The equilibrium price range of oil: Economics, politics and uncertainty in the formation of oil prices

Abstract

This paper attempts to clarify the articulation between economic and political factors in the formation of petroleum prices. It begins with defining the political factors. Then it gives a definition of the ‘dynamic equilibrium price’ of a mineral commodity market. The essential point is that when actors control significant low cost reserves and will not or cannot adopt behaviour of a ‘substantial economic rationality’ then the economic analysis does not allow a unique dynamic equilibrium price to be determined. However, it does permit definition of an equilibrium price range within which political preferences may be expressed. Finally, the paper draws some conclusions on what could be discussed within the scope of a new oil producer-consumer dialogue.