The Rise and Fall and Rise of Oil Prices : The Indicator from Planet Money Last summer, the price of oil was $44 a barrel. This week, it briefly hit $70. What happened? And what does it mean for the future of oil prices?

The Rise and Fall and Rise of Oil Prices

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Last June, the price of oil was $44 a barrel. It had been around that price for about a year. And then it started climbing.


Earlier this week, it hit $70. And that's today's Planet Money INDICATOR. The price of oil is now just beneath $70.


VANEK SMITH: I'm Stacey Vanek Smith.

GARCIA: And I'm Cardiff Garcia. The price of oil is a big deal. How much you pay for heating or a gallon of gas or a flight home all depend on it. But it's also famously volatile. And in the last six or seven years, it's taken an incredible ride. Today on the show - what was behind it and what's going to happen next.


GARCIA: There's something really important to understand about oil prices.

JOHN KEMP: One of the things about the oil market is that right from the very beginning, right from the very first well drilled in 1859, it has always been characterized by this big cycle of boom and bust.

VANEK SMITH: That's John Kemp, a senior analyst at Reuters. And he says just in the past few years, we have seen this massive boom-and-bust cycle repeat itself.

KEMP: Before the middle of 2014, we'd had three years of exceptionally high oil prices - 2011, 2012, 2013 and the first half of 2014 - oil prices averaging well over a hundred dollars a barrel, which is very high in historical terms.

GARCIA: When oil prices are high, John says, oil producers have an incentive to increase how much oil they take out of the ground and sell it. And that's what they did, especially the frackers in the United States.

VANEK SMITH: Fracking of course is this newish way of getting oil out of the ground by breaking open shale rock. It's controversial for environmental reasons. But whatever you think about it, it does make it possible to produce a lot more oil than before.

GARCIA: And a key thing about fracking - it's much easier to stop and start than drilling a traditional well. So when the price of oil shot up a few years back, the frackers got to work.

KEMP: We had a huge drilling boom in response to that very high period of oil prices. We had a lot of shale drilling, particularly in the United States across North Dakota, Texas, Oklahoma, New Mexico. And that produced a huge surge in oil supply.

VANEK SMITH: The U.S. was producing more oil than ever. At the same time, despite all kinds of unrest in the Middle East, the oil just kept flowing.

GARCIA: In June of 2014, the price of oil was $115 a barrel. A year and a half later, it had dropped all the way to $26.

KEMP: That was one of the largest falls in oil prices that we've ever seen.

GARCIA: This was clearly the bust phase of the boom-and-bust cycle. That the price fell so much for so long surprised a lot of people. But just like the price of oil tends to swing too high when it's going up, this time it swung too low when it was going down. In fact, the price of oil went so low that oil companies would actually have lost money by selling it. So some of those frackers started slowing production. And at the same time, oil was so cheap that people started buying more.

KEMP: We see actually quite a big acceleration in oil demand growth worldwide. We see it with American motorists starting to use their cars more but, more importantly, starting to buy bigger vehicles that need more fuel.

GARCIA: Because it's so cheap. In other words, oil is cheap, so gas is cheap. So they buy cars that can guzzle a lot of gas.

KEMP: Absolutely. You also start to see a pickup in oil demand around the rest of the world, particularly in 2016. The global economy starts to pick up. We start to see a big acceleration in global trade happening in 2016. And that drives the demand for fuel as well.

GARCIA: Supply is going down. Demand is going up. So the price starts rising again. But the oil price doesn't go back to anything like where it was before. It now stays in a range of about $40 to $55 a barrel. And then about a year ago, OPEC - that's the cartel of 14 oil-producing countries - agrees to start cutting how much oil they produce. And they're joined by Russia, which is not a member of OPEC but still a country that produces a lot of oil. Last summer, the price of oil started climbing, and John says there are two reasons.

KEMP: The first is that OPEC's production cuts really start to kick in during the summer of 2017 and through to the end of the year. So you start to really get a big impact from OPEC action. At the same time, the hedge fund community again starts to become very bullish about the outlook for oil.

VANEK SMITH: So now that the price has climbed back to nearly $70 a barrel, the question is, can it keep going up? John says that swings in oil prices are mainly driven by global supply and demand but that in the short run, the price can overshoot because speculators like hedge funds have bet so much in one direction. And John thinks that may have happened here.

KEMP: The market always overshoots on the upside and the downside. So we know that at some point, the hedge funds will overbuy, and the prices will correct lower. Whether we've reached that point yet is of course the billion-dollar question.

GARCIA: Regardless of what does happen in the short term, John says, there's another much more important question about the long term.

KEMP: One of the key questions going forward is going to be whether or not fracking can meet all of the growth in global oil demand going forward over 2018, 2019, 2020. Will the frackers keep up? And I think that depends on three things. First of all, can they increase production from the existing fields, particularly in West Texas and North Dakota? Secondly, can they spread those fracking technologies successfully to new areas of the United States - for example, out in sort of Wyoming and Colorado, and can they scale it up? And thirdly, can those techniques be successfully transplanted into other countries? And I'm thinking particularly Argentina, Russia, China, et cetera.

GARCIA: For all the hype about fracking, it's still a relatively small part of the global market. John says it's responsible for about 5 percent of barrels produced each day. And so an essential question that will determine the price of oil from now on is, just how much can fracking keep growing?

This podcast is produced by Darius Rafieyan and edited by Jacob Goldstein. Thanks for listening. Have a great weekend.


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