The price of a barrel of oil has more than doubled in the past year and a half, from $60 in early 2007 to a high of $142 earlier this summer. This has led to a search for someone to blame for this price increase and for government policies to reduce oil prices.

The actions of energy traders, more pejoratively known as speculators, are being targeted by Ralph Nader, the chief executives of the major domestic airlines and many members of Congress as a major cause of this price increase. However, data from world oil market demonstrates that it is unlikely that speculators have had a noticeable impact on world oil prices.

From 1996 to 2006, China’s oil consumption growth far exceeded that of all major consuming countries. China’s average growth in oil consumption over the time period 2000 to 2006 was estimated to be approximately 8 percent per year, up from 6 percent per year from 1996 to 2000. One factor alleged to have caused this rapid increase in the growth of oil consumption in China is the under-pricing of oil to domestic consumers--selling oil-derived products such as gasoline and diesel fuel domestically at prices that are less than the world oil price plus the cost of producing that product. We explore validity of this claim, quantify the extent to which oil domestic oil consumption is subsidized by the Chinese government, and assess the impact of these subsidies on China’s demand for oil. We find economically significant evidence of under-pricing of gasoline and diesel fuel by China relative to the US over our sample period of January 2005 to July 2008 for all of the approaches to computing the comparable price of these products for the two countries. We estimate that underpricing of oil in the form of gasoline and diesel fuel in China resulted in a total subsidy to Chinese consumers of between 5 and 15 billion dollars in 2007. We also analyze the likely change in the consumption of gasoline and diesel in 2007 that would result from the elimination of this underpricing and find that it had little impact on gasoline and diesel fuel consumption for short-run own-price elasticities in the range of recent estimates of these magnitudes from cross country studies.

A spatial equilibrium model of the world coal market is developed that accounts for coal to natural gas switching in the electricity sector in the United States and Europe, the potential for China to exercise monoposony power in its coal purchasing behavior, and the impact of increasing the western US coal export port capacity. The global coal market equilibrium is computed as the solution to a nonlinear complementarity problem. Where possible parameters of the model are estimated econometrically. Where this is not possible the parameters are calibrated to global coal market outcomes in 2011. The model is used to assess how the shale gas boom in the United States impacts global coal market outcomes for dierent models of Chinese coal buyers' purchasing behavior and dierent scenarios for the capacity of coal export terminals on the US west coast.  Although reductions in US and European natural gas prices reduce coal consumption in the US and Europe, the percentage reduction in coal consumption in Europe is much less than that in the US. Increasing US west coast port capacity increases coal exports from the western US and reduces Chinese coal production. US coal prices increase which causes more coal to natural gas switching in the US, further reducing global greenhouse gas emissions. Modeling China as a monopsony buyer of coal reduces the absolute magnitude of these impacts.

Daily city-level expenditures and prices are used to estimate the price responsiveness of gasoline demand in the United States. Using a frequency of purchase model that explicitly acknowledges the distinction between gasoline demand and gasoline expenditures, the price elasticity of demand is consistently found to be an order of magnitude larger than estimates from recent studies using more aggregated data. Estimating demand using higher levels of spatial and temporal aggregation is shown to produce increasingly inelastic estimates. A decomposition is then developed and implemented to understand the relative importance of several different factors in explaining this result.

Abstract

Over the past century peak oil forecasts have had a profound influence on US national security policy.  Unquestioned acceptance of a variety of oil scarcity forecasts, all of which proved wrong, repeatedly led policymakers to assume that rival powers sought to seize dwindling supplies.  Perennial expectation of resource conflict gradually elevated the perceived importance of Middle East (ME) oil, which was thought to be the last left on earth.  In response, increasingly aggressive US policies were adopted to secure a US share of ME oil.  Belief in a scarcity imperative for aggressive policy is here called “oil scarcity ideology.” Over the course of three iterations of the scarcity syndrome from 1909 to 1980, pre-emptive action to avert scarcity became a national security norm. 

During the 1970s Cold War scarcity ideology became particularly complex and dangerous.  Widespread belief in a new generation of peak oil forecasts engendered fear that an Arab oil weapon could cripple the US economy.  Even more ominously, the CIA forecast an impending Soviet production collapse.  From these two forecasts security experts inferred that an oil-starved USSR would try to seize Iranian oil production by force.  If the Soviets were not deterred by President Carter’s verbal warning against such action, some security experts urged that the US must launch its own invasion, occupying Iran’s oilfields to preempt the Soviets from seizing them.  If conventional force failed to halt the Red Army, the US must resort to nuclear war. In conjuring this oil-marauding USSR from scarcity ideology, security policymakers actively disregarded a great deal of market information indicating that global production would not soon peak and that Soviet production would not soon collapse.  The non-apocalyptic outlook was shared by a large cohort of market analysts, academics and government agencies.  Nonetheless, the National Security Council (NSC) was able to persuade the President to proclaim that the US would use unlimited force to protect Persian Gulf oil supply.  Carter’s threat, now known as the Carter Doctrine, has rationalized Persian Gulf force projection ever since.

The essay plan is as follows.  I first describe early iterations of the scarcity syndrome that recurred around the 20^th century World Wars.  In both iterations, scientists and high officials of the Department of the Interior convinced national security policymakers that (i) US oil would soon run out, (ii) that Western Hemisphere supply could not meet the shortfall, therefore (iii) aggressive policies were required to wrest a share of ME oil from rival powers.  I then describe how peak oil theories advanced during WW2 formed the basis of Cold War scarcity ideology, in which the Soviet Union played the rival’s role. Finally, I consider implications of this historical record for international security theory.  My research utilizes two sources not widely available, (i) recently declassified documents from the Jimmy Carter Presidential Library and (ii) the historic petroleum trade journal collection of The University of Tulsa’s McFarlin Library.