Nigerian minister of petroleum Emmanuel Ibe Kachikwu attends the 169th meeting of the Organization of the Petroleum Exporting Countries, OPEC, at OPEC headquarters in Vienna, on June 2, 2016. / AFP / JOE KLAMAR (Photo credit should read JOE KLAMAR/AFP/Getty Images)
Many people think that the Chinese curse “May you live in interesting times” refers to the fact that “interesting” equates with “unsettled”. For those who follow a subject like oil, “interest” equates with “attention” including that from many would-be experts who are quick to opine, blog and publish. Most of the books written about oil in the 1970s were misguided (to be polite), and most of those written in the past decade have been as well. Higher prices yield more books and more authors, while lower prices translates into only those who are seriously involved in a subject continuing to publish.
Recent work has tended to fall into two camps: those who believe in “peak oil” and those who rely on microeconomics to explain oil market behavior. Peak oil advocates include those like Jeremy Leggett, a former geologist, James Howard Kunstler, an urban planner, and Richard Heinberg, a journalist. On the other side, former oil industry executives like Leonardo Maugeri and Robin Mills have produced more detailed analyses and now, two academic resource economists, Roberto Aguilera and Marian Radetzki, have published The Price of Oil, which covers the current oil market from the viewpoint of energy economics.
The book is an academic work, but aimed at a general audience. They discuss the role of OPEC, and the various economic theories addressing whether or not it is a cartel, concluding that the issue is a semantic one. Decisions to impose capacity constraints, they argue, have been more important in affecting long-term prices than short-term quota-setting. Most especially, the major price moves such as in 1979 and 1986 are explained through changes in supply and demand, including the 1979 Iranian Revolution and the Saudi decision in 1986 to abandon its position as OPEC’s swing producer.
This may seem a rather mundane achievement, except for the fact that many in the industry (and outside of it) have a more conspiratorial view of price movements. Some industry executives are convinced that speculators manipulate the market for their own benefit, while some citizens believe the industry is responsible for all price increases—but somehow not the decreases. There is a similar attitude towards OPEC: at one point, OPEC was facing simultaneous legal sanctions in the U.S. for raising prices and for crashing them.
And geopolitical motivations are often given for decisions within OPEC, especially those made by the Saudis. A recurring claim is Peter Schweizer’s theory that the Saudis crashed the oil price in 1986 at the bidding of President Reagan. More recently, it is widely believed that they sought lower oil prices as part of their struggle with Iran. The former is rather absurd: Saudi oil exports were heading for zero in 1986 due to extreme market pressures, and the political contest between Iran and Saudi Arabia dates to pre-Khomeini days, when the Shah of Iran sought to be the region’s dominant power. Yet the Saudis did not crash the price in 1981, or 2005, or any years except where the market signals pointed towards such action.
Peak oil advocates’ work pales in comparison to that of economists like Aguilera and Radetzki in that they typically repeat arguments of others and a select set of facts, substituting anecdotes for analysis. They will claim that “the easy oil is gone” and point to drilling in “hostile” environments without demonstrating trends or causality, neither historical nor geographical context. And alternative explanations to peak oil are given short shrift, at best; my favorite case is Matthew Simmons pointing to the Saudis’ closing of an oil field in the early eighties, which he attributes to technical challenges, ignoring the fact that the market collapse required them to reduce production by 75% in five years. Others have often seized on declines in monthly production as proof that a peak occurred (May 2005 was cited by many), apparently ignorant of the fact that such declines were not uncommon and unrelated to long-term production trends.
Aguilera and Radetzki also provide nuanced assessment of many related issues, such as the impact of low oil prices on the environment, the problem of resource curse for oil producers, and the interaction of oil prices and the global economy. They find both costs and benefits, positive and negative effects, unlike most peak oil advocates who foresee gloom and doom, the end of industrial civilization, and so forth.