TORONTO, Ont. Feb. 3, 2017/ Troy Media/ – The American economist Myron Watkins was right in 1937. He put it bluntly: “The problem of oil, it might be tersely said, is that there is always too much or too little.”
And Canadians have good reason to know this.
After the 1970s oil price shock, we were assured that in a world of increasingly finite supplies the only direction for the price was up. This assumption lay at the heart of Pierre Trudeau’s National Energy Program. But as Trudeau’s sympathetic biographer John English phrased it, “The assumptions about energy prices, so carefully crafted by a gaggle of econometricians, proved badly wrong.”
So we were left with the worst of both worlds.
Alberta fervently believed it had been pillaged by an avaricious federal government that tried to appropriate its resources for the benefit of Central Canada. And federal fiscal deficits soared when prices crashed and the anticipated oil revenues didn’t materialise.
However, the groupthink carousel came around again in the early 21st century as a new run-up in prices brought the concept of peak oil back into fashion. Reduced to its essence, peak oil is one of those irresistible ideas that’s theoretically impeccable but practically elusive.
The underlying thought process is simple: There’ll come a time when the volume of oil extraction peaks and then terminally declines, at which point prices will permanently soar and the world will enter a period of insolubly dangerous scarcity.
But reality keeps complicating things. High prices stimulate both the discovery of new reserves and the invention of new recovery technologies, prices consequently fall, and the peak oil arrival date keeps moving into the future.
Still, there’s no doubting that extreme oil price volatility causes problems for household budgets, industry employment and government revenues. Has it always been this way?
No, says a new book from energy analyst Robert McNally. In Crude Volatility: The History and the Future of Boom-Bust Oil Prices, McNally argues that there have been extended periods of price stability when powerful entities were willing and able to adjust the supply of oil, up or down, in order to stabilize prices. In effect, they played the role of “swing producer.”
The first such market balancer was John D. Rockefeller’s Standard Oil. Beginning in the 1880s, Rockefeller used his power to keep prices stable. Yes, they were higher than they might have been in a pure competition environment, “but since oil prices fell on trend during the Rockefeller era, the public did not notice what it was missing.”
Then came the progressives with their emphasis on breaking up monopolies and trusts that were deemed to be manipulating markets. In the process, Rockefeller’s Standard Oil was forcibly dissolved in 1911.
But while Standard Oil’s demise was widely seen as a victory for the forces of virtue, it had some unintended consequences. Prices became much more volatile.
Stabilization returned in the mid-1930s thanks to the leadership of the Texas Railroad Commission (TRC). Working in conjunction with drillers, the TRC devised and enforced what McNally describes as “the most heavy-handed … quota regime the world has ever seen.”
Production levels were kept below what the market might bear, which had the impact of maintaining prices and keeping spare capacity in reserve. And because Texas accounted for a very substantial chunk of U.S. oil extraction and reserves, the TRC effectively called the shots.
Eventually, though, its controlling ability waned. Demand soared, the TRC’s spare capacity diminished, and by the early 1970s the role of market controlling “swing producer” shifted to the Organization of the Petroleum Exporting Countries (OPEC).
OPEC, however, has had trouble sustaining that role. New capacity from the likes of the North Sea and Alaska, new recovery technologies like fracking, and the propensity for members to cheat on quotas have combined to weaken market dominance.
Of course, some people will be inclined to brush this aside as irrelevant. Oil in particular and fossil fuels in general are, they say, being phased out. So it doesn’t matter.
Perhaps, but consider this.
Even if all parties abide by their Paris Agreement pledges, the International Energy Agency projects that 2040’s global demand for oil will be almost 12 per cent higher than 2015’s.
As always, reality is an unforgiving taskmaster.
Troy Media columnist Pat Murphy casts a history buff’s eye at the goings-on in our world. Never cynical – well perhaps a little bit. Pat is included in Troy Media’s Unlimited Access subscription plan.
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