History of crude oil

1800 - 1869: The early crude oil industry

The modern oil industry can trace its origins to Baku in 1837, where the first commercial oil refinery was established to distil oil into paraffin (used as lamp and heating oil).

This was followed by the first modern oil well in 1846, which reached a depth of 21 metres. At this time, a single oil field in Baku accounted for over 90% of the world’s oil production, mostly going to Persia (now Iran).

Commercial oil wells soon followed in Bobrka, Poland (1854), Bucharest, Romania (1857), Ontario, Canada (1858) and Pennsylvania, USA (1859), sparking a ‘black gold’ rush in several of these regions.

Pennsylvania was the clear winner and within a couple of years was producing almost half of the world’s oil. Prices rose quickly – from roughly $0.49 a barrel in 1861 to $6.59 a barrel in 1865.  

1914 - 1949: Wars, discoveries and oil crises

World War I drove global demand for oil and caused prices to rise from $0.81 a barrel in 1914 to $1.98 in 1918. Demand after the war was driven by the ever-increasing popularity of cars, which caused a gasoline shortage on the west coast of America in 1920. Price surged to $3.07 a barrel, falling back to $1.61 by 1922 as production increased.

New applications and discoveries

At this time, major companies were beginning to research other applications for oil, including in the commercial production of plastics. Despite the increased demand these products created, oil prices remained relatively low due to competition between IOCs and plentiful supply.

Meanwhile, major discoveries were made in Venezuela (1922), Iraq (1928), the USSR (1929 and 1932-34), east Texas (1930), Kuwait (1938) and Saudi Arabia (1938), and the first modern offshore rig was launched in the Gulf of Mexico (1947).

The Texan oil discovery created an oil glut that coincided with the Great Depression, sending prices from $1.19 in 1930 to $0.65 in 1931. However, the Texas Railroad Commission soon intervened to enforce production quotas, which limited supply and stabilised prices.

World War II

When World War II kicked off in 1939, conflict once again became the major driver of demand. This time, however, there was less of an impact on prices due to bountiful global supply. Nonetheless, the war made the importance of controlling oil reserves abundantly clear to governments, as their actions over the next few decades would show.

1950 - 2003: A battle for control of crude oil production

After the war, governments looked to nationalise oil production. Iran, Indonesia and Saudi Arabia all partially nationalised their oil infrastructure between 1950 and 1960. Egypt also took control of the Suez Canal, through which nearly 5% of the world’s oil passed, in the crisis of 1956-57. 

Despite this, control over oil markets remained split between the US and USSR. And when Russia began to flood the market with cheap oil in the late 1950s, the seven sisters agreed to cut prices on Venezuelan and Arab oil to remain competitive.

The formation of OPEC

Officials from Kuwait, Iran, Iraq, Saudi Arabia and Venezuela met in Baghdad in 1960 to discuss how to handle the price cuts imposed by the IOCs. They agreed to form the Organization of Petroleum Exporting Countries (OPEC), with the aim of reducing competition between their nations and controlling prices. 

Over the next two decades OPEC expanded to include Qatar, Indonesia, Libya, United Arab Emirates, Algeria, Nigeria, Ecuador and Gabon. Many of these nations also took control of their oil reserves between 1960 and 1976, by buying out or forcibly taking shares from the IOCs.

A story of supply and demand

The US and USSR remained in control of oil for a short time, but influence soon shifted to OPEC – as emphasised in 1973 when its members opted to embargo countries supporting Israel in the Yom Kippur war (particularly the US). Global prices increased from an average of $2.48 in 1972 to $11.58 by 1974 (and much higher in some parts of the US).

This period was also marked by the discovery of oil fields in the North Sea, areas controlled by Norway and the UK, with drilling starting the mid-1970s. This oil – Brent crude – is now used to benchmark prices along with WTI crude.

Prices rose rapidly from 1979-80, reaching $36.83, as Iran cut production and exports during its revolution and the Iran-Iraq war began. But prices fell quickly thereafter due to demand shocks and because other producers increased production, particularly the USSR, which became the world’s biggest producer of oil by 1988. 

In 1990, Iraq invaded Kuwait, and the ensuing Gulf War created a supply shock that sent prices from $14.98 a barrel before the invasion to $41.00 per barrel in September 1991. 

Prices continued to fluctuate for the next few years. And as the Soviet Union fell in 1991, so too did the Russian oil industry, with production halving over the next decade due to reduced investment. Global demand also fell drastically in 1997 due to the Asian financial crisis, but recovered by 1999 as the region’s economic outlook improved.

2003 - present: A changing landscape and hydraulic fracturing

The US invasion of Iraq in 2003 created uncertainty about the future supply of oil, and at the same time, Asian demand (driven by China) increased massively, contributing to a rise from $28.38 in July 2000 to over $146.02 in July 2008.
From there, prices fell and rebounded as a result of the global financial crisis, reaching $126.48 following the Arab Spring of 2011, which again created supply shortages. 

In recent years, technological advancements have facilitated increased US shale oil production through hydraulic fracturing. This has reduced OPEC’s influence and caused prices to fall – from $114.84 per barrel in June 2014 to under $28.47 in January 2016. 

OPEC responded by colluding with several other countries (including Russia) to implement production cuts, expected to run until at least the end of 2018. Prices rose following the announcement of these cuts but, with the US now able to act as a ‘swing producer’, OPEC’s ability to control prices may be in decline.

Over the next few years, prices are likely to depend on US shale oil production, the OPEC-led coalition, and how Asian demand shapes up. Learn more about oil trading.

Which country holds the world’s biggest oil reserves today?

The US is estimated to have the largest volume of oil reserves, followed by Russia and Saudi Arabia. The following table includes the figures for the top ten countries according to a 2016 study.²

These figures include unconventional shale oil reserves, oil from existing fields, oil that has been discovered and is believed to be recoverable, and estimates of recoverable oil reserves that have yet to be discovered. 

How long will the world’s oil reserves last?

It is believed that global oil reserves (1.67 trillion barrels of oil globally) will be exhausted sometime between 2050 and 2060. This assumes that global consumption (currently 92 million barrels per day) will increase over the next few decades.³