The Oil Crisis

Predictions of Oil Shortage
• In 1875, John Strong Newberry, the chief geologist of the state of Ohio, predicted that the supply of oil would soon run out.
• In 1973, 1979, 2003, and today the Bush government has declared an energy crisis and shortage of oil.

Actual “Reserves”
• In 2003, world oil production was 4,400 times greater than it was in Newberry’s day.
• Oil reserves and production even outside the Middle East are greater today than they were when in 1973.
• World output of oil is up a quarter since Carter’s “drying up” pronouncement (1979).
• Oil reserves are not dwindling; reserves are the current warehouse for known oil that is maintained and replenished by exploration and technology in response to the demand and price.

Oil Shortage
• At the end of 1970, non-OPEC countries had about 200 billion remaining in proven reserves.
• In the next 33 years, those countries produced 460 billion barrels and now have 209 billion “remaining.” The producers used their inventory at a rate of about seven percent per year and kept replacing it.
• The OPEC countries started with about 412 billion in proved reserves, produced 307 billion, and now have about 819 billion left.
• Saudi Arabia alone has over 80 known fields and exploits only nine.
• The amount of a mineral available depends on its cost of extraction and the demand for it, not the actual amount that might be in the ground.

New Knowledge
• In 1950, there was no offshore oil production; it was highly “unconventional” oil.
• Some 25 years later, offshore wells were being drilled in water 1,000 feet deep.
• After another 25 years, oilmen were drilling in water 10,000 feet deep.
• Increasing knowledge lowers cost, unlocks new deposits in existing areas, and opens new areas for discovery.
• The Saudis do not invest to discover, develop, and produce more oil because more production would bring down world prices.

Cost of Finding Oil
• A third of all U.S. oil production comes from offshore wells, and that production will likely increase to 50%.
• Potential rewards from reduced supply induce investment in the development of the new knowledge.
• The cost data (available up to 15 yrs ago) show it is not getting any harder nor any more expensive to find new deposits.

Value of Reserves
• The sales value of proven reserves sold in-ground in the United States show the cost of finding and developing new reserves is not generally increasing.
• Buying and holding the oil deposits produces negative returns even before allowing for risk, and it does not make economic sense to increase reserves beyond what is needed.

Oil Dependency
• Most oil moves by sea, and ships and can be diverted from one destination to another relatively easily. It is fairly easy to reroute shipments of oil from nations that have a sufficient supply to nations that are experiencing a shortage.
• No matter what nation produces higher output, it helps all consumers.
• Lower output hurts consumers no matter where the oil is from or where it goes.
• Exports go to the more profitable destination.
• To the buyer, the distance from exporter to importer makes only a minor difference in total cost.
• Imports do not make any importer “dependent” on any particular exporter, or even all of them taken together.
• How much goes to the United States has no effect on prices we pay nor on the security of supply.
• Direct or indirect spending to reduce imports doesn’t work and wastes resources.

Oil Prices
• Because of the cartel condition in the market, speculation affects cartel prices more than competitive prices.
• Oil prices fluctuate more widely because in addition to predictions of supply and demand, betting on the price must include calculations about OPEC’s quota decisions and the members’ fidelity to their promises.
• The cartel arrangement makes the world oil market less predictable, more volatile, and sudden.
• In the huge oil price spike of late 1973, the change in supply was almost trivial yet the price effects were massive. The “crisis” was due to buyer’s panic.
• Although there are wide fluctuations, a gasoline price of $2.75 today is about the same as the price of gasoline in 1982.
Cause of “Crisis”
• The price and supply instabilities started in 1973–74 when a dozen mostly Middle Eastern nations mutually agreed to cut their output.
• In order to raise the price and their revenues, they have been constraining production and locking away the cheapest oil in the world.
• Oil prices currently depend on the oil cartel’s control of supply and prices.
• In 1979 and again in 2003, the consuming nations essentially agreed to the demands of the current cartel.
• The OPEC nations are largely dependent on their oil revenues and cannot cut supply or raise prices beyond a narrow range.
• The Middle East does not have and has never has had any “oil weapon.”
Conclusion
• There is not, and never really has been, an oil crisis, energy shortage, or gap, only cartel-imposed controls over supplies and prices.