The Oil Drum

On October 24th, Dr. James Hamilton of Econbrowser commented on The Tragic Consequences of the High Discounting of Oil Extraction [1] in his story Is peak oil irrelevant?

Figure 1 -- Click to enlarge

If Dave had gazed not at a century of prices but rather at just the last 15 years of the price of oil relative to the PCE deflator, would he have drawn the same conclusion? If all we had was the graph above, it would seem quite natural to conclude that a rising scarcity rent could well be one factor in the recent behavior of this commodity price...

... I am not at all prepared to dismiss the hypothesis that scarcity rents have indeed started to make a contribution to oil prices over the last five years, and will become more apparent over the next five...

Admittedly, if the oil price should fall from here down to $30, then I'll have to conclude that scarcity rents have had nothing to do with the recent price moves.

But if Dave is right about the geology, oil is not going to $30.

Not knowing of any good evidence to contrary, I'll just make the simplifying assumption that I'm right about the geology.

We'll return below to some of Hamilton's other observations as we consider what meaning to draw from the history of oil prices over the last several years.