Did an Oil Glut Cause Prices to Fall?
The most dramatic change shown in Figures 1 and 2 is not the enormous conservation effort or the rise in non-OPEC oil production, but the rise and fall of the oil price itself. The price increased to six times its 1973 level, then plunged to a third of that new high. What caused these changes? The price increases were due to supply cutbacks and price fixing. In part, two events sparked these changes: the oil embargo in 1973 and the Iranian revolution in 1979. But they do not explain the bulk of what happened. The bottom line of this story is that the price increase was caused by OPEC raising the price, one way or another, to increase it profits. It really is that simple. But the price decrease is more puzzling. Markets have a way of getting even. When some suppliers push the price up, the high price motivates consumers and other suppliers to take actions that push it back down. As we have just seen, OPECs massive price hikes caused the two standard reactionsincreased supply and reduced
