ENERGY INDEPENDENCE ON THE HORIZON - The Power Surge: Energy, Opportunity, and the Battle for America's Future - page 66

You might think this would be easy to nail down: i gure out the his-
torical relationship between oil supply and oil prices and use it to predict
the future impact of producing more oil. h e i rst big problem, though,
is that there are a lot of things that inl uence the price of oil. h is means
teasing out the inl uence of new supplies isn't straightforward. Worse, if
the relationships have changed over time, the results are even less reli-
able. Still, economists have come up with some reasonable guesses—and
the implications are striking. A team at the International Monetary Fund
recently estimated that a 5 percent increase in world oil supplies would
eventually cut oil prices roughly in half. 38 (Even this was a best guess:
they gave nearly one-in-four odds of a drop either twice or only half as
large.) h is sort of change might be produced by an increase of about i ve
million barrels a day in U.S. oil supplies. h e possibility of slashing oil
prices in half by increasing U.S. oil supplies by i ve million barrels sounds
huge. h e problem, though, is we've seen only half of the story.
When U.S. oil production rises, other countries' oil output usually falls.
h e economic logic is simple: more U.S. oil output means lower prices;
lower prices render some oil projects economically unat ractive; those will
either shut down or won't reach production in the i rst place. If the United
States increases its oil output by, say, i ve million barrels a day, this means
total world production rises by less. h e resulting price drop is also smaller

as a result.
h is is compounded by an even more important dynamic: most of
the world of oil production doesn't work like a real free market. Many
countries try to maximize their revenues from oil sales by restraining
production and propping up prices. Saudi Arabia, for example, can ot en
proi t more by producing less oil. It's not unreasonable, for example,
to imagine that a 50 percent increase in Saudi output would cut world
oil price in half. But the net impact would be to slash Saudi revenues
by a quarter. It's no wonder, then, that Riyadh isn't racing to produce
more oil. And things get worse: if several of these “strategic producers”
wanting to restrain their oil production can successfully coordinate, the
payof from holding back output rises. h is is the goal of OPEC, which
still produces 40 percent of the world's oil, a i gure that has swung up
and down but hasn't changed radically for decades.