The price of oil: Lower and upper bounds

The magnitude of the recent dramatic fall in oil prices has once again (like the rises of 1973 and 1979) taken most energy analysts and oil industry participants by suprise, creating even greater uncertainty about future developments in the oil market. In this paper, we suggest that a return to first principles is appropriate at this time in order to help clarify the outlook. Two simple Hotelling-type models of the oil market are described - one of the perfectly competitive market, the other of a purely monopolistic market. These two models are used to derive lower and upper bounds on oil prices. A reinterpretation of the history of the oil market over the last 25 years is suggested, with some implications for the future course of oil prices.