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The Economics of Oil, Part I: Supply and Demand Curves
Posted by Prof. Goose on August 19, 2007 - 11:20am
Topic: Economics/Finance
Tags: 1973, 1979, demand, eia, elastic, elasticity, iea, inflation, markets, oil, oil demand, oil prices, oil shock, saudi arabia, supply [list all tags]
This is a guest post by Robert Smithson, a portfolio manager at a London based investment fund.
This is part one of a two part article on the economics of oil price demand. The second part looks at the economics of peak oil, and how the oil fits into an overall energy demand curve.
Introduction
“The world is consuming more oil than it is producing.” --The Economist, July 14-20 print edition.
Wow, that’s a shockingly foolish statement. Each day approximately 84 million barrels of oil are extracted from the earth, and approximately the same amount is consumed. It can be no other way: inventory space is limited, and could not be extended significantly by “excess production” or indeed drawn down for long by “excess demand”.
The problem is a basic lack of understanding of economics. And The Economist is hardly the only culprit.
Take the IEA’s latest Oil Market report:
Global oil product demand is expected to rise by a robust 2.5% to 88.2 mb/d in 2008… Non-OPEC supply in 2008 is forecast to reach 51.0 mb/d.
But of course, as any economist will tell you, there is no simple supply number and demand number: there is only a demand curve and a supply curve. And the key to all of this is to understand that demand can never outstrip supply, there is never a supply “gap”, there is only the price at which the market clears.
Supply and Demand
The study of supply and demand inside a market is known as micro-economics. (This differs from macro-economics, which is the study of inflation, unemployment, and the like.) So, let us take a simplified market; it has a demand curve that looks like this:
The x-axis is the price, and the y-axis is the demand. There is an inverse correlation between price, and quantity demanded. If we pretend this is the car market, then we see that at lower price levels, people who couldn’t previously afford (or justify) cars can now buy them, and that some families which previously owned one car, will spend on a second. Demand varies with price. And the same is true of supply:
If the price rises, so will supply. At first, this can be difficult to appreciate; surely supply is a function of how many factories make cars? But supply is “elastic”, it does grow with price. In the short-term, higher car prices encourage factories to run with two or three shifts and to pay over-time. Longer-term, higher-prices will feed into firms’ capital expenditure decisions: new machines will be bought. Higher prices mean more supply.
Economists put these two curves together, the demand and the supply to understand a market:
The market price is the point at which demand meets supply. That is, there is a price level where the level of demand is equal to the level of supply. This point cannot be emphasized enough: the market will clear. In any normal market, there cannot be enormous inventories of unsold products, or millions of people willing to pay the prevailing market price… yet unable to do so. An excess of supply, or shortage thereof, is merely another way of saying that the clearing price is moving. And markets will clear.
Oil Supply and Demand
The market for oil is unusual, because – in the short-term – both demand and supply are highly inelastic. Irrespective of what petrol costs, your car cannot easily switch to another fuel. Ships and aeroplanes cannot move from diesel oil and kerosene for their propulsion. If it’s freezing cold, and you need to heat your house, the only option may be to pay more for heating oil. Likewise, if the price of petrol was to halve, you would not drive twice as far, or turn the thermostat up from 22 to 44.
The result is that the short-term demand curve looks like this:
In other words, a large change in price only has a small impact on demand.
Supply of conventional oil is also relatively inelastic, although for a different reason. The actual cost of pumping a marginal barrel of oil is relatively low, once the capital expenses of prospecting and building an oil rig (and associated infrastructure) has been put in place. An oilfield will cost roughly the same to operate whether it is producing at 50% of capacity or at full capacity. Given this, once you have an oil field in place, producers will tend to pump at their maximum sustainable rate. Of course, there is always some flexibility: old wells can be “uncapped”, scheduled maintenance can be postponed, and greater concentrations of gas can be pumped into the well. But these have costs, and oilfield owners are loath to do these, unless the price of oil is high enough to justify it.
The result of this is that the oil market is one where small changes to the supply or demand curve cause large changes to the clearing price.
The Oil Shocks of the 1970s
This model can be applied to the oil price shocks of the 1973. Following US support for Israel in the Yom Kippur war, the newly founded OPEC announced it would stop selling oil to the US, and would restrict its overall oil output. Because OPEC supplied so much of the world’s oil, this had the effect of changing the shape of the supply curve. In other words, for any given price level, there would be less oil supplied:
As can be seen from the chart above, this restricting of supply caused the blue supply curve to move to the left, and – as the market must clear – the price rocketed. Dropping out of theory and into practice, we see that this is exactly what did happen. The price of Saudi Light oil jumped from under $3 a barrel in 1971 to almost $40 by 1980.
Other Short-Term Changes to Supply and Demand Curves
It is not only sellers’ cartels that affect the oil price. When Hurricane Katrina knocked out production in the Gulf of Mexico it had a similar effect: the supply curve was shifted to the left and prices rose.
The rise of emerging markets has also changed the supply and demand dynamics. As China, India and the like industrialize, and their emergent middle classes buy cars, then the demand curve moves to the right. For any given level of price, more oil is demanded. As the chart below shows, this has exactly the same impact on the clearing price of oil as does reducing supply: the price moves, and sharply.
Long-term Supply and Demand Dynamics
But this analysis misses one key point. Oil demand and supply may be inelastic in the short-term, but in the long-term, they are remarkably elastic. Hurricane Katrina does not cause a long-term change in consumer behaviour; but if long-term expectations for oil prices rise, then both the demand and supply curves will shift.
Nowhere is this clearer than in the study of the results of the 1970s oil shocks. In the US the government responded by introducing a 56mph national speed limit, and mandating strict new efficieny standards. In 1975, the average American new car had 136 horsepower under its hood; by 1982, that number had fallen to under 100. Consumers shifted to more fuel efficient cars (a boon for Japanese makers, and a bane for Detroit), and the demand curve moved to the left. Similarly, electricity generators chose to build nuclear or coal-fired power stations rather than oil-fired ones. EDF, France’s national generator, now supplies the vast majority of its electricity from nuclear power stations.
In the three years following the first oil shock in 1973, oil consumption continued to rise – despite soaring prices. Yet from a peak in 1976, consumption began to fall, dropping eventually 15% from its highs. And, again, consumption continued falling for three years, even after oil prices peaked in 1980 and after the world economy began recovering. Moves towards energy efficiency and towards alternative power sources are slow to ramp up, but their effect on the demand curve cannot be over-stated.
Rising prices had another effect in the 1970s, they spurred investment in exploration and production in areas that had previously not been cost efficient. Building rigs in the hostile waters of the North Sea, or in the wilds of Alaska, made little sense while Saudi crude was available for $3 a barrel. But if the Saudi’s oil was restricted, and the price had shot up north of $30, then a lot of new oil suddenly became competitive. And because the key expenses are upfront – building the infrastructure in the first place – then once the new oil came on stream then it was unlikely to be removed, irrespective of the price of oil. The oil supply curve moved to the right.
The impact of a supply curve that moved right (more supply at any given price), and a demand curve that moved left (less demand at any given price) was a collapse in the market clearing price. By 1985, the oil price had fallen back to $10. On an inflation-adjusted basis, oil was as cheap as it had been before the 1973 oil shock.
The lesson here is simple: there is no “over” or “under” supply, there is only the price at which the market clears. And over the long-term, high oil prices will tend to encourage consumers to either reduce energy consumption or shift to other forms of energy. Similarly, investment in either inhospitable areas or in developing technologies will result in greater quantities of oil or synthetic crude coming on to the market. Each boom in the oil price sows the seeds of its own destruction.
http://reddit.com/info/2gmrl/comments
http://digg.com/business_finance/The_Economics_of_Oil_Part_I_Supply_and_...
http://slashdot.org/firehose
if you are so inclined...
(also, there's an old comment thread for this piece here: http://www.theoildrum.com/node/2891#comments ...sorry to make you click back and forth.)
Depends on what The Economist means by producing. We can obviously consume no more oil than we extract.
Smithson makes a mistake in that oil companies 'produce' oil. What they produce is refined products from extracted oil. They sell refined products to the consumers. I have no desire to put West Texas Intermediate in to my tank. It would gum up the filter in very short order if it doesn't foul the plugs first. I want the gasoline which could come from any of several sources and processes. Being in Iowa it is only polite to use a little ethanol out of consideration for my neighbors.
The US alone has total product storage currently 1.7 BILLION barrels and there's that much more again in the rest of OECD.
http://tonto.eia.doe.gov/dnav/pet/pet_sum_sndw_dcus_nus_w.htm
Production could go to zero and demand could still be met for a long time.
I like three egg omelettes, but I only have two chickens. Fortunately, supply and demand are still in balance because I had a dozen eggs in the fridge.
Long time being defined as a month. The purpose of the SPR is so our military can fight long enough to capture an oil field.
I like three egg omelettes, but I only have two chickens. Fortunately, supply and demand are still in balance because I had a dozen eggs in the fridge.
What do you eat on day 13? A two egg omelette? What do you eat after your chickens die of old age? You turned all your eggs into omelettes and none into chicks. I know, you can eat chicken for a long time.
Do you work on wallstreet teehan? Sounds like you'd be perfect for buying mortgages and selling synthetic CDOs and taking your salary out of the price difference.
What this misses is that there are "minimum operational levels" for commodities vital to the operation of our civilization. A growing population and envionmental distruction causes the MOL to rise. For example, subsistance farmers finding their land without water as rivers run dry move to urban centres, putting more demand on food and energy from the global pool. Under supply results in parts of the "Globalized Civilization" failing. People dying. War.
Demand destruction doesn't follow a smooth curve. In a complex system when parts fail it can have an unpredictable knock-on effect to other parts of the system. Or even cause complete collapse.
I think that demand destruction is simply to simple of a concept for oil. A much closer idea would be food our water.
Oil is now as critical to people as food water and shelter.
So I agree 100% that the concept should be minimum operating levels for various types of economies before they begin to fail. The concept of some sort of slow squeeze makes no sense and is not justified by any historical comparison. Societies can restructure to operate at lower levels of oil but since this restructuring itself require leveraging the existing oil infrastructure it doubtful that it can be accomplished without foresight.
The issue is how a complex system decays. Using the Arctic melting as a guide and the collapse of previous civilizations suggests that it happens fast several times faster than the underlying reason the system is decaying.
So for example if we are at say 50% of the current production levels in 20 years we can expect the actual collapse to occur in less than 5 years. The limit on complex systems seems to be how fast the can collapse once they fall into positive feedback but in general they collapse as fast as possible.
As and example the Greenland Ice sheet can only collapse as fast as the ice can move this asserts that the collapse will quickly be limited by this factor. Oil seems to have about a 3-6 month delay factor in its distribution. Thus a collapse of the oil infrastructure is measured over at least a few years given a reasonably slow underlying decline in production. But it seems obvious that its less than a decade and more on the order of years before the society that cannot change collapses.
Robert:
I have taken some micro and macro economics courses, but am by no means an economist.
Lets agree that:
1) At any given time Oil "supplied" = Oil "demanded" = Oil "produced" i.e. that we are using the economists definition of these words, understanding that there are other definitions extant in the language
2) Oil sells for a particular price at any given time. I know there are several standards traded in the markets, but lets simplify it to pick 1 as they seem closely related to each other.
This being said it seems to me that there is little point in saying much about supply and demand curves unless they have some predictive or explanitory power with respect to the amount of oil produced at some time, or its price. i.e. can we use them to decide what level of taxation would reduce global carbon emissions a certain amount, or explain why oil consumption was growing at about 6% year over year just prior to the 1973 embargo?
Wherever I have looked for this info. I have failed to find it, so I was wondering if you could provide [a link to] actual supply - demand curves for oil for any time in say the last 100 years, or speculative curves for any time in the future, and the data / methods that were used to construct them.
Thanks
Me Robert? I'm not an economist either. I don't know what the quote posted by Prof. Goose really means but I'm suggesting a non-silly alternative.
If you call a cow a chicken, how many legs does it have? Four, because calling a cow a chicken doesn't make it one.
No, sorry, Robert Smithson the author of the original post
Darn it Milton,
You are confusing "the comments markets".
I posted an answer here (at the other thread).
I wish we could get to a place where we could admit the truth that this kind of economic analysis has no relevance to an oligopolistic market in which a few players control supply and the availability of supply to meet demand is NOT a free market clearing process. My greatest fear is that Professor Goose may be teaching this nonsense to our college kids.
There are many ways of looking at the world. This is one of them.
I teach my students to learn the many sides of arguments and to think critically, not to live by one dogmatic or normative view.
So, in that regard your greatest fears have indeed been realized. I hope you sleep better at night.
edspievack
What king of nonsense do you mean? Classic economic theory? or the "myth" we live in a free rather than an oligopolstic market?
82% of the oil production in the world is by national oil companies rather than multi-national companies, and as we import about 1/4th of our gasoline and some national oil has refining in the US and about half of the refining is by companies without production or marketing of their own,a very small part of the US market are in what I think you are calling oligopolies .
I agree that classic economic theory is screwed up, there is a physical limit to resources that it is ignoring. But you need to examine your "facts" if you think prices are controlled by big oil companies.
Bob Ebersole
I don't know why I seem to be responding to your comments so often, Bob; maybe you say things that I'm interested in...
I am curious about how much of the infrastructure of these 82% national companies is really built and maintained by branches of the IOC's. I also wonder how much of the oil handling is done by the IOC's for those national interests, but not in name. In other words, how much of the '82% national oil companies' is in name only? How many people are really making decisions about poking holes or opening valves? Are the IOC's really proportional in their influence, or do the talking heads making recommendations get all their information from IOC representatives, then the Wall St. representatives and boardrooms of the NOC's take their cues from these ("Exxon's not drilling, why should we?")?
This is critical when making evaluations of the influences which 'control' the flow of oil and the flow of cash from oil. If most of the oil money ends up plastered around in the offices of Wall Street when all is said and done, then calling the Kettle a "Black Oligopoly" might be appropriate. It doesn't mean that the prices are 'controlled', but perhaps the System which we think of as competitive is simply part of a much larger System of Systems which has taken on a life of its own that has no decency for the living world that created it (RE: Collective Corporate Charter Mores).
The Blue Pill may simply be the illusion that we can put the genie back in the bottle at any time before the market 'clears'.
What I don't understand is, what causes supply and demand curves to shift? And what are the actual supply and demand curves for oil right now? Can anyone give me a chart like:
Supply curve:
10 mbd at $10 per barrel
20 mbd at $20
30 mbd at $28
40 mbd at $44
50 mbd at $49
60 mbd at $58
70 mbd at $64
80 mbd at $69
84 mbd at $72 (current situation)
90 mbd at $80
100 mbd at $120
110 mbd at $150
Demand curve:
120 mbd at $10 per barrel
110 mbd at $15
100 mbd at $40
90 mbd at $60
84 mbd at $72 (current situation)
80 mbd at $100
60 mbd at $150
25 mbd at $250
15 mbd at $500
How could you compute a REAL set of numbers like this? If we had real numbers like this, we could say "Okay, if world oil supply drops to 80 mbd from Hurricane Dean, oil producers will be willing to supply 80 mbd at $69 per barrel, and people will be willing to consume 80 mbd at $100 per barrel (as per the chart above)...so...how do you resolve this into one price? Average the two? 80 mbd at $84.50 per barrel will be the new equilibrium? Am I understanding this correctly?
And why do they present themselves along one set of particular curves, and not shifted to the left or right respective to where they are now. It seems like supply and demand curves give a plausible explanation for shifts in price, but how can they be used to explain the starting price?
The problems are twofold.
First, the bivariate relationships are not linear, but are usually shown that way for simplification. If anything, they are asymptotic S-curves. So, if you took 1MB, 2MB, or 5MB out of the system, you would not get a 1:1 price reduction for each of those, but some other larger logarithmic factor.
Worse, the concepts "supply" and "demand" hide a lot of other concepts that are endogenous to them. Most of those terms are "informational," but they also have myriad causes in their variation, which sometimes take a lot of time to get sorted out, reflecting an imperfect price signal.
Since we live in an imperfect information environment, sometimes the market does not function as it should...
Economics works under a certain set of assumptions. Criticize the assumptions and imperfections of the model? Sure, absolutely.
But understand that there are some insights to be gleaned as well.
Yeah.
But what insights do we gain from an "Economist" saying that the world "produces" oil and that the amount of production is not in line with the amount of "consumption"?
That humans are irrational?
Yes.
That Economists are fooled by their own con game?
Yes.
That all of us humans are fooled by the way our language frames the situation?
Criticise the assumptions? Economics is simplified, temporary, rules of thumb taken beyond any domain of applicability - then worshipped by those that know no better.
Its more useful to say the markets are complex, adaptive and evolving systems in which you might occasionally be able spot repeating patterns. Those patterns, however, will never quite repeat, and will disappear when anything interesting happens. If instead you want to understand fundamental things about markets you need to examine underlying drivers, not its outputs. Economics virtually never does this.
Oh, and if an economist ever used the phrase "its an economic law" in front of you, you're allowed to laugh in his face. That includes when someone says "Jevon's Paradox says that ..."
Markets, just like human brains, and other complex, adaptive and evolving systems have emergent properties, well worth understanding in themselves, even when isolated from the fundamental inputs.
I'm not replying to this post by analysing your neural firings. Reductionism is interesting, but sometimes less useful than the systems view.
--
Jaymax (cornucomer-doomopian)
Mathematical equations for supply and demand curves, while they exist, would be pointless and impossible to create. For example, the demand curve for oil is the sum of every single person on the planets personal demand curves, so we are easily talking about trillion+ variable equations assuming each of our personal demand curve has only a limited number of variables. Secondly...such an equation would be out of date instantaneously.... as they are continuously changing. With physics or chemistry you can take a formula, plug in your known variables, and with great precision predict what the value of the unknown variable will be should you carry out the experiment. If you expect that out of economics, then you will be disappointed, as many on this thread seem to be. Economics can not be that precise simply because it is too complicated... way too many variables to forecast reliably or accurately. But that doesn't mean economics is useless. It allows us to create logical, simplified models that can reveal trends and give us insight. For example, one logical insight from the supply curve is that higher prices will encourage suppliers to produce more, with an important qualifier.... "all else being equal." As we know, all else is not equal, and that geological and political constraints will ultimately trump higher prices. The supply/demand curve, with it's two axis simply can't model this, it's a simple model with two variables....price, and quantity demanded. Clearly there are limits to economic models...the primary limiting factor being the human mind. People here are often quick to blame sub-optimal outcomes on free markets when the blame actually rests with sub-optimal human decision making.
The base of economics is resources.
Mathematics is used to describe the endless variables.
All of this is decided in more numerical mathematics of which this eventual medium is called value.
Value needs a means of identification, which is called money (a medium of exchange)
Value also needs something called preservation of usefulness, especially when the meaning of the word is singularly directed/concerning this means of "money".
Value certainly means scarcity when it relates to money. And, this is because money relates to this means of exchange economics. And, this is because those economics relate to resources, that of which, provide the scarcity and value because they are not an INFINITE MATHEMATICAL NUMERICAL EQUATION. Sorry.
There can be no basis of any sound policy of direction (energy or bingo) when the variables of the "value" of money are infinite, meaningless, and unaccountable.
I tend to simplify problems. Perhaps it causes problems in the outer ripples of faux fiat details? Then again, maybe it resolves/requires minds to ponder the REAL cause of all those outer ripples they so blindly trust to make these grand fiat elaborations upon.
All of the energy in this wonderous blue marble world is 93 million miles away and it is about time we give some serious real-time effort to this wasted energy value beyond the bullshit of valueless fiat directives.
Fiat = somethin' fer nuthin'.
A very minor quibble and a question:
It is disconcerting to me to see the x-axis as the vertical axis. Is that a common usage in economics?
Yes, unfortunately it is. This can be traced back to Alfred Marshall's 1890 textbook, Principles of Economics. From what I understand, he considered it more intuitive to do it this way, but it has caused a lot of confusion since.
This is a very interesting post. Unfortunately, I am running behind on project work or I would add to the discussion. Instead, I will point you to a couple of useful links:
http://www.mees.com/postedarticles/oped/v49n44-5OD02.htm
http://www.mees.com/postedarticles/oped/v49n44-5OD02.htm
Note the reverse "L-Shaped" supply curve shown in the second linked article. I mentioned verticalization of the supply curve in an earlier post http://www.theoildrum.com/node/2757#comment-214106, but haven't looked into this in detail. I would be interested in finding empirical research that supports this (for oil or other non-renewable resources).
Oh, the fallacies in here!
Let's start at the end.
The first statement there is true but probably not in the way the author intends. When there is no more, humans will reduce consumption because they have no other choice.
The second statement in there is more problematic. It displays the erroneous notion that more investment always equals more supply. This may or may not be true in the current case but is not true forever simply because oil supply is finite and cannot be reused once burned.
The third statement is equally erroneous because of the assumption in the second statement. The boom in oil price does not necessarily sow the seeds of its own destruction. This first assumes that potential production does not decline which is patently false. This also assumes that potential demand declines at a rate greater than production declines. Mr. Smithson might look back at the potato famine and the price/demand response there, or back at whale oil usage and the price/demand response there.
This is classic, a perfect example of the falseness of economics, leaping to conclusions without either a theoretical or data basis. Throughout the last several paragraphs, Robert Smithson makes the classic mistake of assuming that the future will be exactly like the past rather than applying real scientific principles to the problem. I am going to guess here but I'd bet that Don Sailorman would have a cow because of the static assumptions made by Smithson that do not consider the alternative scenarios that I outlined (plus many others).
In my opinion, Professor Goose posted this to demonstrate what classic economic thinking produces, what assumptions this engenders about the future, and thus why those assumptions might have the completely wrong outcome if we have actually reached a global peak in crude oil production that is to be followed by a steady decline.
People like Smithson are part of the problem and before we can hope to change civilization, we must counter the mindset of Mr. Smithson or else be ignored even while Rome burns. If we cannot change Mr. Smithson's mind, then the existing global civilization is going to do an Easter Island and "cut down the last tree" anyway. This is the central problem facing those of you trying to save civilization - mindset.
"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Dr. Albert Bartlett
Into the Grey Zone
Right on !
Also of course we obviously don't live in a free market economy this has become clearer everyday. The only issue is when will confidence erode in our fiat currencies. Or better when will people begin to loose faith in the controllers of these currencies.
The underlying problem is without growth our current debt based economic system fails. And peak oil ensures that intrinsic economic growth will stall then decline.
This contraction must have a negative impact on our ability to finance and extract oil so at the highest of levels a nasty positive feedback loop is obvious.
Treating the pillar of our society as some sort of simplistic supply and demand problem makes no sense this is not about economics its about survival.
Sure would be nice if y'all would agree about the future. Then maybe a plain old country boy like me could make some plans. ;)
Maybe I'll just follow the well-dressed man's advise: "The best way to predict the future is to create it." :)
The best move is it have a number of plans A,B,C,D.
And if your in LA get out.
:) Currently on plan B. Seems to be working so far. Did you mean LA the city or LA the State? Used to live in LA the City. Didn't like it much. Drove thru LA the State a few times. Nice place. But I like my place in MS better. It's where I've been creating my future.
Los Angles its a riot.
I think Mississippi if it can overcome its racism can do well post peak. I'm from Arkansas and lived a long time in Holly Springs MS. My mom was a social works in MS and I saw a few things as a child that will live with me for a long time. I should have stayed in the car at a few houses.
But in general MS has a lot going for it in a post peak scenario. I think a lot of the US will end up fairly quickly in the same circumstances as MS without the rich agricultural lands. I just worry that the southern states will fall back into rampant racism as times get tough.
And by racism I don't just mean white vs black it goes both ways I assure you. Since I only go back a few times a year I'm shocked by the racism still present in the area.
Good luck if anything MS has little to lose and a lot to gain post peak if it tries.
I got a speeding ticket in Holly Springs once. Doin 130 in a HemiDodge on Hiway 78. Comin back to Memphis from a beer delivery a bit further south. This was way back in '70 and most of the state was dry. As for the racism thing, the difference between the South and the North, is that down here we don't pretend it doesn't exist. Unlike some parts of the country, that go to great lengths to demonstrate their hypocrisy. In any case, MS is like most states in that it cannot be be easily placed in a well defined bucket. It's as diverse in both demographics and other categories as any other state or region. Don't let the image (of MS as a 3rd world country ) confuse you.
You know, in some parts of the world being called a racist is a compliment and something to be proud of. Sort of like being called a Catholic, Baptist, Democrat, Republican, etc. US citizens are often quite provincial in their outlook. We often fail to understand that large parts of the planet left the stone age literally less than 200 years ago and some cultures are still there. Think about that for minute.
Ohh man I used to live in Asia so I assure you racism is alive and well and in Utah which I won't comment on. So I agree 100%. Its just that if the south was able to rise above its racism it has a lot of potential. Its one of the few places that we really haven't destroyed. The soil is still fertile and the forests have been fairly well managed. Lots of water many navigable water ways the Mississippi being the largest.
Not to mention the oil and gas which is more then enough to support local industry for quite some time.
The south was/should/could/will be a wealthy agricultural region with a fairly well educated populace also heavily involved in light manufacturing given its natural endowments. Also because of the lumber industry I guess a lot of the rail is also still in place.
I got a speeding ticket in Holly Springs once. Doin 130 in a HemiDodge on Hiway 78.
He only gave you that ticket because you are White. Or Black as the case may be.
By economic theory, people would like to consume an infinite amount of oil. We just don't do it because we don't have the choice. At infitiny, that argument is clearly wrong, but it is very close to the truth on more realistical scenarios.
We alread just consume what we do because we don't have the chioce.
Not to say that it would be very bad if (when?) oil production decline to very low levels, but economics isn't concerned if people die because of shortages of if they just save the money to buy something more important. It just wan't to know if people buy the comodity or not. No sentiments are alowed here.
Economy clearly states that there is a maximum level of production. But their effects are quite complex to explain on a short post. I can understand why the author didn't want to do so, since he would have no post otherwise.
On a crude explanation, more investments always lead to more supply, but the increase normaly gets smaler and smaler as you further invest. Because of this, products have a theoretical maximum supply, but it doesn't really matter, because people will never invest all the way into it.
But even on that simplistic explanation on the article, you didn't quite understand what was said. The production curve is being shifted left, so we aren't able to get as much out of our infra-structure as we used to get. What more did you want him to say?
Oh, no, he is right. He just didn't say if it is a good or a bad thing, as no economist would say. Economist tend to not judge values, just state facts and theories, and they have a reason for that. As you said at the first paragraph, if oil production declines, people will use less oil. They don't have further choice at it.
It may be shocking to some people, but competent economists know have they are talking about. Ok there are lots of talking heads at the MSM spreading stupid information on this topic, but on what subject things are different?