Sunday, September 18, 2011

No, we really are not running out of oil

So says expert Daniel Yergin in this weekend's WSJ.  The key point (especially relevant to this week's discussion of cost in MBA 505) is that the price of oil drives incentives for discovery and recovery.  We may be out of $25/barrel oil, but as technologies for exploration and extraction develop AND as higher prices make some oil fields economically viable (that would not have been viable at lower prices), the market provides the incentives to find the juice we need to keep our SUVs rolling.  Yergin shows that the "sky is falling, we are running out of fossil fuels" claims go back as far as the 1880s, when production mostly took place in Pennsylvania and it was common knowledge that there was no oil west of the Mississippi River. 

Please note that I am not saying that we should sit back and let the price system solve all of our energy worries.  What I am saying is that the claims that we are facing some sort of energy shortage are economic nonsense.  As long as prices are allowed to adjust, the market will make sure that buyers and sellers in the petroleum market are able to work with each other. 

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