Re: replenishment

["J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>]

Paul,
     Just because a resource is finite does not
tell us what the near term price movements for it
will be.  The Hotelling model makes a forecast of
such prices rising at the real rate of interest.  But
his model assumes a) perfect information, b)
perfect competition, and c) constant technology.
None of these three assumptions holds.
     I would observe, as I did in a paper you once
published in the JPKE by me back in 1981, that
over time there is an oscillation in the industrial
organization of the world petroleum industry between
more competitive and more monopolistic, with
neither form being able to maintain itself over time.
This oscillation tells us more about the shorter term
fluctuations of the price of oil than anything else.
In 1973 we had a major outbreak of increased monopoly
power that pushed the price up.  It fluctuated at a high
level after that until 1986 when the Sa'udis got tired
of the cheating on OPEC by the warring Iran and Iraq
and crashed the price by increasing output.   More
recently we have seen some outbursts of higher prices,
although these have not been sustained.
Barkley Rosser
----- Original Message -----
From: "Paul Davidson" <pdavidson@xxxxxxx>
To: "J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>
Cc: <pkt@xxxxxxxxxxxxxxxx>
Sent: Tuesday, April 30, 2002 3:56 PM
Subject: Re: replenishment


> At 01:27 PM 4/30/02 -0400, you wrote:
> >      That there may be deeper pools of oil does not
> >disprove the dinosaur or other biological origin theories
> >and certainly does not make oil a "renewable" or
> >"non-finite" resource, although it may suggest that
> >there is more of it than many believe.
>
>
> In 1973 I presented a paper at Brookings (reprinted in Brookings Papers on
> Economic Activity) -- coauthored by a graduate student of mine (Hoesung
> Lee) and an Assistant Professor  colleague (Larry Falk) -- in which we
> argued -- and prevented some econometrics evidence to show -- that there
> was a lot more oil than most people suspected.  At the time, Bill Nordhaus
> had written a paper that was widely quoted as the everlasting truth, that
> the price of oil would reach $100 a barrel in real  terms by the year
2000.
> While the implications of  our paper was that if there was ever a free
> competitive market for crude oil, we would be drowning in the stuff at the
> 1973 market price  - and the price in the year $2000 might be somewhere in
> the neighborhood of $8-15   (in 1972 dollars) by the 1990's    --although
> we  did not take into account of Congressionally mandated mileage saving
> requirements for automobiles-- legislation passed after we had written
> the  paper
>
>    Although both Nordhaus and we overestimated the actual real price of
oil
> by the end of the 20th century, guess who was closer to the correct real
> price!  But who remembers that -- and therefore Nordhaus remains a
> glimmering (if small) star in the Economics Establishment --and I was
> relegated to the status of a "kook".
>
> Art Okun (of Brookings) had asked Robert Solow and Charlie Schultze to be
> the discussants of my paper.  Solow was so incensed that I was making
light
> of the mainstream - Malthusian --idea that we were running out of oil --
as
> a non-renewable resource--that he told Okun he would not dignify the
> Davidson paper by being  a discussant..
>
>   Schultze remained as a discussant -- but lambasted me for not knowing
> anything about the basic concept  of scarcity, i.e., that the rise in the
> market prices of oil was an inevitable result of scarcity (running out).
>
>   Of course, I was the only one of these guys who have ever met a payroll,
> i.e., I had been the Assistant Director of the Economics Division of an
oil
> company and had been privy to many private petroleum engineering reports.
>
> Paul
>
>
>
> Paul Davidson
> Editor, Journal of Post Keynesian Economics
> Economics Department - 523 SMC
> University of Tennessee
> Knoxville, Tennessee 37996-0550
> phone # (865) 974-4221
> fax # (865) 974-1686
> home phone  (865) 692-0802
> http://econ.bus.utk.edu/Davidson.html
>
>
>
>
>