I somehow missed MIT economist Morris Adelman’s fun paper in Regulation this Spring, but I spotted it recently on SSRN. To make a well-done paper undeservedly shorter, he argues provocatively that there is no oil crisis and has never been one, if by that you mean reserves diminishing so rapidly that it warrants panic over future supply and prices.
Instead there is a problem with a crummy monopolist — OPEC — and goofy government policies, from Carter right through to the current Bush administration, that reinforce said monopolist’s power.
Adelman starts with some useful historical context:
Oil is not the first fossil fuel that conventional wisdom has identified as nearing exhaustion. Even before 1800, the worry in Europe was that coal — the supposed foundation of their greatness — would run out. European production actually did peak in 1913, and is nearly negligible today. Is that the result of exhaustion? Hardly — there are billions of tons in the ground in Europe. But it would cost too much for the Europeans to dig it out. At a price that would cover cost, there is no demand. Hence, the billions of tons of European coal are worthless and untouched. The amount of a mineral that is in the ground has no meaning apart from its cost of extraction and the demand for it.
Yes, but aren’t we running out, or something? There are all those darn new books saying so:
It is commonly asked, when will the world’s supply of oil be exhausted? The best one-word answer: Never.
Related posts:
Its well known that there are large oil reserves “out there”, but we are in a pickle regarding those that are cheap and easy to obtain. The cost of extraction has to be in line with the spot price on the market, otherwise it doesn’t make sense to prospect. So it ends up being a game of forecasting. Will the spot prices of crude in 2020-2040 merit going into the Canadian tar sands? Will OPEC manipulate supply to keep people disinterested in alternatives at just the right times while perking the price up through supply constraint when the world isn’t looking?
Saudi Arabia does not have all the world’s oil, but they have a good share of the world’s easily obtainable oil, hence they control the liquidity of the market. Added to which we have a multi-decade history of enhancing the Saudi position through money politics and arms deals. The forecast is not good, but that won’t stop people trying to look insightfully contrarian.