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Can U.S. oil production survive the 20th century?

  • Russell L. Lamb
  • Chad R. Wilkerson

The plunge in world oil prices has brought further difficulties to U.S. oil production, which has been declining in recent years. At the current low prices, most domestic oil wells are not profitable. This calls into question the long-run viability of oil production in the United States. Whether oil production remains a viable part of the U.S. economy in the next century will depend on how long oil prices remain at their current low levels.> Lamb and Wilkerson show how the recent low prices for oil on world markets reflect a combination of demand and supply effects, with both short-run and long-run forces at work. For example, sluggish demand growth reflects both milder weather in some parts of the world (a short-run phenomenon) and the impacts of the Asian financial crisis, which could persist for some time. Meanwhile, supply has mushroomed, in part due to the short-run effect of Iraq's return to higher levels of oil production. In the main, however, the increase in supply reflects sharp declines in the cost of discovering and extracting oil reserves. On balance, the current low prices appear to be mainly the result of longer run demand and supply forces, suggesting that prices are likely to remain low for some time to come. If world oil prices do remain low, U.S. oil is unlikely to be competitive in world markets. Therefore, the domestic oil sector is likely to continue to lose market share for the foreseeable future.

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Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

Volume (Year): (1999)
Issue (Month): Q I ()
Pages: 51-62

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Handle: RePEc:fip:fedker:y:1999:i:qi:p:51-62:n:v.84no.1
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