Seeing is believing

Could the television image we’ve all seen of the Greenland ice cap crumbling into the ocean because of global warming somehow - indirectly and psychologically — be partly responsible for high Oil and other commodity prices? The usual explanation of today’s scarcity and high prices focuses on explosive growth in emerging countries, China and India in particular, whose demand for scarce resources is “insatiable.” But psychology also matters in speculative markets, and perhaps that image of the Greenland ice disappearing makes it seem all too plausible that everything else- land, water, even fresh air - is running out too.

Let’s take a case study, the last generalised boom-bust cycle in commodity prices, which caused these prices generally to rise (more or less) from some time in the 1960’s until the 1980’s, and then generally to fall until the mid-1990’s. Maybe images matter just as much as substance in explaining that.

The conventional “fundamental” explanation for that cycle relates it to political events. The 1973-1974 oil crisis is said to have been due to the cutoff of oil following the Arab-Israeli Yom Kippur War. The 1979-1981 oil crisis is said to reflect the cutoff in oil due to the Iranian Revolution and the Iran-Iraq war. The drop in oil prices after the mid-1980’s is said to be due to the collapse of the OPEC oil cartel.

But some economists doubt that these events tell the whole story. Sure, there were sharp movements in oil prices corresponding to these events, but maybe there were other, even more important factors affecting general trends in oil prices. After all, these events don’t really explain why prices of other commodities followed that of oil.