by Rudi Volti
While watching the blur of ever-increasing numbers on a gas pump, it is small comfort to learn that the retail price of gasoline in the United States has been remarkably stable throughout the automobile age, when reckoned in constant dollars. Wars, foreign embargos, and other external events resulted in occasional price spikes, but these all proved to be temporary disruptions to a horizontal trend. Will history repeat itself and return us to the recent past when gasoline was affordable?
That is not an easy question to tackle. Petroleum is like any other commodity where prices are set by the interaction of supply and demand. But understanding that interaction is tricky. First, the demand for petroleum products is often subject to unforeseen changes in the world economy. To take an obvious example, the rapid and largely unexpected economic transformation of China has substantially increased the global demand for oil, but who saw this coming when China’s economy was shackled by Maoist ideology? Second, the extent of the world’s petroleum supplies is mostly an educated guess. The fact that an accurate assessment of the reserves held by Saudi Arabia, the world’s largest producer, has never been revealed by the Saudi government illustrates this uncertainty. Even more important, efforts to determine the size of the world’s oil supplies quickly enmesh us in a third and equally unpredictable factor: technology.
The availability of oil is, and always has been, tied to invention in exploration, drilling, and recovery. And in turn, invention in these areas is affected by the present and anticipated prices of oil, the current supply-and-demand equation, and forecasts about the future. Today, when the price of a barrel of oil is $100 or more, developing and using technologies that can recover the small amounts of oil that remain in played-out fields may make economic sense. But such efforts would be a waste of money when the same barrel sells for $50. In similar fashion, the current prediction of continued high prices may convince oil companies’ management to sink significant R&D funds into advanced exploration technologies, an expense they might forego if prices remain stable.
Forecasting the future price of oil based on supply-and-demand projections is difficult; throw in efforts to predict future petroleum technologies and the crystal ball gets even cloudier. Important innovations may appear suddenly and diffuse at a rapid pace; this happened in the early 20th century with the invention of rotary drilling, the familiar corkscrew drill and derrick combination tied in the popular imagination to “gushers.” Making matters still more complicated is the possibility that new inventions in fuel technologies may not have anything to do with oil. Petroleum-based fuels have been the leader in terms of energy density, transportability, and price. Even the widespread use of corn-based ethanol as a partial substitute can be attributed more to government policies than to its economic and technical superiority. But what might happen if breakthroughs in genetic engineering and favorable market conditions combine to make ethanol a viable alternative to gasoline, or result in biofuels that can compete with, and even surpass, petroleum-based diesel fuel?
Clearly, making predictions on the basis of changing variables is a difficult enterprise. In today’s world, where petroleum use is governed by an interacting triad of supply, demand, and technology, prognosticators always need to expect the unexpected.
Dr. Volti, a former member of the Lemelson Center advisory committee, is a professor at Pitzer College and the author of Cars and Culture: The Life Story of a Technology.
[From Prototype, September 2008]