Oil Price Volatility

In Istanbul this year at the 31st Annual IAEE conference, I had a chance to present various scenarios for the price of energy in the future. The basic thesis regarding energy prices is that, in general, the world goes through cycles where at the one end, energy prices are very high with very little spare capacity on the one hand and then at the other end where energy prices fall due to either recessions, depressions, or economic adjustment to the higher energy prices with a resulting lower energy prices and higher surplus production.

If we look at 1979, we saw very high energy prices and the world wondering if we were about to run out of oil. By 1984, oil prices were very low, the Us was in recession, and nobody was talking about the end of oil. These cycles tend to have significant effects on the economies by driving conservation at one end and encouraging consumption at the other.

As important as the economic impacts, I discussed the threats of these cycles on long term energy investments. In the 1980s, many industries which had invested in novel energy approaches like oil-shale went bankrupt. The challenge as we look at this set of oil-shocks is how to prevent a bottoming out that would threaten industries like tar-sand, solar, wind etc -- if and when the world's economies adjust to higher energy prices and drive consumption down.