PHYSICAL AND ECONOMIC-ASPECTS OF RESOURCE QUALITY - THE COST OF OIL-SUPPLY IN THE LOWER 48 UNITED-STATES, 1936-1988

For the past half century, the average cost of finding new oil in the lower 48 U.S. has increased in a non-linear fashion. The average cost of producing oil decreased then increased over the same period, with costs rising since the mid-1960s. These results indicate that the cost increasing effects of resource depletion have outweighed the cost decreasing effects of technological improvements in the two primary stages of the oil supply process. Finding and production costs are also highly correlated with the rate of effort expended in each stage, and short-run changes in the rate of effort drive average costs above or below the long-run trend. Previous models which ignored the interplay between short- and long-run effects on cost produced misleading results concerning the scarcity of crude oil in the U.S. The drilling boom of the early 1980s arrested the rate of decline in new additions to reserves, but the average costs associated with those additions were the highest on record. Attempts to sustain production in the lower 48 U.S. through massive drilling programs targeting the large number of undiscovered small fields and infill drilling in existing fields are likely to drive average costs even higher.