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Oil Prices, Exhaustible Resources, and Economic Growth
James D. Hamilton; Department of Economics; University of California, San Diego

Abstract

This chapter explores details behind the phenomenal increase in global crude oil production over the last century and a half and the implications if that trend should be reversed.

I document that a key feature of the growth in production has been exploitation of new geographic areas rather than application of better technology to existing sources, and suggest that the end of that era could come soon. The economic dislocations that historically followed temporary oil supply disruptions are reviewed, and the possible implications of that experience for what the transition era could look like are explored.

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... Knowing what the future will bring in terms of adaptation of both the supply and demand for petroleum is inherently difficult. However, it is not nearly as hard to summarize the past. Coping with a final peak in world oil production could look pretty similar to what we observed as the economy adapted to the production plateau encountered over 2005-2009. That experience appeared to have much in common with previous historical episodes that resulted from temporary geopolitical conflict, being associated with significant declines in employment and output. If the future decades look like the last 5 years, we are in for a rough time.

Most economists view the economic growth of the last century and a half as being fueled by ongoing technological progress. Without question, that progress has been most impressive. But there may also have been an important component of luck in terms of finding and exploiting a resource that was extremely valuable and useful but ultimately finite and exhaustible. It is not clear how easy it will be to adapt to the end of that era of good fortune.

Let me close with a few observations on the implications for climate change. Clearly reduced consumption of petroleum by itself would mean lower greenhouse gas emissions. Moreover, since GDP growth has historically been the single biggest factor influencing the growth of emissions (Hamilton and Turton, 2002), the prospects for potentially rocky economic growth explored above would be another factor slowing growth of emissions. But the key question in terms of climate impact is what we might do instead, since many of the alternative sources of transportation fuel have a significantly bigger carbon footprint than those we relied on in the past.

Link to full report
Prepared for "Handbook of Energy and Climate Change".
(revised 9 January 2012)
Dr. Hamilton has been a contributor to Energy Bulletin.

Press on the report:

Oil production is booming — but for how long?
Brad Plumer, The Washington Post
Lately, President Obama has been talking up the frenzy of domestic oil drilling under his watch. “Right now,” the president said in his State of the Union Address on Tuesday, “American oil production is the highest it’s been in eight years.” Technically, that’s true. But it’s worth taking a longer view. Since 1970, U.S. oil production has actually been in severe decline — and the recent boom is nowhere near enough to reverse it.

Economist James Hamilton offers some historical perspective in this new NBER paper. Thanks to new shale oil drilling in North Dakota and offshore production in Alaska and the Gulf of Mexico, U.S. production has picked up recently and is at about 6 million barrels of oil per day. But that’s still way down from 1970, when production peaked at 10 million barrels per day...

So what lies ahead? Hamilton’s paper is fairly gloomy about future domestic supplies. While most industry optimists expect that rising prices and new technology will help the United States — and the world — keep wringing out more oil from existing fields, history offers reasons for pessimism...
(26 January 2012)

No oil for old countries
Free exchange Blog, The Economist
I think it's worth adding a bit more to the discussion based on a new NBER working paper by James Hamilton, who does great work on the relationship between oil prices, production, and economic growth. Mr Hamilton notes that, all else equal, better technology and higher real oil prices lead to higher levels of oil production, as we'd expect. Over the whole of the past century, however, production in individual fields has tended to follow a simple trajectory, despite rising prices and better technology: oil output rises, peaks, and then drops. And both within America and globally, long-run improvements in oil output are primarily due to the development of new fields, rather than more intense extraction from oil fields. In the American context, for example, production generally rose for much of the 20th century even as production from individual states often peaked and fell, because America was able to develop progressively more of its continental expanse—from the East Coast, to the Midwest, to the Plains, the West Coast, Alaska and the Gulf...

Mr Hamilton goes on to recapitulate arguments he's made elsewhere, on the impact of oil shocks on growth. Recent American experience is not particularly encouraging. Rising American energy output is a useful macroeconomic development. But it might well be a good idea to reduce American oil consumption and raise net oil exports through via an increase in America's petrol tax. That's never a popular notion, but oil-induced recessions aren't much fun either...
(24 January 2012)