CRUDE VOLATILITY CENTER ON GLOBAL ENERGY POLICY SERIES CENTER ON GLOBAL ENERGY POLICY SERIES Jason Bordoff, series editor Making smart energy policy choices requires approaching energy as a complex and multifaceted system in which decisionmakers must balance economic, security, and environmental priorities Too often, the public debate is dominated by platitudes and polarization Columbia University’s Center on Global Energy Policy at SIPA seeks to enrich the quality of energy dialogue and policy by providing an independent and nonpartisan platform for timely analysis and recommendations to address today’s most pressing energy challenges The Center on Global Energy Policy Series extends that mission by offering readers accessible, policy-relevant books that have as their foundation the academic rigor of one of the world’s great research universities ROBERT MCNALLY CRUDE VOLATILITY The History and the Future of Boom-Bust Oil Prices COLUMBIA UNIVERSITY PRESS NEW YORK Columbia University Press Publishers Since 1893 New York Chichester, West Sussex cup.columbia.edu Copyright © 2017 Columbia University Press All rights reserved E-ISBN 978-0-231-54368-2 Library of Congress Cataloging-in-Publication Data A complete CIP record is available from the Library of Congress A Columbia University Press E-book CUP would be pleased to hear about your reading experience with this e-book at cup-ebook@columbia.edu Cover design: Noah Arlow For Denise, my sweetheart The problem of oil, it might be tersely said, is that there is always too much or too little –Myron Watkins, Oil: Stabilization or Conservation? 1937 I am opposed to too much government in business But conditions have changed … it looks like we must have some government in business We will have to forget what we used to believe improper –Texas Governor Ross Sterling, July 22, 1931 … the price of oil must go to $1 a barrel; now don’t ask me any more damned questions –Oklahoma Governor W H “Alfalfa Bill” Murray, after declaring martial law and ordering troops to shut down oil wells, August 5, 1931 We don’t care about oil prices—$30 or $70, they are all the same to us –Saudi Deputy Crown Prince Mohammed bin Salman, April 21, 2016 CONTENTS Preface Acknowledgments Author’s Note INTRODUCTION: THE TEXAS PARADOX PART ONE: THE LONG STRUGGLE FOR STABILITY: 1859–1972 AND THEN THERE WAS LIGHT: FROM CHAOS TO ORDER IN THE KEROSENE ERA (1859–1911) NO ROCKEFELLER, NO PEACE: BOOM-BUST RETURNS WHY ARE OIL PRICES PRONE TO BOOM-BUST CYCLES? THE TEXAS ERA OF PRICE STABILITY: U.S SUPPLY CONTROLS AND INTERNATIONAL CARTELIZATION (1934–1972) PART TWO: THE OPEC ERA: 1973–2008 THE BIRTH OF OPEC: 1960–1969 OPEC TAKES CONTROL FROM TEXAS AND THE SEVEN SISTERS: 1970–1980 OPEC’S RUDE AWAKENING: 1981–1990 OPEC MUDDLES THROUGH: 1991–2003 TWILIGHT: OPEC’S POWER TO PREVENT PRICE SPIKES EBBS AND VANISHES: 2004–2008 10 OIL’S THIRD BOOM-BUST ERA: 2009–? EPILOGUE Notes Bibliography Index PREFACE y inspiration to write this book stemmed from a lifelong passion for history and a professional career as an analyst, official, and consultant involved with the global oil market, energy policy, and geopolitics My introduction to oil was somewhat accidental After serving as a Peace Corps volunteer in Senegal, West Africa, I headed back to school to pursue a master’s degree in international economics and U.S foreign policy My plan was to become a history teacher after graduating But I needed a part time job to help pay graduate school expenses, and was hired as a research intern at an oil consulting firm My unplanned exposure to energy started during a tumultuous period in the oil market and an active one in energy policymaking The 1990–1991 Gulf War had just ended and the George H W Bush administration was beginning to implement new oxygenated fuel regulations on gasoline Daniel Yergin’s magnificent history of oil, The Prize: The Epic Quest for Oil, Money, and Power, had just been released and, like many, I devoured it with relish In the course of punching oil market data into spreadsheets and analyzing OPEC and energy regulations, I realized the historical and contemporary oil market combined my main professional interests—economics, policy, and geopolitics—in a thrilling fashion So my career path changed I joined the firm after graduating and began a rewarding journey in energy (Though I still would like to be a history teacher one day.) This book elaborates on analyses developed over the past ten years and shared mainly with my colleagues and clients My central thesis is the recent dramatic swings in oil prices, including the bust since 2014 but also the mid-2000s boom and bust in 2008, need be understood in the historical context of the broader economic and policy drivers that impact the oil market This required a fresh look at oil’s history, focusing on the critical role that supply control played in achieving the widely cherished goal of stabile oil prices This focus led to my conclusion that, amid the boom in Asian demand in the early to mid-2000s and the more recent, surprise arrival of U.S shale production, the most important feature of today’s oil market is the absence of a swing producer able and willing to adjust supply to keep oil prices stable Since the early 1930s, as this book details, someone has been trying to manage supply to keep oil prices from behaving as they have in the last ten years No longer having such a swing producer implies a return to price volatility for which we have all but lost living memory and which we will find troublesome to manage I presented these ideas at academic events and in congressional testimony, published some of the key themes with my co-author Michael Levi in Foreign Affairs in 2011 and 2014, and wrote a paper synopsizing this argument in December 2015 for the Columbia University Center on Global Energy Policy, where I am a fellow I decided to write this book to explore more deeply how oil’s history can clarify recent trends and shed light on tomorrow’s path, and to present my findings to the general reader M ... mission by offering readers accessible, policy-relevant books that have as their foundation the academic rigor of one of the world’s great research universities ROBERT MCNALLY CRUDE VOLATILITY. .. errors, shortcomings, or omissions are entirely mine Robert McNally AUTHOR’S NOTE hroughout this book, unless otherwise specified, crude prices are in nominal terms and refer to the prevailing... 1899 prices are those paid by the Seep Purchasing Agency 1900 to 1912 prices are based on field-level quotations collected and aggregated by the author 1913 to 1982 crude prices are midcontinent