Resource Plenty: Why Fears of an Oil Crisis Are Misinformed

Article excerpt

Sarah A. Emerson is Director of Energy Security Analysis Inc., an energy research firm.

Concerns over the "energy security" of an oil-consuming country arise from two commonly held assumptions. The first is the general assumption that global oil supplies are finite and dwindling. The second and more specific assumption is that most of the remaining oil is located in politically unstable regions such as the Middle East. Since the first oil crisis in 1973, these two assumptions have shaped energy policy in the oil-consuming countries of the Organization for Economic Cooperation and Development (OECD). The United States has essentially replaced fuel oil with natural gas in industrial consumption and electric power generation. In Europe, gasoline is so heavily taxed that the price at the pump is as much as five times higher than the price at the refinery gate. European countries have also compelled their refiners and importers to hold a minimum level of petroleum product inventory, while the United States, Japan, Germany, and, more recently, South Korea have built substantial government stockpiles. These and other policies have promoted conservation and now provide a buffer stock that will lessen the short-term price impact of a supply disruption.

Though the issue of energy security remains a perennial concern of oil-importing countries, the global oil market is very different today than it was in the 1970s. Public policy must take into account the fact that the nature of energy security concerns has changed as the motivating assumptions that spawned those concerns have changed. Most importantly, the starting assumption of global resource scarcity is grossly exaggerated in public policy discourse: not only does output from mature producing regions continue to exceed expectations, but the exploration and production frontier continues to expand across countries as geographically and economically disparate as Vietnam, Turkmenistan, Chad, and the United States.

It would be foolhardy to contend that there is enough oil in the ground to meet global demand growth for the next 100 years, but energy policy is not formulated to address 100-year problems. Its horizon can be as near as the next election or as far as the foreseeable future, but even the latter is much closer to 20 years than 100. For any energy security policy to be effective over the next 20 years, it must recognize the resource plenty--as opposed to the resource scarcity--that results from the free flow of capital and technology across an increasingly global resource base. That does not mean that importing countries should ignore the question of energy security, but that policies should go beyond "getting out of oil" or "making the world safe for oil production." Importing countries should consider alternative approaches that encourage safe and efficient development of this abundant resource, especially from regions other than the Middle East. In the process, energy security policy can capitalize on resource plenty and lessen, if not postpone, overwhelming dependence on Middle Eastern oil.

The Theoretical Paradigm

The idea that the world is running out of oil was foreshadowed by Thomas Malthus' contention that the more the world consumes its resources, the less it has left. More recently, in energy circles, the issue has been encapsulated in the concept of "resource scarcity," a term closely associated with Harold Hotelling's 1931 paper, "The Economics of Exhaustible Resources," which has shaped perceptions of oil supply ever since. Hotelling's fundamental argument was that the future price of oil is an inclining curve, largely because the volume of oil in the ground is a finite and fixed stock. Therefore, as each barrel is produced and consumed, remaining barrels become dearer and more expensive.

In the intervening decades, however, Hotelling's premise has been modified if not refuted by subsequent analyses, most notably that of Morris Adelman of the Massachusetts Institute of Technology, who succinctly points out that instead of fixed stocks of resources, there are only flows of reserve-additions. …