Technology Alone Won't Hold Oil Prices Down

We share your optimism about technology's revolutionary impact on the oil industry ("The new economics of oil," Cover Story, Nov. 3). It has substantially lowered the costs associated with both finding and producing crude oil reserves, and it is likely to continue to do so, in addition to adding dramatically to the world's proven oil reserves.

While revolutionary, technology should not, however, be seen as the panacea that will hold oil prices in check all by itself as we enter the 21st century. The supply and cost of crude oil and petroleum products will remain volatile, with a bias to the upside. In a just-in-time environment, both public and private integrated oil companies are unlikely to tie up capital on surplus inventories and investments in spare refining and production capacity. In a world of rising demand, this will result in little or no inventory cushion to insulate markets from the occurrence of inevitable and unforeseen surprises that are endemic in a commodity business.

No one can say for sure what the prices of crude oil and refined petroleum products will be in the future, but we don't expect the current trend of real price deflation to continue in the wake of rising demand and tighter availabilities of refined products, especially in a world prone to both economic and geopolitical surprises. In the end, the petroleum business will continue to be seen for what it is--a commodity business, even with the deployment of greater amounts of technology.

John H. Lichtblau Chairman

Lawrence J. Goldstein


Alan M. Herbst

Manager, Business Development

PIRA Energy Group

New York

As I read your piece, I kept thinking that there must be some kind of iron law of economics and technology: Sunk investment in a technology attracts investment in the refinement of that technology, resulting in greater investment and entrenchment of the technology and the industry built on it.

The other prime example is, of course, the internal combustion engine. Nothing could make more sense for an industry than to invest in technology that preserves its accumulated assets and market share. Lacking that investment, fundamentally different and threatening technologies remain experimental, not yet competitive, something that could be in our future. Or, perhaps, just out of reach--capital-malnourished.

Mark Braly

Davis, Calif.

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