We'll never run out
Donald J. Boudreaux, National Post Published: Tuesday, September 02, 2008
Are we running out of oil? The question seems silly. "Yes" is the obvious answer.
Or is it?
That there is less oil in the ground today than there was yesterday is true. That there was less oil in the ground yesterday than there was in 1870 is also true. But "running out of oil" is not as much a question of physics as it is one of economics. And economics assures us that we will never run out of oil.
My colleague Russ Roberts explains why in his book The Invisible Heart. Imagine, Russ says, a room full of pistachio nuts. You love pistachios and can eat all that you wish as long as you throw each empty shell back into the room whenever you eat a nut. You might suppose that you'll eventually devour all of the nuts in the room. Their number, after all, is finite.
But some thought reveals this conclusion to be, well, nutty. At the start it's easy to find pistachio shells containing nuts. The more you eat, though, the more difficult it becomes to find uneaten nuts among the increasing number of empty shells. Eventually, it will not be worth the time and effort required to search amidst the empty shells for the relatively few remaining nuts. You'll voluntarily leave uneaten pistachios in the room.
And so it is with oil. As we continue using oil, getting more of it becomes increasingly difficult. This increasing difficulty of finding and extracting oil is reflected in its higher price -- a phenomenon that prompts consumers to consume oil more carefully and prompts producers to explore for alternatives.
Of course, advances in technology often render reality richer than this simple story. For example, if a new, lower-cost technique for extracting oil is invented, then oil that yesterday was too costly to get might today be profitably extracted and sold. It's highly doubtful, though, that the cost of extracting oil will ever fall so low -- or that the demand for it will ever rise so high -- that we will find it worthwhile to extract literally the Earth's last barrel of petroleum.
The economic limits on the supply of oil clearly differ from its physical limits.
Even oil's physical limits, though, are unknown. Because exploring for oil is very costly, no one has incentives to search for more than a few years' worth of supplies. Just as you don't stock your pantry with more than a few weeks worth of food -- just as you go to the supermarket only when your existing food supplies run low -- oil companies sensibly explore only for enough oil to satisfy their expected needs over the next few years.
Also, just as it would be absurd to estimate your household's lifetime supply of food based only upon the stock in your pantry, it's absurd to estimate the world's long-term supply of oil based only upon today's proven reserves of that resource. There simply is no good way to know how much oil exists in the Earth beyond the always-limited amounts that oil producers have proven to exist through their economically constrained explorations.
Nevertheless, doesn't physics tell us that this amount is limited? Yes -- but physics cannot tell us the economic relevance of this fact.
Consider two scenarios. Scenario One: You're a mosquito on the surface of a balloon containing as much blood as an Olympic-size swimming pool contains water. You, hungry mosquito that you are, inject your proboscis into the balloon and enjoy a meal. By doing so you negligibly reduce the volume of blood in the balloon. Whether you know it or not, you can gorge yourself on blood from this balloon for the rest of your life and there will still be ample blood remaining to feed countless generations of your offspring.
Scenario Two: You're a mosquito on a balloon the size of a pea. You eat a meal. The size of your meal relative to the blood-contents of the tiny balloon is large; you significantly reduce the contents.
I don't know if our relationship to oil is like that of the mosquito in scenario one, but
I'm confident that it's not like that of the mosquito in scenario two. Perhaps we're in some intermediate scenario -- say, like a mosquito on a blood-filled balloon the size of a large beach ball.
Point is, we could be like the mosquito in scenario one. That mosquito needn't know that she's atop a quantity of blood that's practically limitless. If she's informed that the amount of blood in her balloon is finite, she might needlessly worry that she'll run out of blood. She might pointlessly reduce her consumption to avoid a mythical "end of blood."
Again, I don't know that we're like the mosquito in scenario one -- but no one knows that we're not. A resource physically finite might be economically inexhaustible.
-Donald J. Boudreaux is professor of economics at George Mason University.
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