I work in for an Oil and Gas company and I've been employed in the industry for the past 16 years. There have been a number of stories circulating in the mass media lately about the fact that petrol is trading in the $38 per barrel range and what, if any, effect this is having on the economy. Ergo, what effect will these facts have on the U.S elections in November 2004.
It's been noted that prices for gasoline are hovering in the $1.70 per gallon range. However, the fact that oil is at $38 per barrel and that gasoline is at $1.70 per gallon has to be taken into persepctive. A good place to start in looking for knowledge about the economics of oil and gas is the website of the Energy Information Agency. There, you can find inflation index data on what prices have been like in the past verses what they are now.
One of my earliest memories I can recall as a boy was stopping off on the interstate on a family vacation trip in 1972. We stopped at a Mobil station, where I can still remember that the price of a gallon of gasoline was about 35 - 40 cents. I was astonished to find that this is roughly equal to $1.70 in today's prices, which means that over the past 32 years, the price of gasoline has not changed.
The thought beckons - does that mean that current dollars will also only be worth 20 cents by the time I turn 70 years old? If so, I have some work to do in order to make sure I have enough for retirement! Of course, this includes the high inflation years of the 1970's, but considering what is happening with today's Fed, I would not put the idea behind that inflation might break loose again in the future.
As for the here and now, there already have been words and deeds being done over energy. The Senate voted to stop filling up the wasteful "Strategic Petroleum Reserve," but it looks as though that matter will be going nowhere. Strangely enough, much of the original stock for the SPR was purchased and filled in the late 1970's, when oil was $15 - $30. In today's dollars that meant that that oil was purchased for over $50 a barrel. So, the American taxpayers have been hosed in the name of "energy security."
In general, since the SPR is a government asset, it means that it can be used to help buy an election. Think I'm wrong? Well gentle readers, former President Bill Clinton did just that in September 2000, when he ordered the sale of crude out of the SPR just weeks before the election. Democrats I knew were screaming at the top of their lungs that this was all done in the name of sparing the poor average Joe of high oil prices. President Clinton was just acting in the public interest.
And I'm sure that I've got a bridge to sell you in New York.
In the 1931, a Columbia University economist named Harold Hotelling wrote one of the most useful papers ever published regarding natural resources. His idea, naturally, is called The Hotelling Theorem, but is also known by its other name, the Theory of Exhaustible Resources. Hotellling's original paper can be found in the Journal of Political Economy, volume 39, pages 137-175, 1931.
In his paper, Hotelling noted that even though resources can potentially be exhausted, they can - AND SHOULD - still be looked at as any other form of asset. As such, they should be treated, economically, as any other form of asset. If a resource is declining in abundance, the price will then need to rise at a level of at least the rate of interest in order to draw more resources in order to discover more of it. Otherwise, it makes no sense to invest in more resources because you can make better money leaving your money in the bank.
If petroleum really becomes scarce in this world, the price will indeed begin to rise in real terms. But all that will do is signal to all of us that we should use less of it. It also will make alternatives to petroleum more attractive to use.
My own feeling is that over the long run, the marketplace is guiding us to a world of using petroleum from tar sands and oil shale. In the meantime, sometime in the 21st century, the efficiency of solar cells may rise to a level where solar energy may finally become economically as cheap as fossil fuels. In any case, we are headed towards a future of astonishing energy abundance. And that is a positive thought.
Take that all of you endlessly pessimistic (and endlessly wrong!) doom sayers and environmentalists!