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Brooks Wilson's Economics Blog: Spontaneous vs. Government Order and Oil

Thursday, February 10, 2011

Spontaneous vs. Government Order and Oil

In 1973, Arab oil producers cut production and began an embargo of the United States in response to the government’s decision to supply the Israeli military during the Yom Kippur War.  In the short run, neither demand nor supply are responsive to prices.  As Arab nations withheld oil, prices surged and in a misguided attempt to manage rising prices, the government instituted price controls that added fuel to the crisis and energized a government subsidized search for alternatives to oil.  

Wind, solar and ethanol have largely been failures and still heavily rely on subsidies.  Programs to encourage conservation have spent taxpayer dollars but were the expenditures necessary?  In the summer of 2008, did consumers need incentives from Uncle Sam to conserve gas?

The spontaneous interactions of consumers and producers has mitigated the problem.  High prices encouraged oil exploration.  New sources oil were found.  Deep water drilling and other technologies were developed.

This is but one chapter in a long story of the battle between scarcity and market led innovation in oil production.  Jonathan Fahey reports in “New drilling method opens vast oil fields in US” that a new and non subsidized drilling technology first developed for extracting natural gas but now applied to oil has the potential to greatly expand U.S. production.
Companies are investing billions of dollars to get at oil deposits scattered across North Dakota, Colorado, Texas and California. By 2015, oil executives and analysts say, the new fields could yield as much as 2 million barrels of oil a day — more than the entire Gulf of Mexico produces now.

This new drilling is expected to raise U.S. production by at least 20 percent over the next five years. And within 10 years, it could help reduce oil imports by more than half, advancing a goal that has long eluded policymakers.
As with other market developed technologies, it is cost effective.
…drilling for shale oil is not dependent on high oil prices. Papa [chief executive of EOG Resources, the company that first used horizontal drilling to tap shale oil] says this oil is cheaper to tap than the oil in the deep waters of the Gulf of Mexico or in Canada's oil sands.
Problems remain.  Oil is still a finite resource and like all energy sources, it pollutes.  If environmental critics are right, and burning oil results in global warming by releasing carbon into the atmosphere and warming is costly, then developing relatively cheap new sources of oil is a mixed blessing, but a blessing nonetheless.  Other things equal, I would rather struggle with carbon emission with relatively cheap oil prices.


  1. Tracey Marsh11/2/11 9:27 PM

    I am all for alternative energy. If there were a ready-made cost-efficient way for U.S. consumers to cease using oil based energy, I believe the majority of people would switch in a heartbeat. BUT, for right now at least, Oil is king. Efforts to produce more oil within U.S. borders should definitely be pursued and funded vigorously. It may be a put-off intially, possibly even displacing citizens for land drilling. While I would hate to have to move for an oil company, I sure would love to pay $2 a gallon or less for my gas. Point being, alternative energy has amazing potential, but oil is the current state of things. Anything to help the right now should be considered.

  2. Stephanie Tunches12/2/11 11:25 AM

    I agree with Tracey. Alternative energy is a great thing, and if we could stop using energy that's coming from oil, we'd all be in great shape. I love the fact that these companies are investing so much money in oil deposits here in the U.S. Anything to help Americans pay less for oil-related energy sources is a plus for me, even if it has some negative impacts initially.

  3. Alicia Castro(macroeconomics student)13/2/11 10:01 PM

    I am all for alternative fuels that can help us as a society continue to live our luxurious living styles that include driving and home heating systems. The issue of drilling for oil here in the U.S is a matter of opportunity cost. One of the many things that are going to be given up to make this project successful is land. What I question is, will Americans agree with giving up their land for cheaper oil? Although this might seem like a question with an obvious answer, I personally would say no. I strongly believe in using as few nonrenewable resources as possible. The fact that so much oil is going to be extracted from our American land is devastating to me even if it does mean having to buy expensive gas. Maybe with the high prices on gas, many people will stop driving less and air pollution will be less as well.

  4. carla Wilson student13/2/11 11:36 PM

    I am for alternative fuels. Opportunity cost is with the issue of drilling oil in the United States. Investing in the oil deposits in the United States helps us Americans pay less for energy sources. Paying less for putting gas in our vehicles would help woth gas expenses but gas is something that we need to put in our vehicles so even when prices are sky rocketed we are still paying the price that it is per gallon

  5. I believe that it is important for to continue to explore alternative fuel methods. However, I also believe that, until we are able to find that method and completely get away from using oil, it is important for us to move forward with drilling on our own land. It would benefit many Americans to have cheaper fuel cost, but more importantly we need to decrease our independence on the Middle Eastern countries currently supply us with oil. That region becomes more and more hostile everyday and we continue to lose our allies from that region. I feel that American should do everything that we can to become as independent as possible.
    Kim Huffman

  6. I work offshore and right now we are getting more work than we have in several years. Foreign companies are holding out for the money and they can charge any amount they want because oil is a "finite resource". It seems to me that it doesn't matter how much other nations choose to charge for oil, Americans will pay it and raise prices for their inhabitants.

  7. Since wind, solar and ethanol have seemed to fail the replacement of oil. Then we should try another substance that not only replaces the need for oil but will also not pollute our atmosphere, so we won't have to worry about global warming. Eventually we will run out of oil later in the future, so instead of waiting and using up all of the oil that our earth's land has, why don't we figure out a solution for a replacement of oil now before it's too late? We have to come up with a solution sooner or later. It's sad to think that people would rather let as much carbon go into our atmosphere in order to get a cheaper price on gas. The people of this earth are willing to let our earth die before saving it a solution.

  8. Brittany Williams (macroeconomics student)
    I believe in alternative energy. It is a good way to have our energy and is a better substitute for the environment. If their was a handy way to use an alternative energy that is very cost-efficient it would stop the use of oil based energies. The use of alternative energies will definitely be reached in the near and distant future and have amazing effects. People would hopefully change from the use of oils to the use of new alternative energies. The change might be affective such as putting off workers who work on the oil rigs, but it could also lower the cost of gas prices for vehicles because they would be less needed. If alternative energies are reached it would have great possibilities to help our planet and people.