Spencer Dale on the new economics of oil

Duncan Weldon alerted Twitter to this very nice think piece by my old boss, now at BP.

One of the points he makes is how new reserve discoveries have been outpacing oil consumption.  And he uses that to question whether  the old Hotelling model of oil as an ultimately exhaustible resource is now not right for the job.

I wonder.

First, Spencer is making a practical point.  In principle, oil is an exhaustible resource nonetheless, given the pace at which current biomass generates it, relative to current consumption.

Second, as Spencer discusses, we might presume that sooner or later the world will get its act together to make sure that not all the carbon-generating fuel that we have is consumed, to limit climate change.  In which case, new discoveries don’t add to the amount of oil that can and will be consumed.

There’s a lot of uncertainty about how soon and how effective collective action will bite.  And there is the possibility that clean technologies may expand what’s burnable.  But right now, a rational oil price-setter/discoverer would surely start, at least from a precautionary principle, with the view that we won’t find a way to burn all of that oil.

But the science of climate change would seem to make Hotelling’s model of exhaustion, or some version of it, as relevant as ever.

Discovering more oil whose burning we ban would be like discovering oil in the middle ages.  During those times there were no doubt frequent discoveries of seeping oil and gas, but since they had few known uses, they could not relieve the energy scarcity at the time, which would have involved the quantity of burnable wood.

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2 Responses to Spencer Dale on the new economics of oil

  1. Magnus says:

    Doesn’t make sense. If the price of oil increases at the rate of interest, then so does its marginal benefit. An efficient solution then implies that oil does not exhaust, or ever stop being used, as presumably the marginal externality costs are not infinite.

    • Dave Chapman says:

      Oil prices have been so volatile over the last 50 years that I am unable to make any conclusion about what the marginal benefit of oil might be, or whether its price is increasing at the rate of interest.
      The current volatility of petroleum looks a lot like the volatility in the price of whale oil, in the period after 1865.
      I don’t think that anybody else is able to figure out these numbers, much less ratios of them.

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