EMF OP 29 Oil: Alternative Perspectives on the Decade

Abstract:

Over the long run, it is difficult to know whether the Iraqi invasion of Kuwait has permanently altered the sustained price path for oil. This will depend significantly upon whether the monarchial states like Saudi Arabia or the populist Arab states like Iraq dominate in the past-invasion political scene. Does a continued US military presence reduce the risk of oil investment in the region or does it increase the tension of a rising Arab populist mood against Western incursions into this politically volatile region? And what about the actions of major oil-consuming countries? Does a third shock in 18 years significantly increase their efforts to find alternative to gasoline as a transportation fuel?

For all of these reasons, I suspect that it will be difficult to discern for some time whether we have actually entered a new regime for oil markets. Any evaluation will necessarily have to deal with some basic economic factors that shape this market. And those are the issues that I would like to discuss today.