Given the hype which has accompanied the run-up to an oil ministers’ meeting in Doha on Sunday, there is a risk prices will fall afterwards it fails to reach an agreement or produces only a weak one.

But expectations for the meeting are already pretty low.

“We cannot know the outcome but if there is to be a production freeze, rather than a cut, the impact on physical oil supplies will be limited,” according to the International Energy Agency (“Oil Market Report”, IEA, Apr 14).

Given that almost no one expects ministers to agree on a cut, and a freeze would not remove any actual barrels from the market, the scope for disappointment is perhaps limited.

Some analysts argue prices could fall sharply if the meeting fails to produce a significant agreement because it will puncture the sentiment-driven positive momentum that has been driving prices higher.

In this view, ministers must deliver something significant or risk an abrupt deterioration in market sentiment and prices.

But it is also arguable that what has been driving prices higher over the last two months is not just sentiment or expectations about Doha but the prospect of real price-driven rebalancing in the oil market.

The IEA and Goldman Sachs have published commentaries this week entitled respectively “market balance draws near” and “rebalancing gathers pace”.

If hedge funds and other market participants are focused on the price-driven reduction in supply and increase in demand, the lack of a substantial outcome from Doha might produce only a short-lived decline in prices.

At this point, no one really knows how the market will react to a weak deal.

THE PROBLEM OF OIL

“The problem of oil is that there is always too much or too little”, Myron Watkins, professor of economics at New York University, wrote almost 80 years ago (“Oil: Stabilization or Conservation?” Watkins, 1939).

Extreme volatility is the defining characteristic of all commodity markets but none are more spectacular or have as much impact on the fate of economies and nations as swings in the price of oil.

“The basic feature of the petroleum industry … is that it is not self-adjusting,” according to economist Paul Frankel (“Essentials of Petroleum”, Frankel, 1946).

The risk associated with finding oil underground; the high cost of exploration and drilling coupled with the low cost of production; high fixed costs in refining, transport and marketing; and a lack of responsiveness in both supply and demand to small changes in price in the short term combine to produce continuous crises, according to Frankel.

Not much has changed in the intervening decades. Watkins and Frankel would recognize the recent panic about peak oil, shale revolution and the subsequent slump in oil prices as another of the extreme cycles that have plagued the modern oil industry since its beginning in 1859.

PRODUCTION PLANNING

Frankel argued the recurrent crises made some sort of “planning” by major oil companies, governments, or both, necessary and inevitable.

The only way to tame violent price swings was to employ “eveners” or “adjusters”, what would now be called “swing producers”, willing and able to balance supply and demand by altering their own production.

“As there is always either too much or too little oil, the industry, not being self-adjusting, has an inherent tendency to extreme crises; this fact has called forth the ingenuity of planners within the trade. As no individual unit can evolve a rational production policy on its own, some sort of communal organization is almost inevitable,” Frankel concluded.

The history of the oil industry is largely a history of attempts to stabilize production and prices each of which has ended in failure sooner or later.

Efforts have ranged from the Oil Creek Association founded in 1861, the Petroleum Producers Association of Pennsylvania (1869), Standard Oil (1870s-1910s), and the U.S. oil conservation movement (1910s-1930s), to the Achnacarry Agreement (1928), the Texas Railroad Commission (late 1940s-early 1970s) and OPEC (since 1982).

There is no reason to believe an agreement between OPEC and non-OPEC producers in Doha would have any more enduring success.

PRICES OR STABILIZATION

While Frankel was correct that the oil industry is not self-adjusting in the short term, in the longer term, the price mechanism, rather that stabilization arrangements, has brought supply and demand back to balance.

It was high prices which solved the “problem” of peak oil in the mid-2000s, and it is low prices, not OPEC, which are now starting to cure the “problem” of excess oil production in the mid-2010s.

High prices did not lead to the creation of hydraulic fracturing technology but they did enable and finance its rapid scaling up across the oil industry after 2005.

High prices also encouraged much more efficient use of refined fuels in all forms of transport, such that oil consumption in the advanced economies fell almost continuously between 2005 and 2014.

By the middle of 2014, the rapid expansion in oil supplies and the curtailment of demand growth had pushed the oil market into surplus, and lower prices are now reversing some of the earlier trends.

Substantially lower prices are stimulating the fastest demand growth among the advanced economies for more than a decade and curbing production from shale and other higher-cost supplies.

THE ROAD TO DOHA

This background is worth recalling as OPEC and non-OPEC producers head to Qatar for talks about a “production freeze” on April 17.

“The pressing need now is to stabilize the market,” according to the invitation letter sent out by Qatar’s energy minister (“Qatar’s oil-freeze letter to Norway reveals Doha deal logic”, Bloomberg, Apr 14).

“This meeting has triggered a broad and intensive dialogue between oil producers out of the conviction that current oil prices are unsustainable,” the minister explained.

“This has changed the sentiment of the oil market as the price of Brent oil has shown a positive trend, climbing up from its bottom of last February. It has put a floor under the oil price.”

There is no doubt the discussions and the possibility of a deal has contributed to a sharp turn around in sentiment among hedge funds (“Hedge funds establish near-record bullish bet on rising oil prices” Reuters, Mar 30).

From a record bearish position in late 2015, hedge funds have amassed a near-record bullish one in the expectation that prices have bottomed out and are now on a sustained upswing.

The liquidation of previous short positions and accumulation of new long ones in the major crude oil futures contracts has in turn accelerated the rise in prices over the last two months.

If some of that shift in speculative positioning were to be reversed following the meeting, it could lead to a rapid and large drop in prices.

But there are also signs of a real change in both production and consumption in response to the sustained period of low prices.

U.S. crude oil output exhibits an accelerating decline while consumption of gasoline is growing strongly in major markets including the United States, China and India.

The market remains oversupplied and there is a large overhang of stocks inherited from 2014, 2015 and early 2016.

But production and consumption are now on trajectories which cannot be sustained in the medium term (just as they were before prices began to fall in mid-2014).

“If something cannot go on forever, it will stop,” wrote Herbert Stein, former chief economist to U.S. President Richard Nixon (“What I think: essays on economics, politics and life”, Stein, 1998).

Whatever the outcome from Doha, at some point prices must rise to restore balance to the oil market, so any pull-back might be short-lived.