A behavioural finance approach to commodity supply scares
Keywords: energy
oil
economic history
behavioural economics
financial history

This study aims to generate a more robust understanding of public attitudes regarding non-renewable natural resource markets. Employing a comparative-historical case study method, it analyzes three waves of widespread fear that swept the United States over the course of the twentieth century regarding an imminent, irreversible shortage of oil. Each of these periods of fear over oil supply availability coincided with a significant rise in the price of crude oil, only to be followed by a sudden collapse as new production came onstream in response to higher prices. The study utilizes process tracing and pattern matching techniques to examine the linkages between fundamental supply-demand conditions in the crude oil market, oil price movements, and expert predictions of and other public expressions of belief that oil in the United States would become scarcer and more expensive in the future.
This dissertation’s core arguments contribute to existing theoretical debates in three ways. First, by providing a comparative historical portrait of cyclical patterns in public and expert beliefs regarding non-renewable resource availability and long-term price behavior, the study puts contemporary debates over the future of oil supply in historical perspective. It allows the rampant claims of, and widespread belief in, a global shortage of oil that have gained popularity over the last decade—most notably, in the so-called “peak oil” movement—to be situated within a broader chronological context. It also extends and deepens earlier historical work analyzing oil shortage scares in the United States, both in terms of their underlying dynamics and their effect on federal government policy relative to the oil industry.
Second, the study establishes the link between fundamental supply-demand conditions in the oil market, generally reflected in oil prices, and the degree of media attention given to, and apparent public belief in, an imminent, irreversible shortage of oil in the United States over the course of the twentieth century. In so doing, it demonstrates the applicability of Shiller’s (2000, 2005) conceptualization of new era economic theory formation and popularization to observed phenomena in the oil market, but with a crucial difference. Rather than new era economic thinking taking the form of unbounded optimism about the future, in the case of the oil market new era thinking has tended to be manifested as the pessimistic belief that an impending, irreversible shortage of oil would lead to a long-term, even perpetual, rise in oil prices.
The study suggests two modifications to the concept that enhance its greater explanatory leverage with regard to exhaustible resource markets: one, that often the new era predictions most widely cited during shortage scares were actually made prior to the boom in prices, to little fanfare, but subsequently deemed prophetic by new era proponents; and two, that the new era narratives often contained normative elements. Moral judgments—in particular, condemnation of the oil economy’s degradation of the natural environment—have often intertwined with predictions that the oil supply was more limited than widely believed and that prices were destined to continue rising.
Third, the study demonstrates that the concept of narratives of decline, as described by Bennett (2001) and Lieber (2008), constitutes a powerful theoretical lens through which to understand trends in popular opinion with regard to non-renewable resource availability, and to asset prices more generally—a link that has heretofore gone unrecognized. It finds that a positive feedback loop tended to exist between popular fears of a new era of oil shortages, marked by a long-term rise in prices, and related narratives of the environmental and relative political-economic decline of the United States.