NCPA - National Center for Policy Analysis

Energy Parallels and Peak Oil

March 12, 2015

In 1998, the beginning of an oil shock rocked the United States in a way not felt since the 1970s. Gas was cheap — less than $1 per gallon — for similar reasons as today.

In a gamble, the Organization of Petroleum Exporting Countries (OPEC) bet against the East Asian economic crisis of the late 1990s. OPEC chose to raise production, thinking demand for their product would cause prices to increase. They were wrong — a similar mistake for the oil industry as a whole, which was repeated until a few months ago.

East Asian demand wilted, consumers across the world rejoiced, investors flocked toward safer investments, but most strikingly, the price for a barrel of oil fell to $18 by the end of 1997. 

This crisis changed the face of the oil industry in the short and long run:

  • OPEC incurred heavy losses as the price of oil fell 40 percent in less than five months.
  • Fear gripped many parts of the private sector and the megamergers of very large corporations (worth over $30 billion) were common with notable acquisitions such as British Petroleum absorbing Amoco and Exxon merging with Mobil.
  • OPEC continued raising production quotas by as much as 2 million barrels of oil per day, which was a mistake that could easily have set the organization's finances back for years.

With such turbulence in the market, oil and energy analysts left the American public with only partially true predictions: oil prices would rise — forever. These predictions proved to be wildly incorrect.

Source: Blake Clayton, "As oil prices tank, where did OPEC go wrong?" Fortune, March 8, 2015. 

 

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