As oil-market turbulence persists, a new Council on Foreign Relations book shows that over the last hundred years, many experts—including U.S. officials—have fallen prey to fears that the world's oil is dwindling and prices are doomed to rise.
Such predictions have empirically proven incorrect, writes CFR Adjunct Fellow and Citigroup Analyst Blake C. Clayton in Market Madness: A Century of Oil Panics, Crises, and Crashes. Technological advances and geopolitical shifts have repeatedly prompted sudden, severe drops in oil prices—exactly like the one we are experiencing today.
From warnings of oil-supply exhaustion during the Roosevelt era and World War II to the pessimism of the 1970s oil crises and predictions of "peak oil" just a few years ago, Clayton recounts how "this cycle of hope and pessimism has influenced the way people think about oil, from the street corner to the Oval Office."
Market Madness offers important lessons for Washington and Wall Street about energy policy and financial markets:
- Never underestimate the market's power to wring abundance out of scarcity.
- The oil trade is marked by discontinuity. "Dramatic, unexpected changes over time are the rule, not the exception."
- Basic truths about how markets work—what drives supply up and consumption down, for instance—have proven astoundingly reliable, time and again. "New era naysayers who claim that the 'old' laws of economic gravity no longer apply have usually found themselves on the wrong side of history."
- The best defense against unfounded worries is good data. "Improving transparency, within both the physical and financial oil markets, holds the largest potential for decreasing unwarranted price volatility and making certain that retail prices reflect economic fundamentals."
A Council on Foreign Relations Book