Re: OPEC & Oil Prices - Solow

["Gunnar Tomasson" <tomasson@xxxxxxxx>]

Paul:

In the early 1980s, I had occasion to ask Bob Solow why mainstream
economists reason AS IF "investment" was financed with "savings" when, in
fact, NEW CREDIT was routinely used to finance both "investment" and
"consumption"?

This soon-to-become Nobel Laureate replied that it would raise difficult
questions to suppose otherwise!

Gunnar


So Art Okun commissioned my study. The papers are then sent
> to discussants who have preliminary discussions with the author before
> preparing remarks and the whole thing is then presented at a meeting the
> Brookings Institution before being published in the Brookings Papers.  The
> original two discussants of my study were Bob Solow and Charlie Schultze.
>
>          At the last minute Bob Solow refused to be a discussant on my
> paper -- primarily because I attacked the neoclassical view that
investment
> decisions were made on the assumption that the future was reliably
> predictable in the actuarial sense  (see the first few pages of my
> published paper where I explicitly list the assumption underlying the
> orthodox model and why it is inapplicable--- for example it does not
assume
> "user cost" inventory hoarding -- and thus my use of government statistics
> on "shut-in" wells on Federal lands to show the empirical importance of
> such behavior. The use of such statistics apparently angered Bob Solow .
>
>
>
>
>
> >Some would argue that the periods of decline were a result of the fact
> >that every
> >year there is less oil to find.  If the industry does not develop better
> >technology
> >and expertise every year, oil and gas completion rates should decline.
> >However,
> >this does not explain the periods of increase.  The increases of the
> >seventies were
> >more related to price than technology. When a well is drilled, the fact
> >that oil or
> >gas is found does not mean that the well will be completed as a producing
> >well.
> >The determining factor is price economics. If the well can produce enough
> >oil or
> >gas to cover the cost of completion and the ongoing production costs it
> >will be put
> >into production.  Otherwise, its an economic dry hole even if crude oil
or
> >natural
> >gas is found.  The conclusion is that if real prices are increasing we
can
> >expect a
> >higher percentage of successful wells.
>
> Even when well have finished their productive life and are closed down, --
> as much as 1/3 to 1/2 of all the barrels of oil in the field under the
well
> remains underground. With an increase in price, it may pay to use
secondary
> and tertiary recovery methods to flush  out some of the remaining crude.
>
>
> Paul
>
>