RETROSPECTIVE ON OIL PRICES

Energy is the most abundant resource in the universe. While energy supplies are unbounded, useful energy is not. To convert naturally occurring energy resources into useful work, mankind must invest capital and labor–resources that normally are scarce. To produce or use primary energy, both producers and consumers must invest in specialized and often inflexible equipment. In calculating the perceived value of present and future oil supplies, the Organization of Petroleum Exporting Countries and almost everyone else mistook for economic rent the windfall profits associated with short‐term rigidities in energy use. Attention focused on the cost of manufacturing a synthetic crude oil, rather than on the incremental cost of changing consumption patterns in end‐use markets. Mis judgments on the future value of oil were compounded by ill‐conceived government policies and inaccurate forecasts. Substitution of oil for other energy commodities can occur at nearly every point along the chain downstream from the production of primary resources, but it occurs most abundantly and importantly at the point of final consumption. Liquid petroleum remains the cheapest fuel to transport, chiefly because a vast infrastructure already exists to handle it. The steady advance of technology explains the long‐term decline in the real prices of most products, including retail energy prices. Often, the increasing unit costs of harvesting or extracting a finite scarce natural resource have been more than offset by improvements in manufacturing or end‐use technology. The mix of commodities bought and sold in the next generation may be unrecognizable to today's consumer. Thus, the cost of any one primary resource or intermediate product may be irrelevant.