An overview

Extractive resources, and indeed primary commodities in general, have a notorious history of price volatility. In the 1950s and 1960s prices were generally falling in real terms as shown in Figure 7.1 (a). The figure also shows that in the 1970s this pattern changed; at the same time there was a shift of market power from consumers to producers. The increase in prices was a response to unprecedentedly high levels of industrial activity by user countries, and to demand conditions generated by decades of low prices. The oil market was, of course, the prime example and set a trail that other commodity producers sought to follow [Figure 7.1(b)]. Here a seller's market enabled OPEC to overcome two decades of market dominance by the buying cartel of major oil companies and to begin for the first time exercising significant market power on behalf of producers. Although in some circles the role of monopoly on the buying side in holding prices down has been noted for years, this point has only lately become very generally accepted. Widely read publications in the United States and the United Kingdom have commented recently that “In one sense the dramatic increase in oil prices in the mid 1970's represented a belated recognition by the producers that the market had been rigged in the Western interest,” and that OPEC was formed initially as “a cartel to confront a cartel.”.