April 1, 2004
Oil Econ, Once More
Arnold KlingI really like Edward Lotterman's latest.
No one studies elasticities of demand for oil more than OPEC. Its leaders know that in the very short term — i.e., a few weeks or months — a 10 percent price hike may cut their sales only 1 percent or less. But in the long term, price hikes cut OPEC member nation revenues....A century from now, there will still be billions of barrels of crude lying unpumped beneath the sands of the Middle East just as there still are large quantities of copper in Montana and Arizona. Like such copper, the oil simply won't be worth pumping because no one will be willing to pay much for it.
Nor should we worry unduly about maintaining dutifully friendly regimes in the Middle East or even Venezuela.
...Oil is an extremely fungible product. What matters is global supply and global demand. Blocking flows between any two particular countries or sets of countries is meaningless except in the very short run. Don't lose any sleep over this issue.
For discussion, go to one of the previous posts on Oil Econ.
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