World oil: The growing case for international policy

Can the economic theory of depletion be reconciled with low petroleum price s? This article uses a revision of the theory, which reflects demand functi ons that rise in response to increasing world population and income. The ma gnitude of producers' and consumers' surplus is estimated under both compet itive and monopolistic assumptions; the result indicates a present value co mparable to or in excess of today's gross world economic product. Came theo ry suggests a framework that explains the interaction between oil pricing a nd military policy, and the economic incentives that result in a general pa ttern of recent market equilibrium crude oil prices often fluctuating withi n a $15-20 per barrel range. The analysis concludes that the economic incen tives for political instability in the Persian Gulf will increase, and more formal methods of setting the international framework for Persian Gulf oil may be expected. (JEL C61, Q32, Q41, Q43, Q48).