Oil Prices and the Global Economy: a New Paradigm

Abstract

Since the dawn of the automobile age at the beginning of the 20th century, oil has guided the growth of the global economy. The availability of oil and its price have been a determinant in times of both war and peace. The Allied nations achieved victory in two world wars in large part because of their ability to dominate the oil supply. The post-war boom ran on oil that was widely accessible and reasonably priced. When that supply tightened and became subject to political manipulation with the formation of OPEC, there was a direct correlation with slowing growth. This supply and demand relationship between oil and the rest of the modern economy was the underpinning of a Paradigm: when oil was readily available the economy could grow; when it became too scarce or expensive, the economy stalled. Following the end of the Cold War, geopolitics focused on ensuring access to supplies in the Middle East - the swing producing region whose output determined marginal cost and price – even at the expense of wars in Iraq, Kuwait, and Syria and ongoing tensions with Iran. Following the financial crisis of 2008, the pattern of economic growth began to diverge from the supply and price of oil. In the emerging New Paradigm, renewable energy, climate impacts, and new sources of supply from fracking and new discoveries are the determining factors. Oil and its derivatives remain important but their close link to economic performance has been broken.