projects over the next several years both in production as well as in refining.
However, these projects will take time to come onstream. In the
meantime, the world is becoming not only less safe, but also “flat,”1 or
smaller, so that political and security problems in one part of the world—
like Venezuela, Nigeria, Russia, and Iraq—affect people elsewhere. The
global nature of the oil market makes it even more susceptible to geopolitical
tension, and that typically adds something like a 15 percent premium
to the actual oil price.
Just about everyone I know believes that high oil prices are here to
stay because world oil production may be nearing its peak, after which
we shall see a decline of about two percent per year for the foreseeable
future. That’s unfortunate because demand for oil, meanwhile, is traveling
the other direction—rising. The signs are everywhere of a potential
huge problem in the near to long term: Our fuel supply system is already
failing to keep up with demand, a situation that, as every economist
knows, could lead to a total breakdown of free market economy. Since
supply represents how much the market can offer, the quantity supplied
refers to the amount of a certain good producers are willing to supply
when receiving a certain price. In basic economics, the correlation between
price and how much of a good or service is supplied to the market
is the supply relationship, and so price is a reflection of supply and demand.
The relationship between demand and supply underlies the forces
behind the allocation of resources. In a market economy like ours, therefore,
we depend on demand and supply of commodity goods like oil to
allocate resources in the most efficient way possible.
A bigger debate is raging on how fast oil deposits around the world are
getting depleted, and increasingly that debate is getting politicized.
Broadly speaking, that debate pits geologists, who have been dubbed pessimists,
against economists, who are seen as optimists. I’m not sure if
these labels help the debate, but here’s what I have to say: By the very nature
of their profession, traditional free market economists are an optimistic
lot, and often their views are in conflict with traditional scientists,
who, by the nature of their professions, aren’t as optimistic, though not
necessarily pessimistic. It might be more accurate to call most scientists
cautious. This debate, now dubbed the “peak oil,” has drawn a fault line
between the business community, particularly the oil industry, and the
environmental community, particularly geologists. The stakes are huge
and, since most governments don’t know what to do, some have chosen
THE END OF AN ERA? 19