The most startling surprise in the international economy during the 1980s has been the fulfillment of prophecies made five years ago—often voiced, seldom believed—that oil prices would decline significantly from their peak price of over $40 a barrel in 1980-81. Prices have, in fact, fallen to less than $12 a barrel on the spot market this past winter.
There is almost universal agreement that, on the whole, lower oil prices are beneficial to the world economy. But very low prices will pose very big problems. A further dramatic decline in oil prices will have a revolutionary impact on world politics and the international economy of a magnitude tantamount to that of the oil price increases in 1973-74 and 1979-80.
An explanation of the events that will be triggered by an oil price collapse depends, first, on an understanding of the peculiar nature of the international oil trade, so unlike that of other commodities, and second, on a determination of exactly what happened this past winter. Then the conditions that would allow a free-fall in oil prices can be defined. The consequences of such a price drop, including the implications for Western energy security, will become evident. And appropriate policy responses can be discussed.
Whatever emerges in the coming months, it is clear that the oil sector, with its fundamental effects on international economic and political affairs, will never again be anything like what it was.
The international petroleum industry has always been somewhat special and different from other commodity sectors. Given its pervasive influence on industrial growth, and the record of government and industry interventions over the decades, the oil sector has not generally functioned as a free transparent market in which price is determined by the interaction of many buyers and sellers. At most times in the past, rather, oil has been traded through a contrived mechanism to balance supply and demand. The market has also been a source of dynamic change since before the turn of the century,