Crude Volatility

McNally, an energy analyst who served on the National Economic Council, argues that oil price volatility is the natural state of the market and that the periods of relative price stability in the industry's history were produced by deliberate control rather than by market forces.

The historical argument runs through the mechanisms of control. Standard Oil suppressed price swings by controlling refining and transport in the late nineteenth century. After its breakup and the East Texas discovery of 1930, which collapsed prices, the Texas Railroad Commission imposed production prorationing, restricting output from each well to a fraction of capacity and adjusting the allowable monthly to balance supply against demand. That arrangement held American and therefore world prices within a band for four decades. When American production peaked in 1970 and spare capacity vanished, the Commission had nothing left to restrict, and control passed to OPEC. McNally then examines OPEC's record, arguing that it succeeded at price management only when Saudi Arabia was willing to hold spare capacity and absorb the cuts, and that it repeatedly failed when members cheated or when Saudi Arabia declined the role.

The structural explanation is that oil demand and supply are both highly inelastic in the short run. Consumers cannot quickly change their consumption and producers cannot quickly change output, so small imbalances produce large price moves. Without a swing producer holding spare capacity, volatility is the necessary result.

His forecast is that shale, whose investment cycle is faster than conventional production but not fast enough to act as a true swing supply, restores volatility rather than damping it, and that neither OPEC nor the United States will impose stability.

The argument was written before the 2020 price collapse and the 2022 shock, both of which support the volatility thesis. Critics note that McNally gives limited attention to demand-side transition, and that a structural decline in oil demand would change the dynamics his analysis assumes.