In a previous post, I wrote
From time to time, I tell my students that as long as market forces are allowed to work, the world will likley never run out of oil. I think it's an intriguing question and it gets them thinking about how market forces work. There are three basic reasons, all based on market forces, for why we won't run out of oil. Each is based on the premise that when the supply of known oil reserves start dwindling, the price of oil will increase.
1. High oil prices provides an incentive to people to reduce their consumption of oil.
2. High oil prices give an incentive for oil companies to start extracting oil from places where oil is known to exist but where extracting it is very costly. As a case in point, some small oil companies are drilling in urban neighborhoods in Houston.
3. High oil prices give an incentive for oil companies to start exploring for new sites to drill for oil.
Now comes this tidbit from Yahoo!
With oil trading near $60 a barrel, U.S. energy companies are reporting huge profits this week and heralding global searches for new supplies after years of investing in stock buybacks rather than oil stocks.
But renewed exploration is tied to remote and risky areas of the world amid greater competition for those potential resources, energy analysts say. The upshot: High prices are probably here to stay for a while.
Higher prices give incentive to find new sources of oil (and alternative energies), sources that, before, were to expensive to find and extract. Riskiness is a cost of doing business and with lower prices for oil, it does not pay for oil companies to take such risks.
Update: King Banaian at SCSU Scholars adds to the thread with a quote from Russ Roberts' Invisible Heart (thanks, King.). If you haven't read this book, I highly recommend it. Here's a little review I wrote about the book.