Wednesday, September 28, 2005

Finding Oil

For some reason, people always seem surprised when they observe people responding to changes in price. According to an article I read this morning (found via Drudge):

Saudi Arabia, the biggest oil producer, and Exxon Mobil, the largest oil company, yesterday declared that the world had decades' worth of oil to come, in an attempt to calm fears about the record prices experienced in recent weeks.

Forming a powerful alliance, the Saudi oil minister Ali al-Naimi said, at an industry conference in Johannesburg, that the country would soon almost double its "proven" reserve base, while Exxon's president, Rex Tillerson, spoke of 3 trillion or more barrels of oil that are yet to be recovered.

Mr Naimi said that Saudi Arabia would "soon" add 200 billion barrels to its current reserves estimate of 264 billion barrels.

Did billions of barrels of oil just magically appear? Not quite.

As the price of oil rises, the costs of exploration and R&D have greater recoverability, translating to a higher expected return. When the price of a scarce good goes up, we can expect that people will try to produce or find more of that good to sell at the high prices.

Prior to a rise in oil prices, it may not have been a worthwhile investment to search for more oil or find alternative energy sources. Fortunately, I do not have to go to Saudi Arabia and tell people to start finding more oil for me to consume. The price signals that the market sends combined with the desire to make a profit are more than sufficient.

1 comment:

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