World Oil Price Increases Sources and Solutions

Abstract

World oil prices have been high since 1973, compared to average production costs and historical norms, because the Organization of Petroleum Exporting Countries (OPEC) has functioned as a viable price-setting and output-restricting institution. Prices increased sharply in 1973-1974 and 1979, and in each case OPEC validated the higher price levels by subsequently cutting production. On the other hand, the importing countries have failed to establish institutions of their own that could mitigate price increases because they have not perceived the problem to be one of institutional control over prices. Instead, they have tended to view high oil prices as the result of resource scarcity. Their responses have been predominantly intermediate to long term, stockpiling for an embargo, encouraging conservation, and promoting the development of alternative energy.

Managing the Strategic Petroleum Reserve: Energy Policy in a Market Setting

“…Attempts were also made to capture the dynamics of spot and long-term contract pricing, and their interaction. The "ratchet theory" (41,42) described the process this way : In the absence of supply shocks, spot and contract prices are fiat. A supply shock raises spot prices, whereupon oilexporting countries respond by increasing their official contract prices.…”