Petroleum Economics - A Domestic Model
Authors: Merklein Helmut A. 
Published: December 2007

This paper was prepared for the 47th Annual Fall Meeting of the Society of Petroleum Engineers of AIME, to be held in San, Antonio, Tex., Oct. 8–11, 1972 Permission to copy is restricted to an abstract of not more than 300 words. Illustrations may not be copied. The abstract should contain conspicuous acknowledgment of where and by whom the paper is presented. Publication elsewhere after publication in the JOURNAL paper is presented. Publication elsewhere after publication in the JOURNAL OF PETROLEUM TECHNOLOGY or the SOCIETY OF PETROLEUM ENGINEERS JOURNAL is usually granted upon requested to the Editor of the appropriate journal, provided agreement to give proper credit is made. provided agreement to give proper credit is made. Discussion of this paper is invited. Three copies of any discussion should be sent to the Society of Petroleum Engineers Office. Such discussions may be presented at the above meeting and, with the paper, may be considered for publication in one of the two SPE magazines.

Introduction

To say that the U. S. is moving headlong into an energy crisis would be a case of belaboring the obvious. We are already there, and we know it. The petroleum industry knows it; the U. S. government knows it; interested foreign governments know it. Only the public is a bit slow in catching on, and that is easy to understand. Any noises on the energy crisis emanating from the petroleum industry will be shrugged off by the public as one more lobbyist effort toward protectionism.

But why are we going through this crisis? What are the forces in the market place that cause the U. S. consumption of oil to be something like 15 million B/D? Why is the average price of 1 bbl of crude oil $3.10 and not price of 1 bbl of crude oil $3.10 and not double or half that amount? What are the effects of certain tax incentives, or of foreign imports? These are questions that are more often than not asked and answered, separately. They should not be dealt with separately. This paper is an attempt to provide a simple yet paper is an attempt to provide a simple yet complete analysis of the major economic forces that vitally affect the U. S. petroleum industry,

Discussion

A domestic model of petroleum output and pricing, even a highly simplified model as the pricing, even a highly simplified model as the one to be developed here, must possess a certain minimum level of complexity to be meaningful. Too much simplification means that some significant factors will be swept under the rug. Obviously, without these factors the model would have no analytical or predictive value. Its one virtue, namely simplicity, would be more than offset by irrelevance and lack of applicability.

But too much complexity is no virtue either. If all the factors could be brought into the model, no matter how remotely related, it would become so hopelessly complicated that we could not come to grips with the issues at stake, namely the consumption and the price of oil. Questions such as the wealth of the people and its relation to both leisure and business travel, trends of engine horsepower ratings, pollution trends, and many other very relevant pollution trends, and many other very relevant detail problems could be brought into the model. But at the aggregate level to which the present model is confined, these otherwise present model is confined, these otherwise deserving factors will only distract from the main issues.

The starting point to be used in this model will be the simple case of competitive demand and supply. A sampling of the petroleum literature suggests that this is not too humble a beginning. The very terms "demand" and "supply" are used somewhat loosely in the literature.