Publications: Papers

The Global Recovery’s Soft Underbelly: How Sweet Crude Could Rise to $200 per Barrel (The International Economy, Summer 2009)

Why did oil prices surge to almost $150 per barrel in 2008 only to collapse to $30 by year’s end? Why did all of the world’s leading journalists and pundits get the story so wrong? And finally, does the failure of the so-called “experts” to understand the cause of the 2008 price increase have implications for the global economy? Almost all of those covering the subject, including reporters, academic economists, and those working at international institutions such as the International Monetary Fund, do not understand the broader aspects of the oil market. In 2008, nearly everyone writing on the topic treated crude oil as just that, crude oil. They made no distinction between the high sulfur crudes produced by Saudi Arabia and the sweet crude oils produced by Nigeria. No one noted the fact that high-sulfur crudes make up perhaps three-quarters of world supply. Nobody noticed that the world refining industry lacked the capacity to remove the required sulfur amounts from sour crude. And no one realized it would take ten years and perhaps $100 billion to fix the refining industry. A return to a very high crude price regime as nations struggle to keep the recovery from the “Great Recession” going is obviously the wrong medicine for the global economy. In fact, few developments could be worse. Yet public policy is still being hatched in a way that almost assures such an outcome.