≡ Menu

Crude Analysis

Here’s a letter to the Wall Street Journal:

Matt Morgan writes that “Petroleum is a finite resource.  We should import it from other countries now and preserve our reserves for future generations of Americans” (Letters, Aug. 10).

Mr. Morgan errs.  Petroleum is not a finite resource in the way that he supposes (namely, that the more of it that is used today the less of it there is available tomorrow).  One look at the data makes this point clear: world crude-oil reserves today are 150 percent higher than they were in 1980.

The explanation for this long-standing historical trend, and for the flaw in Mr. Morgan’s reasoning, is the fact that production is chiefly governed by economic incentives and only secondarily by physical constraints.  The production of petroleum – no less than the production of coffee, corn, and candy bars – increases as the return to producers increases.  A rise in the price of petroleum or (as instanced by the recent fracking boom) a fall in production costs intensifies producers’ incentives to discover and produce more petroleum.  One upshot of this reality is that Uncle Sam’s ban on crude-oil exports, by restricting the size of the market served by American oil producers, artificially lowers the return to producers of finding in America more sources of petroleum.  Given the immense economies of scale in today’s oil industry, the export ban likely lowers, rather than raises, the future amounts of accessible petroleum available in America.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

Also, export-ban proponents ignore the fact that petroleum is a commodity exchanged on a global market.  And they ignore the value that exports allow domestic firms and producers to purchase from abroad.  But those are other arguments.


Next post:

Previous post: