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Is oil pricing itself out of the market?
Date:8/19/2011

University of Alberta researcher Andrew Leach likes the way Saudi Prince Alwaleed bin Talal thinks.

A new paper by Leach, an associate professor in the Alberta School of Business, and fellow University of Alberta economics researcher Ujjayant Chakravorty, posits scenarios that parallel a statement Alwaleed made in May declaring that it is in the best interests of Saudi oil producers to keep oil around the $70 mark to prevent the West from developing alternative energy sources. Their paper, co-written with a colleague from the Toulouse School of Economics , hypothesizes scenarios wherein a narrowing of the gap between developing renewable energy resources and fossil fuel resources might mean a rush to drain the oil from its source.

But . . . will we need oil for 100 years?

Leach is quick to point out that the paper is not attempting to forecast oil futures or costs. Rather, he notes, they model results of possible outcomes if an alternative energy sources could replace oil quicker than producers expect it to. Citing resource economist Harold Hotelling's notion that "oil in the ground is like money in the bank," Leach notes that, if a bank adversely changed its paid interest rates, the investors would be quick to withdraw their money. In the case of producers, he says the response would be to curb the cost of oil per barrel and increase current production rates to maximize current profits.

"What we tried to do with the paper was get in to some of the climate-modeling results and say, 'what happens if you go back and look at how oil owners should behave if an alternative energy source is emerging and funded and how technology is improving,'" said Leach. "The answer is that you shorten your timeframe and you start thinking, 'well, I better get the value out of this asset now because it's not going to be worth anything in 30 years.'"

Oil producers: for your consideration

Leach notes that dropping
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Contact: Jamie Hanlon
jamie.hanlon@ualberta.ca
780-492-9214
University of Alberta
Source:Eurekalert

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