M. A. Adelman on Resourceship (Part II)

“The distinction between renewable and non-renewable resources is tenuous and perhaps in the last analysis untenable.”

– M. A. Adelman, The Economics of Petroleum Supply (Cambridge: The MIT Press, 1993), p. 66.

M. A. Adelman, profiled yesterday, was an empirically driven energy economist. He was not a Malthusian because the data suggested otherwise. He found with petroleum what Julian Simon found in the the family of mineral resources.

Adelman’s writings richly describe the way to understand the paradox of expanding depletable resources. He emphasized that oil was a fungible, global commodity, and improving knowledge can overcome diminishing returns in different regions and certainly globally.

And Adelman captured a point that Alex Epstein today stresses: that oil is not a ‘natural resource’ but a man-made one, from finding the treasure in the ground to refining the raw material into useful human products to transporting the inputs to delivering the outputs to points of human consumption. Enter resourceship and oil as a manufactured product.

Here are some of my favorite quotations from the kind professor.

“Huge new reserves in old [oil] fields were no gift of nature. They were a growth of knowledge, paid for by heavy investment.”

– Adelman, The Genie Out of the Bottle (Cambridge, MA: The MIT Press, 1995), p. 17.

“The search for new deposits is only a special case of the search for greater knowledge, including better productive methods. The French have a feeling for words, and when they use recherche to mean both research and exploration, they are conveying a truth we cannot afford to overlook. Greater knowledge of the earth’s crust and greater knowledge of the science and technology of extraction are only two exercises of the human spirit, two alternatives for investment.”

– Adelman, The Economics of Petroleum Supply (Cambridge: The MIT Press, 1993), p. 68.

A “Limited, Exhaustible” Resource?

“All minerals are limited because the earth itself is. Where the limit lies, we shall never know and neither will our descendants, ever. Oil, for example, is only one member of a large class of combustibles which in the fullness of time will include seawater, granite, the wind, and the sun in amounts never contemplated today.”

– Adelman, The Economics of Petroleum Supply (Cambridge: The MIT Press, 1993), pp. 373.

“It seems impossible to reconcile [the] data with any theory or vision that oil is a ‘limited exhaustible resource,’ becoming ever more scarce and expensive. What we observe is the net result of two contrary forces: diminishing returns, as the industry moves from larger to smaller deposits and from better to poorer quality, versus increasing knowledge of science and technology generally, and of local geological structures. So far, increasing knowledge has won.”

– Adelman, “Trends in the Price and Supply of Oil,” in Julian Simon, ed., The State of Humanity (Cambridge, MA: Blackwell, 1995), p. 292.

“Oil and other minerals will never be exhausted. If and when consumers will not pay enough to induce investment in new reserves and capacity, the producing industry will dwindle and disappear. Nobody will ever know, or even want to know, how much is still in the ground. Only cost and price matter.”

– Adelman, The Genie Out of the Bottle (Cambridge, MA: The MIT Press, 1995), p. 1.

“‘Is there enough oil and gas in the world’ is a nonsense question and has yielded many a foolish answer. In fact, we shall never know our endowment in fluid hydrocarbons. It is trivial that they are limited because the earth itself is limited. Long before we get to the end of these resources, we shall have ceased to use them, either because the cost has become so impossibly high or because a better and cheaper source of heat has been found.”

– Adelman, The Economics of Petroleum Supply (Cambridge: The MIT Press, 1993), p. 91.

“[We] ignore these far-off possibilities and deal only with shale oil, tar sands, coal, and to a minor and dispensable extent, uranium. The only difference between oil and these other combustibles is that oil is cheaper to extract and use. When and as it becomes more expensive, people will give over the search for it and we shall never get to the end of the stock of oil. In that real sense oil is inexhaustible.”

– Adelman, The Economics of Petroleum Supply (Cambridge: The MIT Press, 1993), p. 374.

Prices and Scarcity

“To explain the price of oil, we must discard all assumptions of a fixed stock and an inevitable long-run price rise and rule out nothing a priori. Whether scarcity has been or is increasing is a question of fact.”

– Adelman, The Genie Out of the Bottle (Cambridge, MA: The MIT Press, 1995), p. 22.

“Mineral prices have if anything declined, because all else is not equal. There has been an endless tug-of-war, increasing knowledge versus diminishing returns. Knowledge has won big—so far. . . . But there is a paradox. What is not necessarily true of the whole population of deposits is true of any individual deposit at any given time.”

– Adelman, The Economics of Petroleum Supply (Cambridge: The MIT Press, 1993), p. xii.

“For nearly 30 years it has been clear that there is no persistent widespread upward price drift; most minerals prices actually decline in the long run. Diminishing returns are opposed by increasing knowledge, both of the earth’s crust and of methods of extraction and use. The price of oil, like that of any mineral, is the uncertain fluctuating result of the conflict.”

– Adelman, The Economics of Petroleum Supply (Cambridge: The MIT Press, 1993), p. 186.

“The argument among econometricians is whether we must reject or accept a long-term downward trend for minerals prices. Long-term increase is not even in question.”

– Adelman, The Economics of Petroleum Supply (Cambridge: The MIT Press, 1993), p. 272.

Inventory View of Reserves, Resources

“In manufacturing, the inventory of input materials is on the average about six weeks production. In oil, the rough rule-of-thumb optimum for proved reserves is 15 years. The industry spends billions of dollars every year to replenish the inventory.”

– Adelman, The Economics of Petroleum Supply (Cambridge: The MIT Press, 1993), p. 271.

“Predictions of ‘undiscovered’ or ‘ultimate’ reserves . . . are not of the in-ground stock; rather they are economic forecasts: how much it will be profitable to produce given current costs and current knowledge. The estimator of ‘ultimate reserves’ is doing economics without knowing it. An inspired guess may be right, but there is no way to tell. As knowledge grows, so do the ‘ultimates.’’’

– Adelman, The Genie Out of the Bottle (Cambridge, MA: The MIT Press, 1995), p. 16.

Fallacy of ‘Nonrenewable’

“The economic theory of mineral deposits has been that of a non-renewable inventory [when] . . . the stock should be used at such a rate over time as to maximize its present value. This theory is logically sound, but it appears less useful the more we learn the nature of the inventory. The distinction between renewable and non-renewable resources is tenuous and perhaps in the last analysis untenable.”

– Adelman, The Economics of Petroleum Supply (Cambridge: The MIT Press, 1993), p. 66.

‘Easy Oil’ Mirage

“It is often said that ‘low-price oil is gone forever,’ and this may be perfectly true—but only so long as the low-cost oil remains dammed up. If the dam breaks, so will the price.”

– Adelman, The Economics of Petroleum Supply (Cambridge: The MIT Press, 1993), p. 157.

False Alarmism

“Today as ever, we hear cries of alarm (or murmurs of delight) about impending mineral scarcity. We need not take them all seriously. When the British National Coat Board predicts a shortage of fossil fuels in the year 2000, arguing that one should therefore continue to use high-cost British coal and save lower-cost fuel available elsewhere, they are trying to convince themselves and the public that they are earning their keep in a useful occupation. In fact they are pensioners, wards of the state.”

– Adelman, The Economics of Petroleum Supply (Cambridge: The MIT Press, 1993), p. 65.

Hotelling Reconsidered

“Under competition, low-cost oil would be more quickly and intensively produced in the member countries of OPEC (Organization of the Petroleum Exporting Countries) than in non-OPEC countries. . . . [Yet an] anomaly is seen within OPEC. The lower-cost oil is held back; the higher-cost oil is produced. Again it refutes the thesis that higher prices are due to expected still-higher prices acting via ‘Hotelling rent.’”

– Adelman, The Economics of Petroleum Supply (Cambridge: The MIT Press, 1993), p. xiv.

Economic Order from Market Prices

“The competitive market price in itself is the price which is sufficient, but no more than sufficient, to encourage exploration for new supplies which will be needed by consumers. Unlike a human observer, who can only attempt to see and estimate some of the forces of supply and demand, a market mechanism registers all of them: that is its purpose. . . .

In gas production, there is no question of the positive relation between price and supply. As with any commo­dity, it is most difficult, if not impossible, to measure that rela­tionship precisely and more difficult to forecast. Like a giant calculating machine, competitive market price registers and weighs these variables of supply and demand, seeking to establish an equilibrium.

Personally, I can see no escape from the competitive market price for any regulatory body which seeks to establish just and rea­sonable prices for natural gas.”

– Adelman (1958). Quoted in Robert Bradley, Oil, Gas, and Government: The U.S. Experience (Lanham: Roman & Littlefield, 1996), p. 464.