February 2016, Vol. 243, No. 2

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Why Oil Booms and Busts Happen

What if I told you that there was a period in history where oil demand declined by 5 MMbpd  and non-OPEC supply increased by 5 MMbpd, yet oil price rallied more than 50%? Would you believe me? If your answer is yes, then you guessed right. This was the period from 1979 to 1985; it was a period during which global oil demand declined from over 61 MMbbls to 56 MMbbls and non-OPEC supply increased from 32 MMbbls to 37 million barrels. Yet prices rallied from $17 a barrel in 1979 to $26 a barrel in 1985, while reaching as high as $35 in 1981. This illogical world of rising prices, collapsing demand and expanding non-OPEC supply was made possible by a 15.5 MMbbls reduction in OPEC’s supply betw

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