazakhstan has taken part in the OPEC+ agreements, and under them it takes on commitments on its production level. In January 2025 the third plant at Tengiz produced its first oil. Production at the field grew in 2025 to about 39 million tonnes, and in the country as a whole to a record 99.4 million tonnes, which is 13.3% more than in 2024. That is 11th place in the world and about 2.1% of world oil production.

In 2026 production is lower than last year's: 61.7 million tonnes in January–August, which is 8.3% less than a year earlier. The government expects about 96 million tonnes for 2026 as a whole, instead of the 100.5 million tonnes assumed earlier, and the same in 2027. Kazakhstan's production level under OPEC+ for November 2026 is 1.628 million bbl/d. The lesson on taxation covers the tax regime and its changes.