(DP 1979-12) Limits to the Price of Oil

Theodoro M. Santos


Are there natural limits to the seemingly incessant rise in oil price? The problem requires knowledge of whether the so-called energy "crisis" results from the exhaustion of oil or energy resources or from the exercise of monopoly power by the oil producer. Investigation of price, production and discovery of new oil deposits before 1973 that the world is far from exhausting oil resources. On the contrary, the growth of supply had been outpacing demand. The energy crisis, therefore, is not caused by natural scarcity. It is contrived. Contrived scarcity is subject to the laws of demand and supply. Analysis suggests as much as 40 percent concentration in demand in five years and about 300 percent in 20 or more years, if the 400 percent increase in price remains. Similarly, oil supply is expected to increase four times in 20 or more years. These figures, however, cannot be realized if political and social environment will substantially change. Among the natural forces exerting downward pressure on price are the supply increases in the world market. This is brought about by the (1) new oil reserves in the Organization of Petroleum Exporting Countries (OPEC) and the non-OPEC countries; (2) entry of China and Russia; (3) development of alternative sources economical at prevailing prices; and (4) development of breeder nuclear reactors, fusion reactors and solar energy. This paper shows there are natural limits to monopoly pricing. If allowed to freely operate, the energy market will determine prices according to demand and supply. Such prices are expected to be much lower than the prevailing.

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