The New Global Oil Market: Understanding Energy Issues in the World Economy

By Siamack Shojai | Go to book overview

Chapter 11
Energy Use and Efficiency In the G-7 Countries Dominick Salvatore

The energy market in general and the petroleum market in particular have been remarkably unstable during the past two decades, with reduced supply and high prices in the 1970s followed by ample supplies and low prices in the 1980s and early 1990s. While petroleum remains the most important energy source, accounting for some 40 percent of the world energy consumption, there have also been major shifts in the relative importance of the various energy sources during past decades.

There is, in addition, a great deal of disagreement among experts in interpreting the events with regard to the operation of the petroleum market in the 1970s and 1980s. The most widely accepted view concludes that the sharp increase in petroleum prices during the 1973-74 and 1979-80 periods was the classic result of the cartelization of the world oil market by OPEC. A significant number of economists, however, believe instead that the sharp increases in petroleum prices were the result of competitive forces that saw petroleum consumption get close to production capacity, thereby leading to large price increases. These price increases were very large, they argue, because of very low price elasticities. The collapse of oil prices since the early 1980s is given as evidence and vindication that market forces reign supreme and that OPEC is basically irrelevant in influencing petroleum prices.

Considerable uncertainty also exists about future petroleum prices. Past projections have been so far off the mark and have been revised so frequently and drastically that great prudence and meekness is required in any attempt to forecast petroleum prices in the future. For example, the consensus of oil price forecasts compiled by the International Energy Workshop in 1981 predicted real oil prices would be $60/.barrel in 1990. This figure was revised in 1983 to $40/ barrel, and again in 1983 to $30/barrel. In June 1990 the actual nominal price

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