Roberto F. Aguilera and Marian Radetzki, The Price of Oil. New York: Cambridge University Press, 2015. x + 242 pp. $37 (paperback), ISBN: 978-1-107-52562-7.
According to data available from the United States Energy Information Administration (EIA), crude-oil production in the U.S. grew from just over 1.8 billion barrels in 2008 to more than 3.2 billion barrels in 2016: the largest annual production since 1974. This astonishing increase in production is attributable primarily to the “shale-oil revolution” and to a lesser extent to the “conventional-oil revolution.” These revolutions in relation to the history of global oil markets, their current impacts, and their potential future impacts are the subjects of Roberto F. Aguilera and Marian Radetzki’s enlightening book The Price of Oil. Anyone interested in oil markets, or energy markets more broadly, should add The Price of Oil to their reading list for its careful and informative analysis of the effects of these revolutions.
Aguilera and Radetzki open The Price of Oil by auditing the history of crude oil prices, which they show to be quite extraordinary in comparison to the price histories of other nonrenewable resources. The authors then explore the academic literature and augment that literature with their own analyses to debunk the common myths that OPEC behavior, depletion, and rising costs explain the abnormally high historical growth rate and volatility of oil prices. The first major contribution comes in chapters 5 and 6 where Aguilera and Radetzki describe the role that insufficient production capacity has played in oil’s extraordinary price history. The authors posit that state ownership combined with government greed have slowed capacity expansion, while certain manifestations of the “resource curse” have led to outright capacity destruction.
Several reasons for the wave of state resource ownership that began in the 1960s are provided, including the dominance of resource extraction industries in many nations’ economies, the immobility of resources, and the high rents associated with resource extraction. However, state ownership has led to inefficiently low investment in capacity expansion due to inexperience and rent-seeking behavior among state actors. Above-ground conflict associated with the resource curse has led to outright capacity destruction — for example, during the Iranian Revolution and subsequent war between Iran and Iraq. Government mismanagement eventually led to the re-privatization of many resource-extraction industries in the 1980s, but not the oil industry, which continues to be dominated by state ownership today. The authors attribute the continuing dominance of state ownership of oil to the relatively high rents associated with a lack of suitable substitutes. The shale and conventional revolutions are likely to loosen the grip of these oil states.
Part II of The Price of Oil describes the shale-oil and conventional-oil revolutions, their impacts to date, and their potential impacts in the future. The drastic increase in U.S. oil production highlighted in the introductory paragraph of this review is widely attributable to the shale-oil revolution, which started when the combination of horizontal drilling and hydraulic fracturing was applied to relatively impermeable shale-oil reservoirs after first being perfected in similarly impermeable natural-gas reservoirs. The economic benefits in terms of fiscal receipts and employment related to this increased oil production are drastic. The federal government’s share of tax revenue associated with shale-oil development would “suffice to fund 80 percent of the budgets of the U.S. Department of Interior, Department of Commerce and NASA combined” (p. 88). The benefits in terms of decreased prices paid by oil consumers are similarly massive. The U.S. benchmark oil price (WTI) averaged less than $50 per barrel in 2015 and 2016 after averaging more than $90 per barrel in 2013 and 2014. Some market observers question how long such benefits will last.
Responding to relatively pessimistic estimates from EIA and the International Energy Agency (IEA) implying that the U.S. shale-oil revolution will peak in 2020 before U.S. oil production returns to long-term decline, Aguilera and Radetzki point out that these agencies’ estimates are traditionally overly pessimistic, and cost-decreasing technological advancement has continued to surprise oil-market observers. The authors show that while the drilling-rig count in the Bakken Formation, the original epicenter of the shale revolution, fell dramatically in response to the precipitous fall in oil prices experienced at the end of 2014, oil production continued to increase. The authors attribute this counterintuitive outcome to productivity-enhancing and cost-reducing technological advancement, which surely played a central role. However, it must be pointed out that it is also partially due to endogenous well selection; that is, only the most productive wells are drilled during periods of low prices. Nevertheless, the shale and conventional revolutions are sure to continue to play a major role in international energy markets for years to come.
Another major contribution of The Price of Oil is its novel focus on what the authors refer to as the “conventional-oil revolution,” which encompasses the application of horizontal drilling and hydraulic fracturing to conventional reservoirs in an attempt to renew output from aging fields. Aguilera and Radetzki describe how both revolutions are likely to spread across the globe in coming decades leading to long-term production growth. The low prices associated with increased production will decrease rents associated oil extraction, and the authors posit a contemporaneous decrease in rent-seeking behavior and the negative effects of the resource curse. While it is clear that increased production in the U.S. will have this impact, it must be noted that some of the countries with the most production growth potential (e.g., Russia and China) might use their increased resource wealth as political weapons both domestically and internationally. Such actors will be checked by the degree to which their market power is diminished by increasingly competitive global oil markets.
The new oil revolutions are sure to impact our lives, and the lives of our progeny for decades to come. Roberto F. Aguilera and Marian Radetzki have taken a large step toward understanding these impacts in The Price of Oil by describing and analyzing the revolutions in historical and international context. The Price of Oil is a must read for energy-market observers around the globe.
Gavin Roberts recently earned his Ph.D. in economic from the University of Wyoming. His research focuses on integrating petroleum-engineering knowledge into economic models of crude oil and natural gas extraction.
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