Traditional economic analysis suffers when oil and natural gas prices are on a roller coaster. On the ride up, there are expectations of massive profits. On the ride down, there are dire predictions of economic doom, of outflight of capital, and of collapse in drilling. However, a narrow focus on only oil prices misses the point that costs also rise and fall with prices.

This paper examines the interdependent roles of prices, costs, and efficiency on the economics of domestic oil and gas supplies by addressing three points:

  • Historical relationship of costs and prices since the early 1970's;

  • Change in relative oil and gas supply economics since the "energy crises" through today;

  • Implications of the cost/price relationship on "least-cost" strategies for oil and gas reserves and alternate fuels.

The paper concludes with several examples to show where proper use of cost/price relationships could improve industrial and public policy decision making in energy.

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