Abstract

Oil-price surges in the 1970s were not harbingers of ultimate resource depletion, but only a severe manifestation of a commodity-price cycle. Another round of excess supply and falling prices was thus inevitable. Thus far, history does not show any unambiguous long-term trend in global petroleum-production costs, but there is an inexorable tendency for energy cost to fall, whatever the limits may be to supplies of specific fuels.

Dangerous Assumptions

Two great surges in world oil prices during the 1970s convinced almost everybody that civilization was reaching the end of its low-cost energy resources. Oil prices would surely continue to rise indefinitely at a pace exceeding that of general inflation, making it both essential and profitable to invest in ever more costly energy supplies. The conviction that the era of cheap energy was over incited worldwide campaigns to find, develop, and deliver frontier oil and gas, to manufacture synthetic hydrocarbon liquids and gases, and to generate electricity from coal, uranium, and a variety of exotic sources.

Much of this effort cost more than it is worth, and much wasteful investment and useless meddling with private energy-use decisions still go on because analysts and decision-makers misunderstand the fuel-supply and price upheavals of the 1970s. In early 1984, oil use had been shrinking and total energy consumption had been stagnant for five years; real (inflation-adjusted) oil prices had been falling for three years; and a growting surplus of producing capacity was becoming apparent almost everywhere for almost every energy commodity. Oil companies, national and international energy agencies, and the majority of independent experts nevertheless still believe that the long-run energy price trend is inexorably upward, and that the prospect of future fuel shortages should drive the decisions of political and corporate leaders around the world.

These are dangerous assumptions.

They are at odds with more than two hundred years of historical experience, simple truths about global resources of natural hydrocarbons, and fundamental economic principles. The energy shortages and spectacular price rises of the 1970s did not spring from worldwide resource depletion or steeply rising economic costs. They were, rather, artifacts of an unusually severe commodity cycle not much different from those which afflict the markets for copper, coffee, and fishmeal, for example, and a downturn was quite as inevitable in the Eighties as was the upswing of the Seventies.

Oil and gas are commodities, and like other commodities, their demand expands unevenly over time, and sometime contracts sharply. Supply also grows in fits and starts, levels off at times, and occasionally shrinks; and the uneven movements of supply and demand are seldom in harmony with each other. As a result, it is to be expected that their prices, absent powerful institutional restraints, would swing over a wide range of values. Nobody should have been surprised by the oil-price runup of the 1970s, and nobody should have been surprised that prices slumped and continued to slump in the 1980s.

During more than 125 years of recorded oil prices, there has been one exceptional period of price-stability. Between 1935 and 1972, the Texas Railroad Commission controlled a strategic fraction of the world's discretionary oil-producing capacity (and a cartel of major oil companies controlled the flow of crude oil everywhere outside of North America) and, as a result, the average yearly change in inflation-adjusted crude-oil prices, up or down, at the U.S. Gulf Coast was only about 4 percent. Over the past 125 years taken as a whole, however, the inflation-adjusted price of crude oil has moved up or down by an average of about 20 percent per year. The violent price upheavals of the last decade were just a return to normality in oil markets.

Lessons From History
Don't Count on Higher Prices.

While oil prices have almost always been volatile, history shows no statistically significant long-run price trend. No rising or falling trend has, in fact, ever lasted more than ten years. The average price of crude oil over 125 years has been about $15 per barrel in today's dollars, and each of the five 15-year periods show an average price in the $13–$17 range.

These are dangerous assumptions.

They are at odds with more than two hundred years of historical experience, simple truths about global resources of natural hydrocarbons, and fundamental economic principles. The energy shortages and spectacular price rises of the 1970s did not spring from worldwide resource depletion or steeply rising economic costs. They were, rather, artifacts of an unusually severe commodity cycle not much different from those which afflict the markets for copper, coffee, and fishmeal, for example, and a downturn was quite as inevitable in the Eighties as was the upswing of the Seventies.

Oil and gas are commodities, and like other commodities, their demand expands unevenly over time, and sometime contracts sharply. Supply also grows in fits and starts, levels off at times, and occasionally shrinks; and the uneven movements of supply and demand are seldom in harmony with each other. As a result, it is to be expected that their prices, absent powerful institutional restraints, would swing over a wide range of values. Nobody should have been surprised by the oil-price runup of the 1970s, and nobody should have been surprised that prices slumped and continued to slump in the 1980s.

During more than 125 years of recorded oil prices, there has been one exceptional period of price-stability. Between 1935 and 1972, the Texas Railroad Commission controlled a strategic fraction of the world's discretionary oil-producing capacity (and a cartel of major oil companies controlled the flow of crude oil everywhere outside of North America) and, as a result, the average yearly change in inflation-adjusted crude-oil prices, up or down, at the U.S. Gulf Coast was only about 4 percent. Over the past 125 years taken as a whole, however, the inflation-adjusted price of crude oil has moved up or down by an average of about 20 percent per year. The violent price upheavals of the last decade were just a return to normality in oil markets.

Don't Count on Higher Prices.

While oil prices have almost always been volatile, history shows no statistically significant long-run price trend. No rising or falling trend has, in fact, ever lasted more than ten years. The average price of crude oil over 125 years has been about $15 per barrel in today's dollars, and each of the five 15-year periods show an average price in the $13–$17 range.

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