World Oil: Market or Mayhem?

E nergy analysts sometimes speak of oil’s “golden era,” that 100-year stretch between 1874 and 1974 when the real price was relatively stable within a range from $10 to $20 per barrel (BP, 2008) in 2007 dollars. Figure 1 shows that in recent decades, that stability has ended. In October 1973, several Arabic members of the Organization of the Petroleum Exporting Countries (OPEC) announced that in response to U.S. support for Israel during the 1973 Arab–Israeli war, they would place an embargo on oil exports to the United States. That action caused real oil prices to soar from $12 to $53 per barrel within four months. Later in the 1970s, political turmoil in Iran and the Iran–Iraq war again rattled the market and by January 1981 pushed the real price up to $95. Eventually, oil prices fell back to earth with a thud, bottoming out at $21 per barrel in July 1986. The roller coaster ride of prices has continued more recently. After oil prices skidded to a low of $12 per barrel in December 1998 in the wake of the Asian financial crisis, oil stabilized again around $30 during 2000–2004 before a breathtaking ascent that reached $145 per barrel by July 2008—only to dip below $40 per barrel again before the end of 2008. A unique combination of economic circumstances surrounds oil markets. A short list would include extremely high price volatility; the prominent role and unusual longevity of a major cartel (OPEC); the absolute size and scope of the oil industry and its important links to industrialization, economic growth, and the global distribution of wealth; nagging doubts about the sustainability of the resource base; substantial volumes of petroleum-related CO2 emissions that pull oil