Publications: Notes at the Margin

Central Banks vs. Inflation: Oil Markets Destroyed (May 23, 2022)


Forty years ago, I penned a piece titled “Volcker versus Yamani: Oil Prices in Decline.”[1] The consulting firm Booz Allen Hamilton distributed it widely in the way McKinsey & Company now circulates excellent in-depth analyses. In my 1980s contribution, I explained that it was not oil ministers but central bankers who controlled the global economy’s future. I added that Paul Volcker, then chairman of the Federal Reserve, was determined to arrest inflation, noting as I recall that Volcker was not acquainted with Sheik Yamani, Saudi Arabia’s oil minister from 1962 until 1986.


I cannot locate a full copy of the paper. I remember, though, that it won me no friends in the oil industry or at Booz Allen. At the time, the consultants at the latter asserted that the only path for oil prices was up as I argued they might drop below $20 per barrel.

Three years later, oil prices were down by seventy-five percent. By then, I was working elsewhere, writing on oil futures markets. The Booz Allen division I had assisted, which offered advice to clients leading to billions in bad investments, had closed. One of the unfortunate clients, Combustion Engineering, put millions into oil and gas drilling supply firms. By 1990, it had to shut down as well.

The oil industry today confronts conditions like those in 1981. On May 16, Federal Reserve Chairman Jerome Powell told listeners at a Wall Street Journal-sponsored conference that “restoring price stability is an unconditional need. It is something we have to do. There could be some pain involved.”[2]


Central bankers are again acting aggressively to curb inflation. However, the difference today from 1981 is the scarcity of surplus capacity anywhere in the economy. Many financial advisers writing and speaking about inflation today argue that the banks will go easy on the economy and that, if a recession occurs, it will be mild. One good friend and financial adviser believes the US Federal Reserve will back off on monetary tightening as the fall mid-term elections approach. A Bloomberg columnist told oil producers essentially the same thing.[3]


These views are comforting but probably wrong. The Federal Reserve will more likely need to move even more aggressively in the coming months, perhaps to the point of creating a recession of “Volcker magnitude” or worse.

[1] Philip K. Verleger, Jr., “Volcker versus Yamani: Oil prices in decline,” Energy Booz-Allen 4, No. 1, pp. 1-4 [].

[2] Nick Timiraos and Michael S. Derby, “Powell Says Fed Has Resolve to Bring U.S. Inflation Down,” The Wall Street Journal, May 17, 2022 [].

[3] Javier Blas, “The Oil Market Needn’t Fear a Calamitous Recession,” Bloomberg, May 17, 2022 [].


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