As we lurch into another season of toilet paper shortages, it is time to recall the gasoline lines of 1973 and the often overlooked science of Narrative Economics.
This year, rumors of supply chain disruptions, factory closures and price gouging supplemented the fear of months-long quarantining which led to people telling themselves, crap, we gotta get a lot of toilet paper! And once the run on toilet paper started, the hoarding snowballed. If one package was all I needed, I got 5 just in case. Now we know that factories never shut down, the supply chain never faltered, and price gouging did not occur, which means that the disappearance of toilet paper was completely tied to a change in the behavior of people because they had bought into a believable, but false, narrative – Narrative Economics.
In November 1973, to hurt nations friendly to Israel, the OPEC nations announced a 25% production cut that would be instituted in the near future; but by December, just 7 weeks later, OPEC said they may actually increase oil output or maybe just cut by 10%. These threats and cuts and changes were hurled around, introducing chaos into the global oil markets, but most importantly this chaos lodged the fear of gasoline shortages into the hearts of car owners. Overnight, US car owners performed the biggest transfer of gasoline inventories in history, moving gas from gasoline station underground storage tanks into the fuel tanks of Fords, Buicks and Cadillacs. Without a single barrel of oil being removed from the market by OPEC, American consumers — on their own — created a nationwide, months-long shortage of gasoline. All this happened because people bought into a believable, but false, narrative – Narrative Economics.
Here’s where we see the negative impacts of Narrative Economics hurting the oilfield in 2021:
NARRATIVE: Biden is going to halt frac. RESULT: Let’s drill and frac everything right now, even though the financial reason for taking this action is shaky;
NARRATIVE: Drilling activity is never going to get better. RESULT: Let’s get out now even though we lose everything;
NARRATIVE: From today onward renewables will soar, crushing demand for oil. RESULT: Stop investing in oil and gas immediately.
Here’s the take-away: The crowd isn’t always right; but when the crowd surges in one direction, they drag everyone along. When the toilet paper is gone from the shelves, even the clear-eyed economists can’t buy toilet paper. When gasoline is being rationed, even the realist has to wait in line. When the investors all move to wind and solar, all oil has to wait its turn.