Politics—not OPEC interventions—explain oil's extraordinary price history

Abstract

Oil prices in 2008–10, measured in constant money, were almost eight times the level of 1970–72. The prices of minerals and metals, another exhaustible resource group, increased by a mere 45% in the same period. The paper contends that the actions of OPEC, primarily production quotas, cannot account for this stark difference in price performance. Neither can the evolution of oil prices be rationalized by cost developments, for costs have remained far below the prices. The price evolution is better explained by capacity constraints caused by the inefficiency of state owned enterprises that dominate the oil industry since the 1970s, and that, additionally, have been deprived by their owners of financial resources to invest in capacity maintenance and growth. A capacity-destroying “resource curse” afflicting many oil producing nations, has been a further factor driving prices upwards.