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

by Daniel Yergin

Expectations became important as oil prices steadily rose from 2003. There was a widespread apprehension, especially within financial markets, that demand from China and India would go through the roof and that an oil shortage was inevitable in the next several years. All these factors—supply and demand, geopolitics, costs, financial markets, and expectations—came together to carry oil prices from $30 at the beginning of the Iraq War through $100 and $120 and then $130 and then over $145 a barrel. By that point, expectations had created a bubble in which the price was increasingly divorced from the fundamentals. For, as prices went up, demand had—inevitably—begun to weaken. The oil shocks of the 1970s were precipitated by specific events—the 1973 Yom Kippur War and the Arab oil embargo, and the 1978–79 Islamic revolution in Iran. This time was different in that there was no single dramatic event. Yet there was no question but that the extraordinary rise in prices constituted another oil shock of its own. In the United States, the painful economic impact of the oil shock was made much worse by the credit crisis that erupted in mortgage and banking sectors. Moreover, the shock was increasingly felt around the world. It was only when demand growth slowed markedly, in response to high prices, a financial crisis worse than any since the Great Depression, a world economic downturn, that the price came down dramatically. The half-decade rise in oil prices had brought significant ...