In the spring of 1999 the price of oil, reflecting the world’s trauma over the “Asian flu,” fell to $10 per barrel. The price plunge was due to unreasonable speculation. It was not a decline in demand; it was a barely discernible lower level of expected growth. Oil executives went into a tizzy. The Economist, in a now infamous cover story titled “Drowning in Oil,” talked about $10 oil lingering throughout the decade, and even raised the specter of $2 oil.

At about the same time, my colleague Ron Oligney and I wrote an op-ed piece for the Houston Chronicle, saying, to the laughter of many, that oil would climb to $30 by the end of the year. Ours was not a flippant ideological opinion. We actually used standard petroleum engineering decline analyses, and related prices to margins of excess capacity or shortage. We missed our prediction by just two weeks. Oil went to $30 around January 15, 2000 and, except for a couple of very short periods, it has never looked back.

With a newly acquired notoriety, I started putting out a series of publications with a group of assistants at the University of Houston, attempting to apply some science to what we called the “equilibrium” price of oil. We collected a lot of data on the “activation index” – how many dollars it would take to bring online a stabilized flow of one barrel per day – for all of the most important oil-producing places in the world. We were surprised to find out that very prolific deep offshore areas and west Texas had about the same activation index, $10,000 per barrel per day. Deep offshore could produce 8,000 barrels per day per well but the drilling, completion, and connection of that well could cost $80 million or even more. A well in West Texas would cost $500,000 but the best production we could expect would be 50 barrels per day. In an era when people were talking about “lifting costs” of $2 per barrel in Saudi Arabia, our work showed that they were irrelevant. The activation index in Saudi Arabia was $3,000 to $3,500 per barrel per day. Venezuela had similar numbers. Iraq, thanks to sanctions, was coming in at $7,000 and more per barrel per day.

Using life-cycle economics, observed regional decline rates, the longevity of wells, and operating costs and taxes, we calculated equilibrium prices in many parts of the world. And using an average weighted by contribution to the world oil supply, we calculated a world equilibrium price: $28 per barrel. Of course we joked then that this is the statistician’s definition of well-being: your head is in the oven, your feet are on ice, but on average you are comfortable.

OPEC, which cut production after oil hit $10, confirmed our thoughts a year and a half after the price went through $30 and climbed to $37. Sheepish and mindful of years of being berated by consuming nations (headed by the United States), OPEC began talking about an official “price band” of $22 to $28 per barrel, which was not abandoned until just two years ago, even though oil prices had climbed to over $50.

OPEC’s supply cuts followed. Creeping up on OPEC was a truth that got very little coverage: from a bona fide excess capacity of over 10 million barrels per day in the late 1980s, the cartel, by 2000, had essentially no excess capacity “behind the valve.” That is not to say that OPEC could not produce more with proper investments. It simply had not made those investments, and years later spawned an entire mythology of “peak oil” and “twilight in the desert.”

In a world of no excess capacity, energy militants such as the Iranian mullahs, Venezuela’s Hugo Chávez, and increasingly, Russia under Vladimir Putin, have held sway. Populism and nationalism in energy-producing countries have re-emerged. As usual, populism is wildly popular until, as usual, it proves economically disastrous. Chávez in his firebrand anti-Americanism has created quite a stir, prompting copycat nationalizations in Bolivia and Ecuador and noises elsewhere. The long-term reckoning will take time. But for now, higher energy prices prop up Chávez and the Chávez copycats. Not surprisingly, Venezuelan oil production is now at about its lowest level in three decades.

Russia was the brightest star in the oil business for about five years, from 1999 to 2004. Some companies like Yukos and Sibneft had annual production increases of 20 percent. Neither exists today, and the events surrounding their demise and takeover by state-owned companies have been covered extensively in the press. The state now openly controls more than 50 percent of Russian oil production and, indirectly, most of the rest. Russian production is now flat and many, myself included, predict declining production for years to come. Nevertheless, Putin’s approval ratings in Russia are over 70 percent.

China and, to a lesser extent, India, probably account for another $10 in the price of oil. There has never before been a country in the history of humankind that increased its oil consumption by 20 percent in a year and yet China has done just that for three years running. The galloping Chinese economy creates an insatiable hunger for all forms of energy and although coal supplies 75 percent of Chinese energy, oil demand is causing anxiety in China and the international markets. Chinese oil companies have become increasingly daring and aggressive all over the world, even in countries such as Sudan and Nigeria, which are unpalatable to everybody else.

A remark by Ayatollah Ali Khamenei, Iran’s paramount leader, in early June, demonstrated just how volatile the price of oil can be. Khamenei stated that the U.S. could “seriously endanger energy flow in the region’’ by acting against Iran. The comment lacked explicit details and was fairly nebulous, yet reaction to that statement alone increased the price of oil by almost $2 per barrel. A few weeks later, more moderate comments from other Iranian leaders drove the price back down by $2.