The Prize: The Epic Quest for Oil, Money, and Power

by Daniel Yergin

So companies did not want to hold more inventories than their normal experience suggested they needed. If they thought that prices were going to go down because consumption was sluggish, they reduced inventories, and as quickly as they could, with the idea of buying later when the price would be lower. That was exactly what the industry was doing during the soft market conditions through most of 1978. By contrast, if companies thought that prices were going to go up, they bought more of today’s cheaper barrels so that they would have to buy less of tomorrow’s more expensive oil. And that was what happened, with extraordinary vengeance and fury, in the panic of 1979 and 1980. In fact, the companies bought well in excess of anticipated consumption, not only because of price, but also because they were not sure they would be able to get any oil later on. And that extra buying beyond the real requirements of consumption, combined with hoarding, dizzily drove up the price, which was exactly what companies and customers were struggling to avoid in the first place. In short, the panic of 1979–80 saw self-fulfilling, and ultimately self-defeating, prophecy on a truly colossal scale. The oil companies were not alone in panic buying. Down the consumption chain, industrial users and utilities also furiously built inventories as insurance against rising prices and possible shortages. So did the motorist. Before 1979, the typical motorist in the Western world drove around with his tank...