The Shocks of a World of Cheap Oil

Courtesy Reuters


Oil prices have been flirting recently with $25-$30 per barrel, levels almost reminiscent of the oil shocks of the 1970s. Rising energy prices have been accompanied by the usual hysteria about dwindling supplies and potentially dangerous transfers of wealth, tempting policymakers to consider ways of dealing with a coming oil crisis. But contrary to much received wisdom, the energy problem looming in the early 21st century is neither skyrocketing prices nor shortages that herald the beginning of the end of the oil age. Instead, the danger is precisely the opposite; long-term trends point to a prolonged oil surplus and low oil prices over the next two decades.

Paradoxically, this scenario of plenty could destabilize oil-producing states, especially those in the ellipse stretching from the Persian Gulf to Russia. And although the economies of the United States and oil-importing developing nations would by and large benefit, the backfire of low oil prices could undermine U.S. policy assumptions and imperil U.S. interests.

Both the popular and the elite media -- from Parade asking "Could It Happen Again?" to Scientific American, no less, proclaiming "The End of Cheap Oil" -- are peppered with forecasts of gloom and doom about energy security. But the "sky-is-falling" school of oil forecasting has been systematically wrong for more than a generation. In its dramatic 1972 "Limits to Growth" report, the group of prominent experts known as the Club of Rome wrote that only 550 billion barrels of oil remained and that they would run out by 1990. In fact, the world consumed 600 billion barrels of oil between 1970 and 1990, and there are today more than a trillion barrels of proven reserves (recoverable at current prices under current conditions). This figure is likely to continue rising even as global consumption exceeds the current 73 million barrels a day. Indeed, the International Energy Agency says that there are 2.3 trillion barrels in ultimate recoverable reserves, and if unconventional sources such as tar sands and shale are included, the number

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