In general, oil prices are volatile in nature. The oil price volatility has also been witnessed in history throughout the journey from Pennsylvania oilfield to OPEC formation. There are several factors which have influenced oil prices in recent years as well as in past decades. Like for other commodities, demand and supply fundamentals also play major role in driving oil price volatility. However, there are other factors, including political, geographical as well as financial, that are responsible for determining oil prices. This section will focus on the history of oil shocks and the traditional factors which influenced the oil prices. In addition, this section will also describe emerging factors affecting oil prices (Hamilton, 2010).
Back in 1850 people used traditional old methods to obtain oil such as extraction of oil and gas through coal but by the passage of time new techniques and methods were introduced. In 18th century people used to produce illuminates through gasser and downer processes, but later oil was discovered as an efficient substitute to produce illuminates. In 1859 the first oil well was drilled in Pennsylvania which was a far more efficient way to obtain oil in large quantity than the traditional method to process coal in order to get oil (Hamilton, 2010).
The first product of the well was sold at a price of 50 cents per gallon and the price for oil is generally given $20.00 per barrel from August till the end of 1859. Due to increase in oil production from Pennsylvania field, the price of oil started falling and reached an average of $9.60 per barrel. During the period of 1860-1861 where exploration of oil was on peak, the production rose from half a million to 2 million barrels per day. As a result of an increase in production there was a fluctuation in prices which resulted decline in prices from $9.60 per barrel to $2.00 per barrel (Hamilton, 2010).
Historically the first oil shock occurred during 1862-1864 which was an era of civil war in the United States of America. During this time there was scarcity of different commodities including oil. Beside the civil war, another factor leading to oil shortage was waterflood, which resulted in natural decline in production, and consequently increase in oil prices (Hamilton, Historical Oil Shocks, 2010).