Petroleum Economics.

Petroleum Economics

Jean Masseron, Petroleum Economics (Paris: Editions Technip., 1990), 519 pages.

Most writers on petroleum find crude oil production enough of a challenge to seize their entire attention. This book seeks to cover all of petroleum -- oil from production to sales,

As is made clear only after you get past the title page, Masseron had four collaborators on the book. Francois Bonis-Charancle wrote the section on demand and marketing of petroleum products. Jacques Cheli did petrochemicals. Jean-Luc Karnik and Michel Valais covered natural gas. Masseron himself provided the introductory and concluding sections and the sections on crude oil markets, transportation and refining. The book was originally available only in French, but at some stage (possibly with this edition), an English version was added.

The economics are predominantly applied. Attention is on technologies, industry and government practice, and available data on quantities and costs. The emphasis on breadth results in considerable variation in the adequacy of the treatment. The strongest sections are those on oil refining, transportation, and marketing. The natural gas and petrochemical sections are good introductions; the crude oil section is too terse. Given the state of the literature noted initially and the already substantial size of the book, these seem reasonable choices. Emphasis is placed on issues where good additional material is hard to find. The main criticism that might be levied is that the bibliography provided is too scanty to guide neophytes.

The discussion starts with a 48-page overview that first rushes through the treatment of past and prospective consumption trends, investment levels, the uncertainty of drilling success, the role of transportation and refining, and the nature of the oil companies. Not surprisingly, this proves too cursory even as an introduction. Then roughly in the middle Masseron introduces the rise of OPEC and devotes the rest of the chapter to a good summary of OPEC-company relations and oil shocks.

The crude oil section is subdivided into a market chapter, a cost chapter, and a tax and legal aspect chapter. The first of these again tries to cover too much with widely variable success. It begins with three pages on the all-too-familiar shift from Texas Gulf pricing, and then turns to successive surveys of policy practices in the USA, Western Europe, CPEs, and OPEC, reserves, and pricing. The best discussions are those on pricing and OPEC, but even they are too limited. The basic concepts and problems are well explained, but too much is left hanging. As short as it is, the cost survey gives a good overview. The legal and tax discussion provides clear explanations of several of the regimes that have been in force. The role of national oil companies is slighted.

The tanker chapter of the transportation section manages well to cover the availability of tankers and port facilities, the distances on major routes, the costs of construction and operation, and rates and how they are set. The pipeline chapter describes the major pipelines and the cost situation.

The refining section begins with a terse but solid explanation of how crude oil characteristics, demands for different products and refining technology interact. This is followed by discussion of the size and costs of the refining sector. The cost discussion carefully treats the key influences. A misnamed legal chapter superficially treats law and then has an interesting introduction to the use of linear programming to optimize operations.

The marketing section is subdivided among consumption trends, distribution techniques and marketing practices. The consumption section seeks to explain the nature of the various products, their roles and how they have evolved, the role of individual oil companies, price setting, and the pollution impacts. The device of showing rates of change between 1978 and 1988 proves a good way to convey a great deal in a short space. The pollution survey is a good introduction; the price and tax discussions are at best useful starts. The other chapters are a bit too terse and selective. The distribution chapter covers in 24 pages a sample of regulatory influences, the types of arrangements between refiners and distributors, transportation patterns, and service station costs. The even shorter marketing chapter works better by focusing on branded versus unbranded gasoline.

Cheli is amazingly successful in conveying the basic issues about petrochemicals in less than 40 pages. He focuses on what is important -- the wide range of products and their uses, the high growth rates experienced, the changing identity of the producers, the effect of oil prices, and the possibilities of shifts back to coal-based production.

Somewhat surprisingly, the natural gas section is only slightly longer than the petrochemical one. Again, we get a good primer that covers production, reserve prospects, transportation technology, possible markets, pricing, and prospects. Given the lack of a good comprehensive recent analytic review of natural gas, someone should do more but that may require another separate book (each of the several good available studies of natural gas unfortunately is deficient in some area).

The book concludes with reflections on energy prospects in which the whole seems less than the sum of its parts. Masseron presents a series of generally sensible observations on reserves of different fuels, costs, problems of introducing new fuels, balance of payment impacts, and the role of oil companies. He concludes by proposing accords to stabilize oil prices, stockpiling, and conservation policies. These are typically European proposals. The familiar objections on the basis of merit need not be reiterated here. The key complaint is that nothing in the prior discussion leads to these conclusions.

The faults are inevitable in a book of such ambition. Those seeking a good crash course in the nature of the hydrocarbon industries are well-served. At least for the next few years, those who still teach energy economics will find the book a good way to provide the institutional detail otherwise so hard to find. The authors are urged to keep up their efforts and provide the updating when needed. Richard L. Gordon The Pennsylvania State University