Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Sunday, August 07, 2005

Twilight in the Desert

JJ recommends that we listen to an interview with Matthew Simmons by clicking here. Simmons is the author of Twilight in the Desert.

Sparked by personal observations of Saudi oil wells-which led him to suspect that some Saudi fields were in decline-energy industry insider Matt Simmons has created a compelling case that Saudi Arabia's production will soon reach an apex, after which the world will be confronted with an immense and potentially catastrophic oil shortage. Written in a clear and engaging style, Twilight in the Desert provides an in-depth look at the world oil market and the mismanagement of Saudi oil resources.

... Mr. Simmons asserts that sudden and sharp oil production declines could happen at any time. Twilight in the Desert shows that even under the most optimistic scenario, Saudi Arabia may be able to maintain current rates of production for several years, but will not be able to increase production enough to meet the expected increase in global demand. Eventually, the reckoning day will come, and the world economy will be confronted with a major shock that will stunt economic growth, increase inflation, and further destabilize the Middle East.
It looks as if Simmons thinks the efficient markets hypothesis and the Coase Theorem are inapplicable in this instance. If property rights are well-defined, and if transaction costs are low, then (if Simmons' technical assessment is correct) speculators should be buying up access to the Saudi oil reserves and holding them off the market.

Even if doing so is difficult or impossibly costly in Saudi Arabia, if Simmons is correct, speculators should be buying up oil reserves and holding them off the market until later, when the Saudis are no longer able to pump as much oil. Perhaps that is one of the reasons oil prices are rising. Or perhaps not everyone agrees with Simmons.

Mismanagement of assets could also prompt a hostile takeover, in every sense of the word. If Simmons if correct, the Saudi royal family will find it increasingly difficult to buy off the resistance, and we could see some intense world turmoil. Another reason for speculators to buy up oil futures.

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