In the summer of 1974, Saudi Arabian Oil Minister Shaikh Ahmad Zaki Yamani, concerned that world oil prices had risen too far too fast, sought to bring them down by auctioning Saudi oil for whatever it might bring. His worry was that high oil prices - it had quadrupled to $12 a barrel in less than a year - would cause oil-importing nations to make major energy-saving investments and reduce long-term demand, GN reported.
Yamani's announcement came as a surprise to the journalists sitting in the living room of his lavish home in the mountains above Taif, the Saudi summer capital. After all, the Kuwaitis had cancelled their routine auctions only the month before because they thought the bids weren't high enough.
Yet Yamani hadn't cleared his plan with King Faisal and the auction was never held. The added income from higher prices in the short run was too attractive to pass up.
The Organisation of Petroleum Exporting Countries (Opec) would do well today to consider whether Yamani might have had a point. Those energy-saving investments, as well as adoption of higher vehicle fleet-mileage standards, were made in the US and elsewhere. As a result, energy and oil use per dollar of gross domestic product fell significantly.
There are signs a similar response is in the works again with gasoline prices at the pump approaching $4 a gallon in the US and much higher in Europe. The increased awareness of the dangers of global warming is probably heightening the response to the squeeze on consumer pocketbooks.
In the long run, price matters a great deal in determining demand for oil. According to estimates from the Energy Information Administration, if world oil prices were to stay at today's level of about $127 a barrel, oil use in the US might rise little, if at all, over the next 20 years.
That outlook ought to give Opec pause because this country consumes far more oil and other petroleum products than any other.
Sales of gas-guzzling sport-utility vehicles and light trucks have declined almost 20 per cent in the past 12 months. Legislation passed in December requires automakers by 2020 to produce vehicle fleets that get an average of 35 miles (56 kilometres) per gallon, which will provide a push for electric and hybrid cars and doom SUVs built on heavy truck frames.
Those changes will have a slow, cumulative effect on oil consumption as the fleet of roughly 250 million vehicles in the US ages and is replaced. Meanwhile, there will be some reduction in consumption as the cost of driving causes people to change their habits.
Of course, the world oil supply-and-demand balance is much tighter than it was three decades ago, as economic growth and higher incomes in China, India and some other developing nations put more cars on the road.
On the other hand, growth of demand in such countries isn't going to be immune to the impact of $127 oil. While their incomes are rising, they still are low compared with those of industrialised nations.
High prices won't affect just demand. Expensive sources of oil, such as Canada's tar sands and deep-water sites, become economic to exploit. For instance, in March the EIA's Annual Energy Outlook 2008 said US crude-oil production will increase from 5.1 million barrels a day to 6.3 million in 2018 as a result of drilling in the Gulf of Mexico and more use of advanced recovery techniques on older on-shore fields.
That predicted increase in production isn't tied to $127 oil, which EIA assumes won't last.
Still, Opec ought to do what it can in the short run to hasten a price decline and guard against a drop in oil use. Instead, the organisation's president, Chakib Khelil of Algeria, has said that there's no shortage of oil and that high prices are due to speculation, a weak dollar and other forces. And Saudi Arabian authorities politely rebuffed US President George W. Bush's request on May 16 for a substantial increase in oil output.
Instead, they said production would be raised by 300,000 barrels a day, to 9.45 million.
If speculation is part of the reason oil prices are so high, then why didn't the Saudis say they are investing billions of dollars to increase production capacity to 12 million barrels daily and that they will increase exports to bring down the price and head off conservation by consuming nations?
At an industry conference in Houston on February 12, Abdallah Jum'ah, head of Saudi Arabian Oil, the country's state-owned oil company, complained that the effort to displace fossil fuels with alternatives such as ethanol have created doubts about future demand for oil.
Well, Yamani years ago suggested a way for Saudi Arabia to maximise its long-term income: keep oil prices moderate enough so that investments in alternative energy and more fuel-efficient vehicles aren't economical.
The counter move would then be to levy a tax on refined products that would keep the incentives in place for those alternatives and generate needed revenue to help finance them. Unfortunately, politically that would never fly.