Introduction

In the waning days of the Carter administration, the Department of Energy forecast oil prices for the next twenty years. For 1986, oil was expected to be selling for a nominal price of around $50/bbl. There was some skepticism about that price. It seemed too low. Some models projected nominal prices quintupling by 2000, which meant about a 9 percent increase on average per year, and a price in 1986 of about $67/bbl; even a 10 percent average annual increase (albeit at “irregular intervals”) was thought possible (Fesharaki 1981).

There was reason to fear that even this was too conservative. After all, from early 1979 through the first half of 1980, the price had more than doubled, and it had increased more than tenfold since 1970. In fact, in November 1980, the U.S. secretary of state, Edmund Muskie, received a briefing paper that argued that if the Iran-Iraq War continued, (which it did), the price of oil would “likely break the $50 per barrel level” in 1981 (U.S. Department of State 2012, 902). Moreover, in 1981, price controls were finally removed, and there appeared to be no limit to how high the price would go or how quickly they would get there. OPEC would surely raise the price by far more than 10 percent. As a major 1980–1 study, the Energy Modeling Forum, concluded, “While there remains a high degree of uncertainty about future world oil prices, our analysis suggests that most of this uncertainty concerns not whether real prices will rise in the next several decades but rather how rapidly they will rise.” In other words, the forecast for 1986 of $50/bbl seemed impossibly optimistic.