Oil dependence: the value of R&D

Abstract

Over the past quarter century, the United States' dependence on oil has cost its economy on the order of $5 trillion. Oil dependence is defined as economically significant consumption of oil, given price inelastic demand in the short- and long-run and given the ability of the OPEC cartel to use market power to influence oil prices. Although oil prices have been lower and more stable over the past decade, OPEC still holds the majority of the world's conventional oil resources according to the best available estimates. OPEC's share of the world oil market is likely to grow significantly in the future, restoring much if not all of their former market power. Other than market share, the key determinants of OPEC's market power are the long- and short-run price elasticities of world oil demand and supply. These elasticities depend critically on the technologies of oil supply and demand, especially the technology of energy use in transportation. Research and development can change these elasticities in fundamental ways, and given the nature of the problem, the government has an important role to play in supporting such research.