The economist’s view of oil supplies vs. the on-the-ground one

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I didn’t notice this one until late in the day Thursday: On the op-ed page of the day’s Washington Post there’s a George Will column pooh-poohing talk of an oil crisis. Then, on the front page of the W$J, there’s a fascinating article about the decline of a major Mexican oil field. It’s a nice case of on-the-ground reporting trumping punditry, and as somebody who does more of the latter than the former, it’s a cautionary tale.

The first part of Will’s column, in which he points out that, when adjusted for inflation, gas prices are no higher now than they were in 1982, is fine. But then he trots out Morry Adelman.

In 1979, President Jimmy Carter, an early practitioner of the Oh, Woe! School of Planetary Analysis (today Al Gore is the dean of that school), said that oil wells were “drying up all over the world.” Not exactly.

In 1971, according to M.A. Adelman, an MIT economist, non-OPEC countries had remaining proven reserves of 200 billion barrels. After the next 33 years of global economic growth, Adelman says, those countries had produced 460 billion barrels and had 209 billion remaining. As for OPEC countries, in 1971 they had 412 billion barrels in proven reserves; by 2004 they had produced 307 billion and had 819 billion remaining.

As someone who has gone to the Adelman well himself and come back with what has turned out to be a pretty wrongheaded forecast of looming OPEC weakness, I am dubious. Adelman was spectacularly right once in predicting that the oil crisis of the 1970s would pass. But now I’m not so sure his purely economic model of the oil market–in which supply shrinks and grows (mostly grows) with the price of oil–is the most helpful way to view the world now.

From the Journal article on Mexico’s giant Cantarell field:

From January 2006 though February 2007, Cantarell lost a staggering one-fifth of its production, with daily output falling to 1.6 million barrels from two million.

The oil industry was stunned. Cantarell, which currently produces one of every 50 barrels of oil on the world market, is fading so fast analysts believe Mexico may become an oil importer in eight years. That would batter Mexico’s economy, which depends on oil exports to fund 40% of its government spending.

I’m sure some of Adelman’s magic is at work in oil markets right now. New oil fields are being found; previously uneconomic Canadian tar sands are being mined. But you don’t have to be a peak oil true believer to acknowledge that at some point oil will be proved to be a finite and shrinking resource, and there are worrying if tentative signs all around that we may be nearing that point. Trotting out the great false alarm of the 1970s, while it’s a helpful reminder that the gloom-and-doomers can get ahead of themselves, doesn’t really prove anything at all.

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