Analysts are asking if the world will have to get used to permanently low prices not just for oil but for other commodities too
has been much mocked for our suggestion in 1999 that, in a world “drowning in oil”, a barrel of the stuff might cost as little as $5. That was just before the oil price shot up from $10 to a peak of nearly $150 over the next decade. This month, however, the world is again awash and the oil price has plunged to unheard-of depths. On April 20th a barrel of West Texas Intermediate oil for delivery in May had a negative price-tag, meaning sellers had to pay buyers.
Economists are in two broad camps over the long-term direction of commodity prices. In the late 1940s two development economists, Raúl Prebisch and Sir Hans Singer, hypothesised that the price of raw materials would fall against manufactured goods over time. They argued this would happen because, as global incomes rose, demand would rise faster for complex goods than for basic commodities such as oil or food.
This interpretation inspired arguments that capitalism would inevitably widen the gap between rich and poor countries. Places that make manufactured goods would become ever wealthier compared with those that produce commodities. Falls in commodity prices after the second world war, and then again in the 1980s and 1990s, seemed to lend some credence to this theory.
But in the commodity boom of the 2000s growing demand from rapidly developing emerging-market economies such as China sent commodity prices rocketing. Criticism of Prebisch’s and Singer’s theory mounted. Other economists pointed out that they had ignored the role of technological change in reducing the price or increasing the quality of manufactured goods. A computer may cost the same as one produced 20 years ago.
So what will adherents and critics of the Prebisch-Singer hypothesis make of the oil-price crash? Neither could really cite it as evidence. In the history of oil prices it is far easier to see short-term volatility after dramatic events than it is to spot a long-term direction. Indeed, looking at a chart of oil prices in inflation-adjusted dollars over the past 160 or so years, the most striking feature is the absence of any discernible pattern or trend.
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