Preface A former colleague at the University of Calgary, Richard Kendon, always started his course on the International Petroleum Economy by informing his students that ‘oil was a commodity like any other and subject to the laws of supply and demand’. In an ‘oil city’ like Calgary, which benefits (and suffers from) the booms (and busts) of international energy markets, petroleum is often treated as a ‘special’ good whose analysis requires a ‘new’ economics. This is largely mystique, and Richard Kendon is right. The study of petroleum markets is complex, however, because the ability of market participants to react to changing market conditions is constrained for both demanders and suppliers. On the demand side, consumers of petroleum products are often constrained in their ability to substitute among energy sources by the investments they have made in the past - vehicles, furnaces, storage, transport infrastructure, production processes and so on. This makes it difficult to alter their choice of energy purchased in the short run when prices rise or fall. On the supply side, long lead times are required for the expansion of output when prices are favourable - exploration, oil field development, infrastructure investments (in pipelines, refineries and so on). Typically, these sunk investment costs dwarf the actual production costs. This means that production does not decline significantly when prices fall. The productive life of oil fields, pipelines, refineries and so forth tends to be measured in multiple decades. Thus, decisions made in the distant past have a significant bearing...
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