$3 Oil: The Twenty-Seven Year Calm That Built the Modern World

In January 1946, a barrel of crude oil cost $1.17. In December 1972, it cost $3.56. Over twenty-seven years, the price of the world’s most important commodity had risen by a total of $2.39 — less than the price of a cup of coffee today. During the same period, the consumer price index nearly doubled, meaning oil became cheaper in real terms with every passing year.

This was not an accident. It was not the result of supply and demand finding equilibrium in a competitive market. It was administered pricing — a system in which a handful of institutions decided what oil should cost and then enforced that decision through production controls, concession agreements, and political muscle.

The system had two pillars. In the United States, the Texas Railroad Commission regulated production by assigning each oil well a maximum number of days it could pump per month. When demand fell, Texas reduced the “allowable days.” When demand rose, it increased them. This was, in effect, a government-sanctioned cartel that controlled the flow of American oil and, by extension, the global price.

Outside the United States, seven oil companies — the “Seven Sisters” — controlled the concessions that produced Middle Eastern, African, and Latin American oil. Exxon, Mobil, Chevron, Gulf, Texaco, BP, and Shell set the price at which crude was sold, determined production volumes, and shared the revenues with host governments according to concession agreements that the governments had little power to renegotiate.

The chart is striking for what it does not show. No spikes. No crashes. No volatility. Oil in this era moved in steps — occasional adjustments of 20 to 50 cents per barrel, followed by years of perfect stability. The price sat at exactly $2.57 from January 1948 through May 1953 — sixty-five consecutive months without a single price change. It sat at exactly $2.97 from March 1959 through August 1966 — ninety months.

This stability was the foundation on which postwar America was built. Cheap, predictable oil made it rational to build suburbs thirty miles from city centers, to design cities around automobiles rather than trains, to air-condition houses in Arizona and heat them in Minnesota. It made it sensible for the federal government to invest $25 billion in the Interstate Highway System. It made it possible for the United States to consume more energy per capita than any nation in history.

It also made the world complacent. Twenty-seven years of stability convinced two generations of planners, economists, and politicians that cheap oil was a natural condition, like gravity or daylight — something that simply existed and would continue to exist. Nobody built contingency plans for expensive oil because nobody could imagine it.

Indexed to 1947, the divergence is remarkable. Consumer prices rose 87% between 1947 and 1972, reflecting the steady inflation of the postwar era. But oil rose only 94% in nominal terms — and since general prices nearly doubled, oil actually got cheaper in real terms. A barrel of oil that cost the equivalent of $1.84 in 1947 dollars was selling for $1.91 in 1947-equivalent purchasing power by 1972.

This real-terms cheapening had profound consequences. It meant that energy-intensive industries became more competitive over time, not less. It meant that the incentive to conserve oil — to build efficient cars, to insulate homes, to develop alternative energy sources — weakened with every passing year. It meant that when the price finally did move, the shock was not just economic but existential. The entire industrial structure of the Western world was built on the assumption of perpetually cheap oil.

The “Real Oil” column tells the story. Adjusted for inflation, oil was cheaper in 1972 ($1.90 in 1947 dollars) than it had been in 1950 ($2.38). The highlighted rows show the divergence accelerating — by 1970, CPI inflation was running at 5.7%, driven by Vietnam War spending and Great Society programs, while oil prices were barely keeping pace. The real price of oil was falling at precisely the moment global demand was surging.

The administered pricing system began to crack in the 1960s. Three forces were converging to destroy it.

American oil production peaked. In November 1970, US crude production hit 10.04 million barrels per day — a level it would not reach again until the shale revolution of the 2010s. The Texas Railroad Commission, which had been restricting production for decades, began allowing wells to pump at 100% of capacity. For the first time, America could no longer increase production to cool prices or punish foreign producers. The swing producer had lost its swing.

OPEC found its voice. The Organization of the Petroleum Exporting Countries, founded in 1960 by Saudi Arabia, Iran, Iraq, Kuwait, and Venezuela, had spent its first decade as a talking shop — a forum where producing nations complained about the Seven Sisters but lacked the leverage to change anything. By the early 1970s, that changed. Libya’s Muammar Gaddafi nationalized foreign oil operations in 1969. Algeria followed. The balance of power was shifting from the companies to the countries.

The dollar was collapsing. Oil had been priced in dollars since the 1940s, when the dollar was backed by gold at $35 per ounce. When Nixon abandoned the gold standard in August 1971, the dollar began to devalue. For OPEC nations, this meant their oil revenues were worth less in real terms with every passing month. A barrel of oil that bought $3.56 worth of goods in 1971 dollars bought considerably less after the dollar fell 10% against major currencies in 1972. The producers were being paid in a depreciating currency for a depleting asset.

The automobile economy. US car registrations rose from 28 million in 1946 to 97 million in 1972. The average American drove 9,500 miles per year. Gasoline cost 30 cents a gallon. No other country in history had ever organized its entire society around the private automobile, and the only reason it worked was that the fuel was essentially free.

The petrochemical industry. Cheap oil was not just fuel — it was feedstock. Plastics, synthetic fibers, fertilizers, pesticides, pharmaceuticals, and thousands of other products were derived from petroleum. The Green Revolution, which doubled global food production between 1950 and 1970, was powered by oil-based fertilizers and oil-powered machinery.

The suburban experiment. Levittown, the model for postwar suburbia, was built on the assumption that commuting thirty miles each way was economically rational. At 30 cents per gallon, a 60-mile daily commute cost about $1 per day in fuel. The entire architecture of American life — single-family homes, shopping malls, drive-through restaurants, two-car garages — assumed oil prices that remained cheap indefinitely.

American geopolitical dominance. The United States in 1946 was the world’s largest oil producer, the world’s largest oil consumer, and the guarantor of the global oil system. Cheap oil powered the military that defended Europe, the industry that rebuilt Japan, and the economy that funded the Marshall Plan. The American century was, in a very real sense, the oil century.