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and application subsidizes tomorrow's

uct shortages of 1973­74 and 1979.

resource base and consumption.

Enhancing "energy security" has been a

The implication for business decision-

major mission of the U.S. Department of

making and public policy analysis is that

Energy and the International Energy

"depletable" is not an operative concept for

Agency of the Organization for Economic

the world oil market as it might be for an

Cooperation and Development ever since

individual well, field, or geographical section.

the troubled 1970s.

Like the economists' concept of "perfect

Energy security, like resource exhaustion,

competition," the concept of a nonrenewable

has proven to be an exaggerated rationale for

resource is a heuristic, pedagogical device--an

government intervention in petroleum mar-

ideal type--not a principle that entrepreneurs

kets (such as emergency price and allocation

can turn into profits and government offi-

regulation, publicly owned strategic oil

cials can parlay into enlightened interven-

reserves, international contingency supply-

tion. The time horizon is too short, and tech-

sharing agreements, and crash programs to

nological and economic change is too uncer-

fund new electricity sources or transporta-

tain, discontinuous, and open-ended.

tion alternatives). The lesson from the 1970s

energy crises is that government price and

allocation regulation can turn the process of

The Shrinking (Negative)

microeconomic adjustment to higher energy

Externalities of Fossil-fuel

prices into a "macroeconomic" crisis of phys-

ical shortages, industrial dislocations, lost

Consumption

confidence, and social instability.2 5 The "oil

crises that were not," during the Iran-Iraq

War of 1980­81 and the UN ban on Iraqi oil

Fossil fuels are not being depleted and

exports of a decade later, demonstrated that

will probably continue to grow even more

freer markets can anticipate and ameliorate

plentiful for decades to come. But now that

sudden supply dislocations without physical

the traditional rationale for a government-

shortages, the need for price and allocation

assisted transition to unconventional fuels

regulation, or strategic petroleum reserve

is removed, new rationales have arisen.

drawdowns.2 6

Does our reliance on imported oil risk the

nation's economic security? Is not fossil-

The international petroleum market is

fuel consumption at the heart of most envi-

subject to geopolitics, which will occasional-

ronmental problems, and can we "save" the

ly lead to supply disruptions and temporari-

environment only by repairing to uncon-

ly higher world prices. But the risk of higher

"Depletable" is

ventional energies? This section examines

prices must be balanced with the normalcy

not an operative

those questions and finds that the econom-

of price wars and a "buyers' market," given

concept for the

ic and environmental externalities of fossil-

an abundant resource base and natural pecu-

fuel consumption are vastly overstated and

niary incentives to find and market hydro-

world oil market.

dwindling in importance.

carbons. Markets learn, adjust, and improve

over time as technology and wealth expand.

The Chimera of Energy Security

"Market learning" from the 1970s has result-

Although the underlying physical stock

ed in increased energy efficiency; greater

of crude oil has always been plentiful, crit-

diversity of supply; enlarged spot-market

ics can point to interruptions in oil imports

trading, futures trading, and risk manage-

to the United States and other net import-

ment; and greater integration and alignment

ing regions as the operative constraint.

of producer interests with consumer inter-

ests.2 7 Future oil crises like those of the 1970s

Energy security became a concern in the

United States and other industrialized

are highly improbable because of the amelio-

nations with the "oil shocks" and oil prod-

rating effects of the new market institutions.

7