The Sky is Falling…We Are Running Out of Oil

Well okay not really. My contention is that we will never actually run out of oil. But I am always amused by the doom-n-gloom crowd and Kevin Drum has periodically posted doom-n-gloom about oil. His latest is no exception. Kevin has gotten a review copy of Matt Simmons book Twilight in the Desert. According to the Sunday Harold of Glasgow,

At the same time, Matt Simmons, one of Bush̢۪s energy advisers, was at a conference in Edinburgh, spelling out harsh facts on Saudi oil production which, if proved true, would have severe repercussions for the global economy.

Okay. Sure, technically if there is no technological advancement at all then yes, things would be bad when we start to use up the last of the oil supply. But how likely is that? How likely is it that there will not continue to be advances for things like hybrid cars, improvements to solar, wind, and other forms of alternative energy. Not very likely, in my view.

However, there is a problem. The problem is that busybodies such as environmentalists and politicians get involved in the market for energy and just muck things up. Gasoline prices are too high, so naturally the politician wants to find some way of getting the prices back down. Of course, low gasoline prices don’t do much for inducing research and development into alternative fuels, hybrid technology and what not. If gasoline is cheap, why not drive a monster SUV?

We see the political aspects of the above problem from both sides. We have the conservatives who are blabbering on about drilling in ANWR as if that oil will be sold at rock bottom prices and not at the prices prevailing on the world market. We see the similar mouthings from some on the Left with releasing oil from the Strategic Petroleum Reserve. Then there is the obligatory hot air from the D.C windbags about the price gouging of oil companies. Or pressuring OPEC to up its production. Keep the price low, keep the voters happy.

Environmentalists, the hard core loony ones, I have always felt want a return to some sort of pre-industrial society. Nuclear is bad. Oil is bad. Coal…really, really bad. They gives up empty chatter about renewables, but when we get right down to it…those don’t work either. After all, we can’t cover the Mojave with solar panels. So…really you’ll just have to go without. Learn to make your own organic wax, on your own sustainable farm while wearing hemp clothing and sandals made of corn husks.

So what happens? We end up in precisely the situation where the oil is running low, prices are going high and because of the busybodies the alternatives are still not on the horizon. Things could get really ugly and painful. My reaction to the higher gasoline prices is: Do Nothing. Let the prices rise and let people and firms react accordingly. Sure it’ll be painful, but so are lots of things.

For example, if we had the government we do now back when mechanization was first moving into the farming industry the politicians and activists would be wringing their hands. We see books with titles like Twilight on the Farm and people worrying about the massive dislocation of farmers and the resulting unemployment. There would be bread lines, generations born with no hope, cats living with dogs and we’d all have a third class ticket on a handbasket to Hell. Fortunately we didn’t have a government like we do today. Nobody worried about mechanization, at least not on a grand scale that resulted in a National Strategic Farm Policy. Instead the mechanization occured, family farms basically disappeared and people went out and found other income generating means.

Another example: whale oil. As whales became more and more extensively hunted the price rose. If we had a Bureau of Whale Oil Accountability there would be dreadful predictions with charts showing global economic collapse. Policies would be implemented to make sure that whale oil would be around for our children and grandchildren. In the end, there probably wouldn’t be a whale left in the ocean. Instead what happened? Someguy figured out how to use kerosene in lamps and in 1859 in Titusville PA the first oil well hits strikes it rich.

But in each of these instances if a person was asked what was going to replace whale oil (prior to Titusville) or what were the erstwhile farmers going to do for a living (prior to mechanization) the answer probably would have been a shrug or “I dunno”. What is going to replace oil and gasoline? I dunno. Is civilization going to destroy itself in a blaze of nuclear glory over oil? Maybe, but I doubt it. For one thing, there has not been a single instance where a resrouce has gone through a complete Hubbert cycle.

A complete Hubbert cycle is where first production is low and flat. Then it ramps up to a peak (or in some cases peaks) and then it ramps down back to low and flat. Why haven’t we seen a complete cycle? How about this hypothesis. As production ramps up, prices fall, but then as production peaks and starts to decline then prices rise. As prices rise people look around for substitutes. Could oil and gasoline be the first complete Hubbert cycle? Sure, but history is against it (hence my bet we wont run out oil). However, if I had to bet as to why oil and gasoline could be the first case of a complete Hubbert cycle it would be due to the busybodies.

My previous post on the Hubbert Curve.

FILED UNDER: Economics and Business
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Django Bliss says:

    I would have to agree. No major research (and I mean large scale corporate funded research, not grant research) will be done on alternative energy until companies see dollar signs. The second that gas and oil prices reach a certain point and consumers begin screaming for a solution there will be a huge incentive for companies to create a solution. It’s only a matter of time, but like you said Steve, finding new oil fields and methods to extract more oil only delay the problem.

    I think that there’s no real question that the energy that will be used in the future (for everything from transportation to heating) will be electricity. But the research has to be done on how to efficiently store that energy. But hey, at least there’s already a distribution network in place. That’s more than you can say for hydrogen.

  2. Anderson says:

    So we will “never actually run out of oil” in the sense that we have “never actually run out of” whale oil?

    This sounds a bit like not “actually” being broke, because there’s all that loose change under the sofa cushions.

    But of course your main point is correct; I do however think the adjustment to another energy sources is going to be unprecedentedly painful, given that we’ve never been *so* dependent on so much technology associated with a single source.

  3. John Burgess says:

    Oil’s not yet too expensive to burn to propel an automobile. When it does become too expensive, then alternatives will start appearing like wildflowers. There are many alternatives that just don’t make sense when oil is priced at $30/bbl, but start to make sense when it’s at $50/bbl. They’ll make even more sense when oil costs over $80/bbl.

    But it’ll still be a steep learning curve for those who insist on solutions perfect in every regard to accept that no solution is perfect, that all solutions have downsides, that people need to actually take some responsibility in aknowledging and accepting the costs of those downsides.

    While most petroleum is burned for its energy value today, I suspect we’ll want it more for its other uses, from pharaceuticals to clothing, in the mid-term future.

  4. Victor says:

    This is why Drum will become a multi-billionaire: the futures market for oil. The market is saying that 2010 crude is trading for less than today’s oil. His wealth accumulation is assured.

    Drum: … My life will also be made more difficult by the fact that the galleys don’t contain any of the graphs and charts that will show up in the finished product, and I have a feeling those graphs and charts do a lot to make the text more understandable. Sigh.

    But I shall persevere, and I expect that shortly I will be a minor expert on the arcane details of carbonate rock formations, Gas Oil Separation Plants, and geostatistical modeling. I’ll bet you can hardly wait.

    I assume this is some sort of attempt at self-mocking humor? If not, however, it does explain why he is so much smarter than the market. I would imagine that becoming a minor expert on geostatistical modeling — without the aid of charts and graphs, no less! — in a few days requires an extremely keen intellect.

    That is truly impressive. I’m going to go out and buy some oil futures. If a man that smart says it, it has to be true. Hopefully I’ll get into the market before he and the Washington Monthly folks bid the price of 2010 oil up.

  5. Steve says:

    Victor,

    Right! Kevin would really impress me if he put some money where his mouth is. It doesn’t have to be alot of money, but some would at least send a signal that even he believes this.

    Anderson,

    Funny analogy, but yeah. We have never gone through a complete Hubbert cycle on anything. I suppose someday we will, but I have yet to see any compelling argument that we have tol/gasoline.

  6. Daniel Swanson says:

    I read these same arguments over and over. They are well intentioned, but missing the point.

    In order to understand the energy situation that we are in, two things must be understood that all too frequently are not.

    First, We cannot run out of oil. As soon as I see someone talking about running out of oil, I know that they as least do not understand the problem, maybe that they are incapable of understanding the problem. The problem is that we are losing control of the cost of energy, and our economy may not survive that situation.
    We may very well end up in a severe depression with 25% of the world original endowment remaining in the ground.

    Second, Money cannot solve this problem. This problem is about energy. If you think in terms of money you will never understand the problem. You must think in terms of energy return, then you could translate to potential money returns. Money is not real, it is a man made abstraction for wealth. We have made assumptions about this abstraction that will not hold true in a falling energy economy.