Don’t stop worrying about oil

This article appears in the February 29, 2016 issue of National Review.

Two years ago, in January 2014, oil traded around $100 per barrel. Today, oil trades around $30 per barrel, a level unvisited in over a decade, and consumers have been tanking up with $1.50-per-gallon gasoline.

The collapse in oil prices has come after a surge in U.S. production. This has led many to theorize that the U.S. has finally dislodged the Organization of the Petroleum Exporting Countries (OPEC) from its position of dominance. Historically, the OPEC cartel has managed production to keep prices high, even when, as is happening today, a weaker global economy exerts downward pressure on them. Its apparent failure to do so at this moment has led some to forecast low energy prices as far as the eye can see. Accord ing to this line of reasoning, U.S. production will undercut any attempt by OPEC to raise prices, as American oil will flood the market and drive the price down when OPEC attempts to raise it.

As the nearby chart illustrates, such optimism is poorly grounded. To contextualize this most recent development in the oil market, we gathered data on oil production between 1965 and 2014 from the BP Statistical Review of World Energy. The data measure oil production in barrels produced per year. For each of the years, the chart shows the share of world oil produced by OPEC, the U.S., and the countries that were members of OPEC during the 1973 OPEC oil embargo (Algeria, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela).

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