The Economics of Oil

I read the following passage in David D. Friedman’s Hidden Order: The Economics of Everyday Life (published in ’97):

In the previous discussion, we were considering a pure depletable resource — a resource whose price was entirely determined by its limited supply. Consider at the other extreme, a resource of which only a limited amount exists but for which production costs are substantial and for which that “limited amount” is very large compared to the quantity demanded at a price sufficient to cover the cost of production. The amount is so large that technology, law, and political institutions will have changed beyond recognition long
before the supply is exhausted.

Under those circumstances, saving the good now in order to sell it when supplies run short is not a very attractive idea — before that happens we may have stopped using it, the owner may have been expropriated, or the world may have ended. Changes in its price over time will be almost entirely determined by changes in production cost. The good is, strictly speaking, depletable, but that fact has no significant effect on its price. The pattern of oil prices over the past ninety years or so suggests that that may well be how the market views petroleum.

This reminded me of my arguments, months ago — on this blog and in Backtalk — against the Peak Oil Theory (POT). Curious about the present level of POT’s popularity I checked Google News and found that in the past few days POT has been mentioned in articles on numerous dissident sites, including Axis of Logic, Al-Jazeerah,, From the Wilderness, Slashdot,, CounterPunch, Znet, Common Dreams, AlterNet, Mother Jones, and Washington Dispatch. Two Indian news sites also mentioned POT but no mainstream Western sources did. In this case, I think the mainstream is getting it right. IMO, the relatively high current oil prices are due to political chaos, cartel decisions (possibly), and dollar inflation (depite the Iraq invasion, the euro price of oil has risen little; the prices of gold and real estate have risen with the price of oil but neither gold nor real estate is being consumed) — not due to oil’s peak passing.

Chris Nelder’s GetRealList blog has a good selection of pro-POT articles: here.

Not exactly on-topic, but here are a couple of articles about increasing fuel efficiency from the The Economist‘s Technology Quarterly: “The Rise of the Green Building” and “Plugging in, at Last.”

For previous blog and Backtalk debate on POT, click here.

Author: Sam Koritz

I like cheese.