The Real Oil Problem

Adelman
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Edward, we must take the other side of the argument into perspective also as posted by Marcelo. MIT economist M.A.Adelman has recently published in the current issue of Regulation just the opposite of Erdman's views. Now, which of these two views is correct, I have been unable to determine. There are hundreds of professional views on each side of this important issue. Whether it be Paul Krugman, or futures markets, etc., all these can be false signals of the psychology of the marketplace. I just don't know a way of determining the true answer, until the price goes through the roof. Any comment Chris?

IS OIL RUNNING OUT?

M. A. Adelman is professor of economics emeritus at the Massachusetts Institute of Technology. He is the author of several books, including The Economics of Petroleum Supply: Selected Papers 1962–1993 (Cambridge, Mass.: MIT Press, 1993) and The Genie Out of the Bottle: World Oil Since 1970 (Cambridge, Mass.: MIT Press, 1995). More recently, he published “World Oil Production and Prices 1947-2000” in the Quarterly Review of Economics and Finance (Vol. 42).

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.

In 1875, John Strong Newberry, the chief geologist of the state of Ohio, predicted that the supply of oil would soon run out. The alarm has been sounded repeatedly in the many decades since. In 1973, State Department analyst James Akins, then the chief U.S. policymaker on oil, published “The Oil Crisis: This time the wolf is here,” in which he called for more domestic production and for improved relations with oil-producing nations in the Middle East. In 1979, President Jimmy Carter, echoing a CIA assessment, said that oil wells “were drying up all over the world.” Just last year, the New York Times reported that “oil reserves are expected to dwindle in the decades ahead,” while the International Energy Agency fore-according to “conventional wisdom,” humanity’s need for oil cannot be met and a gap will soon emerge between demand and supply. That gap will broaden as the economies of Europe, Japan, and several emerging nations grow and increase their energy needs. The United States is at the mercy of Middle Eastern exporters who can use the “oil weapon” to cripple the U.S. economy. Unless we increase domestic oil production radically or cut consumption, or nations like Russia quickly exploit recently discovered oil fields, the United States will find itself in an oil crisis.

But conventional wisdom “knows” many things that are not true. There is not, and never has been, an oil crisis or gap. Oil
reserves are not dwindling. The Middle East does not have and has never had any “oil weapon.” How fast Russian oil output
grows is of minor but real interest. How much goes to the United States or Europe or Japan — or anywhere else, for that matter
— is of no interest because it has no effect on prices we pay nor on the security of supply. ...Link
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