THE PETROLEUM CULTURE
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disruption in the years ahead. In addition, exporting nations may
wish to keep their oil in the ground to maintain their target price
range. In fact, there are considerable political and social uncertainties that could result in less oil being available than existing models
predict.
5.4.4 Price Swings
The price of oil, like the price of all commodities, is subject to major
swings over time, particularly tied to the overall business cycle.
When demand for a commodity such as crude oil exceeds production capacity, the price will rise quite sharply because both demand
and supply are fairly inelastic in the short run. Users of oil might
be shocked by much higher prices, but they have commitments
and habits that determine their energy use, and these take time to
adjust.
On the supply side, especially at the outer edge of existing production capacity, adding new capacity is time-consuming and
expensive. However, over time, both businesses and individuals
figure out ways to cut back their oil consumption in response to
high prices, and the high prices promote new investment in production and the arrival of new sources in the market, gradually
restoring a supply-demand balance. The extraordinary spike in
prices in mid-2008 represents to a large extent the consequences
of a brief period where global oil demand outran supply. When
supply exceeds demand, on the other hand, microeconomic theory says the price should collapse to the marginal cost of production of the most expensive source. As the price drops, the most
expensive wells become uneconomical and are shut down, at least
temporarily.
As global oil production begins to decline after peak oil, the
medium-term volatility of oil prices is likely to be higher than
before, because the range of production costs among all sources
supplying the market will much greater. Major oil fields exist
where the cost of production is relatively inexpensive and a large
portion of the world's supply still comes from such inexpensive
sources.
However, it is hoped that future shortages and high prices will
spur the development of oil sources with higher production costs,
including deep water sites, tar sands, oil shale, and secondary recovery from depleted fields. In the language of economic theory, the
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disruption in the years ahead. In addition, exporting nations may
wish to keep their oil in the ground to maintain their target price
range. In fact, there are considerable political and social uncertainties that could result in less oil being available than existing models
predict.
5.4.4 Price Swings
The price of oil, like the price of all commodities, is subject to major
swings over time, particularly tied to the overall business cycle.
When demand for a commodity such as crude oil exceeds production capacity, the price will rise quite sharply because both demand
and supply are fairly inelastic in the short run. Users of oil might
be shocked by much higher prices, but they have commitments
and habits that determine their energy use, and these take time to
adjust.
On the supply side, especially at the outer edge of existing production capacity, adding new capacity is time-consuming and
expensive. However, over time, both businesses and individuals
figure out ways to cut back their oil consumption in response to
high prices, and the high prices promote new investment in production and the arrival of new sources in the market, gradually
restoring a supply-demand balance. The extraordinary spike in
prices in mid-2008 represents to a large extent the consequences
of a brief period where global oil demand outran supply. When
supply exceeds demand, on the other hand, microeconomic theory says the price should collapse to the marginal cost of production of the most expensive source. As the price drops, the most
expensive wells become uneconomical and are shut down, at least
temporarily.
As global oil production begins to decline after peak oil, the
medium-term volatility of oil prices is likely to be higher than
before, because the range of production costs among all sources
supplying the market will much greater. Major oil fields exist
where the cost of production is relatively inexpensive and a large
portion of the world's supply still comes from such inexpensive
sources.
However, it is hoped that future shortages and high prices will
spur the development of oil sources with higher production costs,
including deep water sites, tar sands, oil shale, and secondary recovery from depleted fields. In the language of economic theory, the