The Price of Oil: Main Interpretations and their Theoretical Background

Abstract

Various interpretations have been put forward on the long-run movements of the price of crude oil, particularly in the attempt to explain its multifold increase in 1973-74. In evaluating the debate over a practical issue, much insight can be gained by looking at the theory underlying the various positions and comparing the interpretative power of contending approaches. Examining the theoretical background of various approaches permits isolating crucial factual assumptions or locating feeble links in the chain of reasoning. We consider first the common-sense explanation of the explosion in the price of oil based on its natural scarcity. Ultimately, this rests on the idea that price is determined by the interaction between demand and a given supply, with a marginalist treatment. Interestingly, a somehow analogous result-i.e., a long-run tendency to an increase in the real price of oil-can be derived from the Ricardian theory of rent. Another interpretation, advanced by Adelman, explicitly relies on a Marshallian background. A rival contention was presented by Frankel in 1946. The contrast focuses on the degree of competitiveness in the oil sector; Frankel's oligopoly thesis also emerged from a managerial approach developed by Penrose. Other views discussed include Chevalier's Marxian-Marshallian analysis and the work of Arab economists (Abdel-Fadil, Al-Chalabi) stressing the role of producing countries. This survey will leave us with a