Bumpy rides: understanding booms and crashes in oil prices

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Timing is everything, they say, and this would seem to be a great time to publish a book on oil prices. So Blake C. Clayton’s “Market Madness – A Century of Oil Panics, Crises and Crashes” , just published by Oxford University Press is very timely. In fact Clayton focuses more on oil price hikes rather than crashes, but is nevertheless interesting reading for anyone trying to understand how the oil markets work.The book makes the interesting point that while exaggerated price rises in general, such as stock price bubbles, are the result of “irrational exuberance”, in Alan Greenspan’s famous phrase, oil price rises are more the result of “irrational anxiety”. What Clayton is referring to is the recurring theme of the world running out of oil. He traces this theme back in time, citing, for example, US president Theodore Roosevelt’s 1908 forecast of the “imminent exhaustion” of crude oil resources. And again in 1920, the chief geologist of the US Geological Survey was telling Americans that US oil production would peak in 1927, and decline thereafter. The decades of the 1970s and 1980s were another period of extreme pessimism over global oil resources, reacting to events – such as the rise of OPEC (and of oil prices) and the two major oil shocks, coupled with “Hubbert’s Peak” of US oil production in 1970 – which suggested that oil would be in shorter and shorter supply, and would be increasingly expensive.

At the moment, we seem to have left the eras of “irrational anxiety” behind (at least as regards oil resources), and Clayton reflects this in his book, with one of the later sections being entitled “What if we never run out of oil?” This is a question worth asking, and should remind us of Saudi Oil Minister Sheik Yamani’s famous statement to the effect that the Stone Age did not end because we ran out of stones, and the Oil Age will not end because we ran out of oil. This statement seems now to be exceptionally prescient. Up until very recently anyone forecasting the end of the Oil Age would probably have imagined that it would come as oil became increasingly expensive and drove us to find substitutes. But now it becomes perhaps possible that the Oil Age, if it does indeed end, or dwindle, might come with an era of low oil prices as economies cannot, or do not wish to, consume all the oil that we now have available.