Can expanded exploration lower oil prices?

Abstract

We suggest that the oil-exporting nations can be divided into two main groups: “profit maximizers” who require their oil revenues for domestic development and “optional producers” who can forego export revenues for considerable periods. A substantial part of the cartel's market power derives from the ability of the optional producers to withstand loss of income. The consuming nations have no equivalent ability to withstand supply cuts. If all oil exports were supplied by profit maximizers, it is likely that supply security would be greater and prices lower. Profit maximizers do not have as much market power because their need for revenues is symmetrical with the consuming nations' need for oil. Consequently, it appears to be in the consuming nations' interests to restructure the oil trade so that profit maximizers account for a larger share and optional producers a lesser share. To accomplish this, additional supplies of oil must be found. Recent experience suggests that the best oil targets are not in the consuming countries, but, rather, in Third World countries. There is some question about whether or not these resources will be developed. Oil companies, the traditional explorers, may be reluctant to accept the financial risks. If after careful examination it is concluded that exploration will remain underfunded, it may be in the consuming nations' interests to sponsor exploration abroad. Greater supply security will follow from diversification of supplies; lower prices will follow from augmented production confronting inelastic demand.