"Oil reserves are a function of price and technology."
Jim_p, let me make a slightly different case for the notion that we face an oil problem.
Would you agree that the following assertions are true?
1) With respect to getting oil out of the ground, early effort (in a new oil province, let’s say) produces large rewards, while later effort produces less rewards. The pattern is thus:
early effort / big rewards
middling effort / middling rewards
late effort / small rewards
2) Elasticity of the entire economy with respect to oil price is negative --- that is, if the price of oil rises, the level of economy activity goes down. (To say this another way: a rise in the price of oil discourages more transactions between people than it encourages, so the net effect is negative.)
3) There are 538,574 oil wells in the United States.
If you don’t agree with the above assertions, continue on with your life. If you do agree, or think the assertions might have validity, then do a “thought experiment.” Assume for a moment that all of the oil in the world is,or was, located in the continental United States. In other words, suppose that the historical endowment of oil in the contiguous Forty-Eight was the only oil that ever existed.
Question: would there now be than 538,574 producing wells in the United States?
My answer: never, impossible, out of the question.
Why?
In the early 1970s, when oil production in the continental USA peaked, we would have had a spike in prices (as we did), and a decline of economic activity (as we did). Except that, if our historical endowment of oil were the only oil in existence, later attempts at economic recovery would have failed. Soon, with no oil from foreign sources, entire industries would have shrunk or disappeared and the demand for oil would have plummeted. In addition, persistent economic stress would have translated into political upheaval.
If our historical endowment were the only oil in existence, neither economic nor political conditions would have favored a smooth continuation of oil production in the USA, and the development of 538,574 oil wells. The price of oil would be low, and more oil would be in the ground than is now the case. But away from oil, the economy would be in ruins, and politics would be marked by desperate struggles as people fought to preserve some degree of liberty, or even to survive.
This means, then, that there is a relationship between big foreign deposits of oil and the 8-barrel a day operation -- between Ghawar and the backyard pump rocking back and forth in Ponca, Oklahoma. But the relationship is indirect, since the 8-barrel operation gets no check from Saudi Arabia.
What is relationship then?
It is a “subsidy,” but one that goes to the society as a whole. It is a “subsidy” that allows us here in the USA to continue to live with each other in ways that have been centuries in the making. It is a subsidy that makes unnecessary desperate struggles by desperate men -- so that people can devote themselves to other matters, such as getting a few more drops of crude out of an old field somewhere.
It seems to me that the situation we face at the present moment is similar to the situation that our “thought experiment” suggests we might have faced in 1970, had USA oil been the world’s only oil.
That is, we are seeing:
1) oil prices that spike up but on the whole, over the entire cycle, remain rather disappointingly low;
2) spreading economic distress;
3) rising political tension in the world;
4) significant concern about oil supply even though oil prices are moderate.
The hypothesis that pulls these four tendencies into a coherent whole is an oil crisis, but one that does not and will not manifest itself in oil markets, but rather, one that manifests itself in the human world of politics.
If the crisis does not manifest itself in the market, but does manifest itself in politics, your twin driving forces of price and technology get chopped down. Prices will only spike, do their damage, then fall; and the social conditions for technology will not be good. |
