The Ongoing Oil Glut

Lately the nation’s media seem overflowing
with news on the worldwide glut of oil. The best article was Business
Week’s
cover story on oil economics, “The New Economics
of Oil” in its November 3, 1997 issue.

The Business Week story makes a strong case
that oil prices will continue to remain stable or even decline over the
next decade or so. Much of the history of oil production over the last
couple decades completely defies the notion that oil will become more
scarce, and thus more expensive over time.

Perhaps the best indicator of this that really
jumps out at the reader is the current cost of finding an additional barrel
of oil. Using increasing scarcity as a model, doomsayers of all stripes
have concluded the cost of finding each additional barrel would gradually
increase. Instead the cost has declined 60 percent in real terms over
the past decade. As a result there is a huge glut of oil.

Advances in exploration technology, for example,
have cut Exxon’s exploration costs by 85% in 10 years. Many areas
such as in the deep ocean once considered inaccessible are now being drilled
for oil.

Current proven oil reserve are 60 percent higher
than in 1985, and Smith Rea Energy Associates Ltd., a London-based researcher,
claims an additional 350 billion barrels of oil is now recoverable due
to technological advances that isn’t included in the proven oil reserve
estimates.

Over at Microsoft’s Slate,
James Surowiecki looks at the effects technological changes have had on
the Oil Producing and Exporting Countries. To put it bluntly, OPEC has
all but fallen apart. Where once OPEC cause worldwide economic shifts,
today it has met with little success in restricting its output. At a recent
OPEC meeting, for example, the cartel raised daily production quotas to
27.5 million barrels, but Surowiecki claims most estimates suggest OPEC
nations are already pumping 28 million barrels a day.

In fact, shades of Julian Simon, Surowiecki
quotes the chief economist of Venezuela’s state oil company saying,
“our reserves are — for all intents and purposes — infinite.”

Surowiecki identifies a factor in oil prices
which Business Week doesn’t mention — the importance of the futures
market in oil. The oil futures market is relatively new — it didn’t
exist prior to the 1980s. With the futures market it is easier to stabilize
prices over the long term by locking in future prices today and encouraging
price competition.

Finally veteran Associated
Press
reporter Walter Mears notes that the low cost of oil has meant
the death of an idea that was so prominent in the 1970s — energy independence.
Today the United States imports 50 percent of its oil; in the 1970s that
level was considered perilously high. The 55 mph speed limit, designed
to conserve oil after the Arab oil embargo, was finally repealed in 1995.

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