The Oil Price And Macroeconomics

In the silence of my lonely room, and sometimes in crowded seminars, I enjoy referring to myself as a brilliant energy economist, and among other things I feel  that this gives me the right to describe Professor James Hamilton as the leading academic oil economist in the United States (U.S.). I want to make it clear though that I don’t know that scholar, nor do I want to know him, because although we share the same outlook on the past and future of oil, he has never mentioned me in his publications, despite my citing and alluding to his work whenever I get the opportunity.  

Hamilton has carefully examined (2012) the relationship between increases in the oil price and the negative effect they have on the U.S. economy , beginning at the end of the second world war (WW2), until the early years of the last decade of the 20th century. His results are similar to those of Professor Andrew Oswald of Warwick University and  later myself, but much more thorough, and covering a longer period. The thing that my future energy economics students will kindly be asked to remember is Hamilton’s claim that “all but one of the recessions in the United States since WW2 were preceded – typically by about 9 months – by a dramatic increase in the price of oil.”

This is an important macroeconomic observation, and you should make every attempt to remember it. It is the kind of contention that you can take to the bank and draw interest on, although in later articles and conference papers, and of course on the blogosphere, his research likely goes as far as the present day. I might as well confess however, that  for the period 1991 to the present, my own work on oil economics ranks with any that has been done anywhere in the world, and as a result I will use this opportunity to give readers my version of exactly what happened on the global oil market in the early years of this century .

From the formation of OPEC in 1961, until at least the beginning of the twenty-first century, it was the intention of that organization to manage not only the oil in their countries, but also to obtain a controlling interest in the global oil price. In order to do this efficiently, complete (or nearly complete) unanimity among the directors of that cartel was required, and as far as I can tell they did not obtain sufficient like-mindedness until the price of oil fell below ten dollar a barrel (= $10/b), and the amateur energy experts – or ‘know-nothings’ and charlatans as I usually call them – in the oil importing world, began talking foolishness about it reaching $5/b. That was when even the ‘independent thinkers’ in the OPEC executive suite in Vienna saw the light, and fell into line with OPEC’s main men.

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