Glenn Reynolds notes a new book by Matthew Simmons that argues that Saudi oil reserves are closer to being depleted than is commonly believed, and that we are all in trouble if this happens. I don’t buy it.
The world has huge non-Saudi oil reserves. What keeps most of them unexploited is the extremely low Saudi marginal cost of production: SA can at any time increase its production, and by so doing lower prices and make expensive investments in new extraction technologies worthless. Peter Huber made this argument well here.
So what happens if the estimates of Saudi oil reserves are indeed overstated and Simmons’s oil-shock scenario comes to pass? It seems likely that a lot of oil-extraction ventures that aren’t worth the risk now, with the Saudi marginal cost of production at just a few dollars a barrel, would become worthwhile. And once the investments in those projects are made there is little reason not to continue producing oil from them. That wouldn’t be good for the Saudis but it would be fine for consumers. I doubt that the end of Saudi oil, unless it occurred precipitously, which is unlikely, would raise long-term prices very much if at all.
UPDATE: Glenn Reynolds has updated his post to include links to a couple of other critics of Simmons’s argument.