Oil has been moving markets for over 100 years. It went through a particularly turbulent period during the "energy crisis" in the 2000s. So, how did the all-time high share prices and the trend in oil prices that shaped an entire decade come about?
Long-term investment trends, also known as decade trends, can develop positively for investors, especially if they enter the market at a sufficiently low price. From there, prices move continuously upwards. Opportunities can therefore open up for investors if they get in early enough.
The price of oil, one of the most important commodities in the economy, trended predominantly downwards in the 1990s. In the wake of the Asian crisis in November 1998, the price of a barrel of West Texas Intermediate (WTI) reached a long-term low of around 11 US dollars. Adjusted for inflation, this was the lowest price since the late 1940s.
Following a slight recovery after that time, demand significantly plummeted again in the wake of the terrorist attacks in New York on 11 September 2001. At first glance, it did not look like it was going to be a golden decade for oil. But at second glance, knowledgeable investors could see that despite the price slump to below the 20 US dollar mark, the 1998 trough was nowhere close to having been reached: that had been a clearly greater low despite the terrible news of the attacks.
Today, we know that this was the beginning of a long upwards trend in crude oil prices. For investors, crude oil became one of the defining investment trends of the 2000s and a factor that had to be taken into account. This commodity had been in a deep sleep for a long time. But that was about to change.
The main reason for the rise in oil prices was the ever-increasing demand from China. This was generated by continued strong economic growth and the growing thirst for energy - from industry, but also due to the greater prosperity of the people. The increased traffic on the roads and in the air resulted in higher demand for oil. The developments were similar in India, on a smaller scale. Further to this, the global economy flourished until 2008, causing oil consumption to rise in the rest of the world as well.
Besides the high and rising demand, other factors that impacted supply and price were also at play. Above all, these included the pronounced weakness of the US dollar between 2000 and 2008, which had a procyclical effect because oil is traded in this currency.
In addition, temporary price peaks were reached due to various problems and concerns about supply-side bottlenecks. One example is Hurricane Katrina in 2005, which affected oil production in the US. Another example is the conflicts in the Middle East, such as between Israel and Lebanon in 2006.
Many oil companies were able to benefit from the decade-long demand for black gold and earn good money for their shareholders. Exxon Mobil's share price roughly tripled between 1998 and 2008 - and it paid lavish quarterly dividends. With the rise in its share price, Exxon Mobil actually replaced General Electric as the world's largest company in terms of market capitalization in 2006. But other oil companies such as Chevron, Total and BP, as well as utilities such as Iberdrola, E.ON and RWE also benefited significantly during the 2000s.
Companies that pursued alternative oil extraction processes were another group that saw strong growth. The high prices led to the fact that fracking, an expensive and controversial (above all for environmental reasons) method for oil extraction, became more and more attractive. Chesapeake Energy is considered the pioneer in this area. While its shares were still at around 140 US dollars in February 1999, they peaked at a hundred times that figure in July 2008 at 14 000 US dollars.
PetroChina, too, was able to benefit - not quite as extremely - but still remarkably clearly: the NYSE-listed shares of the Chinese company rose more than fifteenfold between 2000 and 2007. Its share price was further fueled by the euphoria surrounding the IPO in Shanghai. As a result, PetroChina briefly replaced Exxon Mobil as the world's largest company in the fall of 2007.
Despite growing demand and ever-increasing prices in the 2000s, production capacities were not expanded accordingly. The peak oil theory provides one explanation for this: a significant expansion of supply was not possible because production capacities were close to their maximum. And because supply was capped, there was also talk of an energy crisis.
The result was an increasingly steep rise in the oil price. At the beginning of 2008, the price of WTI oil reached 100 US dollars for the first time. This marked the beginning of a period of overheating which culminated in an all-time high of 147 US dollars just six months later, on 11 July 2008. Even adjusted for inflation, the price of oil was in the triple digits and at a higher level than during any previous oil crisis.
And it is quite possible that prices would have climbed to over 200 US dollars. However, the 2008 financial crisis put an abrupt end to this swift rise. The energy crisis was soon over. The decline in oil prices was even more rapid than the rise that preceded it: in the five months to Christmas 2008, they fell to around 35 US dollars. Nobody was talking about peak oil anymore; instead, oil inventories were bursting at the seams and there was a considerable supply overhang. Many oil companies suffered significant share price declines during this period, however, they were initially able to recover from this in the early 2010s.
In contrast to the more politically motivated oil crises of 1973/74 and 1979/80, the 2000s saw an oil price boom in which the negative effects on the economy were less pronounced because of its reduced dependence on oil. Prices tended to rise in line with increasing global economic momentum rather than acting as a brake in the opposite direction, as had previously been the case.
However, the share prices of the former drivers of the upwards trend were generally not able to regain their former strength. In 2014, the price of oil experienced another major slump - and the recovery in the years that followed was weak. In 2020, this was followed by the corona shock, which brought trading to a near standstill and for a short time, took the inflation-adjusted price back to its 1998 level.
What has become of the companies that had spearheaded the trend? For Chesapeake Energy, the rapid success story recently took a tragic turn: in June 2020, the former apple of investors’ eyes went into insolvency. The story of oil will therefore likely remain volatile in the future.
Long-term investment trends such as the oil boom in the 2000s have inspired many an investor over the years. We will be examining a number of these so-called decade trends in a series of articles on MAG/NET. These include:
- The boom experienced by a number of large US companies - the "Nifty Fifty" - in the 1960s
- Gold at the end of the 1970s
- The rise of the Japanese economy and its Nikkei 225 index in the 1980s
- The formation of the internet bubble in the 1990s
Investors should note that direct investments in oil are only possible via futures markets. Such an investment requires a relatively high level of technical financial knowledge and entails specific risks.
Long-term investment trends play an important role in LGT's investment advisory services. If you are also interested in current global market and economic developments, we recommend that you read some of the insights provided by our research experts.