What will happen to the oil price? Look to the PC for clues

Worstall on Wednesday Economics, of course, is simply a bunch of mumbo-jumbo – as evidenced by its failure to answer the Queen's question regarding the crash: "Why did nobody see it coming?"

Theory of Finance scribe and Nobel laureate Eugene Fama's answer – that economic theory insists it is impossible to predict such things – tends not to convince all that many.

However, it's still true that at the level of microeconomics we can gain some useful insights into the future, even if we can't make firm predictions. And that's what is being done here in this fascinating little research note (PDF). The main message of "Rise of the ManufRacturers" is that if we want to have a way to think about the future of oil (and natural gas) prices, then we'd do well to look at how the computing industry has developed over the past 50 years or so.

The essential point is that it was in this time period that at the PC revolution took place. What had happened was that computing had moved from an economic model very similar to that of resource extraction and over to one of a "manufactured good".

Similarly, we could say that the technology of fracking is moving fossil fuels (although not coal) from that one model to the next. Of course, computers have always been “made”, so in that sense they've always been a "manufactured good", but that's not the aspect of the model upon which the researchers are concentrating (models are, by definition, simplifications – so of course they don't include everything). Such models are also not wholly accurate, perhaps only a guide to a way of thinking about something.

Texan oil barons weren't exactly engineering geniuses....

Oil extraction – resource extraction in general in fact – becomes more difficult over time. We usually start with the easy-to-extract stuff, but as we go on, and those simple deposits/reservoirs become exhausted, we need to move onto more difficult and more costly to develop fields.

Way back when it all started, there were fields in Pennsylvania and Texas that you pretty much hammered a piece of pipe into and they became gushers. As we used up all that easy stuff, we ended up having to build the world's largest ever machines to drill in the North Sea, the Arctic and so on. That's our conventional worldview.