Oil Honesty

By Felder, Frank A. | Harvard International Review, Winter 2007 | Go to article overview
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Oil Honesty


Felder, Frank A., Harvard International Review


Matthew Simmons joins the crowd of oil doomsayers in his article "Shock to the System: The Impending Global Energy Supply Crisis (Fall 2006)." For these doomsayers to be right, we would have to run out of oil relatively soon, without anyone realizing it in time. Not likely.

There's no doubt that we have serious energy and energy-associated environmental problems that require immediate attention. But let's not allow the severity of these problems to cloud our analysis. Folks have been predicting the end of oil for decades, and they've been no more correct than all those who've been predicting the end of the earth for centuries. But in fairness, logic dictates that the doomsayers are correct to note that the amount of oil on the earth is finite. That alone, however, is not enough to argue that we will reach oil's limit imminently. Doomsayers' analysis fails to account for the fact that as oil becomes scarce, its price rises. This elevation spurs technological improvements on the supply side and conservation and energy efficiency on the demand side.

There are plenty of oil reserves, as the recent discovery in the Gulf Coast illustrates, as well as extensive reserves of less-conventional supplies such as tar sands and oil shale. If push comes to shove, we can expand the use of hybrid vehicles and even switch to electric or hydrogen-powered vehicles. Civilizations have successfully made the transition from one fuel source to another, and we can make the next one as well.

That being said, there are still two big problems with oil. The immediate one is that so much of it is controlled by an unstable cartel, which results in wildly fluctuating prices, major political instability, and military conflict. From political, economic, and moral points of view, it makes no sense to be so dependent on unstable oil supplies, especially given the consequences in lives and treasure. As Simmons points out, there are several key choke points in the oil supply chain that make it vulnerable to disruptions. These only exacerbate price volatility and problems. Volatile oil prices make it tough to distinguish between short-term price spikes and long-term trends; in turn, this makes even more difficult the decision companies face about whether to sink billions of dollars in capital investments that could be wiped out with a price drop.

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