Kemp: Forecasts For Higher Oil Prices Misjudge The Shale Boom



Massive new fields in Siberia and Alaska, as well as the development of deep offshore drilling in the North Sea, eventually contributed to price declines in the late 1980s and through the 1990s.

But the history of oil prices is as much about the history of technology as field discoveries.

In a very basic sense, production costs have been rising since the industry was born. As in all extractive industries, the easiest oil was developed first, and more expensive oil has been developed later. Hamilton's argument that costs are increasing could have been made at every stage in the oil industry's history.

The first wells in Pennsylvania tapped oil buried less than 100 feet below the surface. By the mid years of the 20th century, wells were being bored thousands of feet below ground. Then in the 1970s the industry turned to offshore drilling, which was even more tricky and expensive. Now it is mastering the art of drilling horizontally rather than vertically.

But productivity has also increased as companies have learned to target the highest yielding formations and drill faster and more accurately. Hamilton's paper is silent on all these matters, and that is ultimately what makes it unconvincing.

The paper is also silent about climate change, policies to restrict the consumption of fossil fuels, and the growing challenge to oil-based fuels from natural gas even in the transport market, all of which could depress real prices in the medium to long run.

So while Hamilton concludes that $100 oil is here to stay, in real terms, the outlook is far less certain. In fact, a betting man, looking at the price history, might conclude prices are currently abnormally high and due for a fall.

(editing by Jane Baird)


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