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 20^th 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.

Econometrics is a familiar item in advanced academic economics, and I taught it for a few years in Stockholm and Uppsala. It was also one of the reasons why I was given the opportunity to spend 3 years in Geneva (Switzerland), but eventually concluded that playing econometric games was too rich for my blood. However some simple calculations that I made about 2005 indicated that the oil price had started to accelerate upwards.  A few years later, while I was giving a long talk on oil at the Ecole Normale Superieure (Paris), that price was on its way into orbit, and eventually it reached $147/b, which provided OPEC with the income they had been dreaming of since the formation of that organization. Fortunately, a high degree of intelligence and rationality prevailed in the OPEC executive suite, and so there was no attempt to over-exploit a good thing.

Unfortunately however, according to myself and Professor Hamilton, the macroeconomic damage had been done. As much as I hate to say it, the machinations of speculators, and the clumsiness of bank directors and politicians had very little to do with the bad economic news that began in 2008, which is best described as the most serious economic downturn since the great depression (that began in l929).

Future students of mine will have to understand the above perfectly if they prefer a passing to a failing grade. They will  have to recognize the power of an organization

like OPEC. The recession triggered by the oil price escalation cut the ground out from under the global macroeconomy, and as a result the demand for oil fell in such a way that the oil price bottomed out at about $32/b. OPEC reacted to this situation by simply reducing production by a small amount, and the oil price quickly climbed to $72/b. This is the most important thing for you to remember should you find yourself in a conversation on oil with persons who think that they know more than you do! Shortly after – with the global macroeconomic apparatus still in disarray – the oil price kept moving up, until finally the aggregate oil price exceeded $100/b, although the demand for oil was not increasing rapidly.

In case you haven’t heard, with that price OPEC’s income was a trillion dollars a year. Not bad for a syndicate that Nobel Laureate Milton Friedman and some of his colleagues at the University of Chicago pictured as a losing proposition.

It is also useful to cite what happened when the war in Libya began – a war, incidentally, that was about oil and not protecting civilians, as the ignorant NATO president claimed. Oil production in Libya almost ceased, which meant that about 1.7% of the global oil output disappeared. That loss was enough to cause the oil price to increase by approximately 17%, as you have might have been informed by me on many occasions.

 Even students at the store-front university in Chicago from which I obtained my economics degree should be able to calculate and interpret the short-run elasticity of the oil price from those numbers, and if they are hooked on nonsense about speculation, also realize that OPEC receives all the help it needs from large oil producers who, surprisingly, prefer high to low oil prices, and in concert with OPEC understand how to make the moves that are necessary to obtain them. Please remember this too!

Much more will be said about oil in my forthcoming textbooks (2015), but right now I want to mention some thoughts of the billionaire Canadian investor Stephen Jarislowsky, which are especially appropriate when dealing with energy economics.

“We’re living in just about the most dishonest time in the history of mankind. It’s theft from A to Z”. Well Steve, it’s also lies and misunderstandings, where by the latter I constantly refer to President Obama’s belief about natural gas, and where the former is concerned the persons who have provided the commander-in-chief with his counter-productive opinions about energy, since I am certain that a few of them know almost as much  about that issue as my good self. Actually,  they should know a great deal more, because in theory they are in the lovely position of being able to obtain all the information they want or need, at any hour of the day or night,  from world-class economists, managers and scientists.

References

Banks, Ferdinand E. (2015). Energy and Economic Theory.

Singapore, London and New York: World Scientific. (2015).

Energy Economics: A Modern First Course. (In Process) Hamilton, James (2012). 

‘World oil production is not going to increase forever’. Working paper, University of California (San Diego).