[The Typing Baker] A World Without a 'Swing Producer', Where Is Oil Prices Headed?

[Asia Economy Reporter Lee Ji-eun] One of the characteristics of a market economy is free competition. In a free competitive environment, companies improve quality or lower prices to sell more of their products. As a result, prices in competitive markets are generally lower than in monopolistic markets, which is common economic knowledge. However, there are markets where this formula does not hold. In fact, prices stabilize only when large corporations or countries collude. The 'crude oil' market is such an example.

Although somewhat controversially titled "The End of Oil Does Not Exist," the original title of this book is "Crude Volatility." The author, an energy expert with over 30 years of experience who served as an international and domestic energy advisor at the White House, analyzed oil price data from 1859, when crude oil was first discovered and began to be used, recording the volatility during that period.

As a result, the early period, which was closer to a free competitive market, showed an average annual volatility of 53%, whereas during the Rockefeller era (1880?1911), when the monopoly system in the crude oil market was established, volatility was only 24.9%, about half as much. Although everyone criticized Rockefeller's Standard Oil Trust as a "monopoly empire," the discipline and control within the collusion system he built actually helped stabilize the highly volatile oil prices. He played the so-called role of a "swing producer."

The meaning of a swing producer is known as "an oil-producing country that can influence overall supply and demand by independently adjusting its production volume in the global oil market." While we generally think of the Organization of the Petroleum Exporting Countries (OPEC) as the swing producer, OPEC only gained this power in the early 1970s. Before that, the Texas Railroad Commission (TRC), representing the major U.S. oil-producing region, and the seven major oil companies performed this role.

So why does the crude oil market, unlike other markets, require collusion and the presence of a swing producer? It is due to the nature of crude oil as a commodity. Crude oil is essential yet insensitive to supply and demand. Even if gasoline prices are halved, consumption cannot double, and even if gasoline prices double, people cannot stop driving. Therefore, as soon as signs of crude oil shortages appear, prices surge sharply, and conversely, when demand shows signs of weakening, prices fall steeply. In January 2008, oil prices exceeded $100 per barrel for the first time in history, approached $150 in July, but dropped to $60 in October due to the aftermath of the Lehman Brothers collapse in September of that year.

As OPEC's influence wanes, some predict that shale oil will become the new swing producer. However, the author points out the limitation that shale oil is too dispersed to play a role in stabilizing oil prices. How should a country like South Korea, which imports 100% of its oil, navigate this turbulent era? Rather than merely declaring "decarbonization," it is crucial to thoroughly collect accurate energy data and prepare to reduce volatility.

The End of Oil Does Not Exist | Written by Robert McNally, Translated by Kim Na-yeon | Page2 Books | 442 pages | 23,000 KRW

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