May 09, 2004

Tyler's Right, Parapundit's Wrong

Tyler Cowen is right that increased PRC demand for oil does not impoverish the US. And Parapundit is wrong in thinking that higher prices will necessarily enrich current OPEC nations at oil consuming nations' expense.

The secret is in the difference between oil reserves and oil endowment. We are currently ending an era in the oil market where Saudi Arabia (SA) has kept a great deal of its production capacities off-line so it could serve as a swing producer. This kept high cost producers off the market because SA could, at will, make them take a loss for as long as SA wanted, bankrupting anybody foolish enough to bet against the Saudis. But SA has announced that they don't have any more significant unused production reserves. They're going flat out like most everybody else. This means that marginal, high cost producers like Canada's oil tar sands operations can expand in economic safety. Nobody's going to drop the price of oil below their $12/barrel production costs. Thus, high prices will increase supply and we will all come to a new equilibrium with Canada becoming a major oil supplier.

In fact, a bunch of countries that are outside of OPEC have huge endowments of oil that are not counted as reserves because they fail the test of being economical to extract at current prices. Sure, PRC demand will raise energy prices but it will also enlarge the economy. On net, it will be a boon to the world, including the US, for the PRC to grow rich (and hopefully even free). To say otherwise is to say that for every economic winner there must be a loser and trade of any type is at most a necessary evil. This is foolishness on a grand scale.

Posted by TMLutas at May 9, 2004 12:30 PM