The next drilling instalment

Morris Adelman's impressive 1972 study, The World Petroleum Market, presented an extensive history and economic analysis of developments in the structure, behaviour, supply, costs and prices in the world oil industry up to 1970-71. The Genie Out of the Bottle brings that story up to date.

It rests on the same general economic propositions and contains the same criticisms of the received wisdom regarding the economics of the industry that were fully developed in the earlier work. Anyone approaching this book and unfamiliar with the economics of the world oil industry would do well to examine the introduction and first chapter of the 1972 work to ensure a clear understanding of how the author approaches the subject. He challenges many of the most common assumptions held by the public and many experienced oilmen as well as oil economists and presents an excellent basic analysis. This is succintly restated here, together with a general overview of the issues.

It is impossible to know how much oil is contained under the ground, yet it is assumed that it must be limited and would eventually become "scarce", leading to rising costs as it inevitably becomes more expensive to find. Such an argument was seen by many to justify the Organisation of Petroleum Exporting Countries' attempts to raise prices and later restrain production to support them.

Inevitably this required the organisation to allocate increasing output among member countries, resulting in competition between them to obtain what they considered to be an appropriate share. The resulting struggles, together with international conflicts of various kinds, incompetent economic analysis and unfortunate political judgements led to profound instability in oil prices.

Between 1970 and 1981 oil from the Persian Gulf rose in constant prices by a factor of more than 12; between 1981 and l993 it fell by a factor of three and a half.

The bulk of the book consists of a careful record and appraisal of events over the past 25 years, relying largely on press and journal coverage, government investigations, contemporary studies and reports. Although such sources cannot contain all that a future history will produce, they enabled Adelman and his colleagues at the Massachusetts Institute of Technology to put together a comprehensive story and to describe in minute detail, sometimes almost month by month, the changes in the price and supply of oil since 1970, the factors influencing these and the consequences.

The detailed chronological discussion is contained in five chapters. Given the importance of oil in modern society, as a crucial source of funds for producing countries and of energy for consuming countries and the intricate interplay of competition and monopoly, the role of incompetent economic analysis and appalling judgement on the part of those who ought to know better is of great significance. Saudi Arabia is by far the largest oil producer. It is a country with few other resources and is therefore a major importer of industrial and military equipment from the industrial world, and the exporters and holders of industrial contracts make especial efforts to maintain good relations. Adelman shows how pivotal in the whole story is the relation between Saudi Arabia and the United States, and comments on what he sees as the US "grovelling" towards Saudi Arabia.

For Adelman, governments are the villains. He quotes Ibn Khaldun, the 14th-century philsopher and historian, commenting on the harmful and ruinous effects of commercial activity by a ruler. Earlier in this century it was oil companies that were often perceived as the villains.

Edith T. Penrose is emeritus professor of economics, University of London.