Peak Oil

Basically, Peak Oil is the idea that someday (soon!) we’ll run out of oil. To quote from Wikipedia,

Peak oil is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline.” (soon!)

There are a lot of people tossing numbers and projections and figures and expectations (soon!, really soon!) about when we’ll hit Peak Oil. (the end is nigh!) In the current economic climate, we’ll undoubtedly hear a lot about Peak Oil and our dependence on fossil fuels. It’s important to remember that it’s all wrong.

Oil reserves are infinite. Yep, that’s right. They’re infinite.

The earth’s natural resources are finite, which means that if we use them continuously, we will eventually exhaust them. This basic observation is undeniable. But another way of looking at the issue is far more relevant to assessing people’s well-being. Our exhaustible and unreproducible natural resources, if measured in terms of their prospective contribution to human welfare, can actually increase year after year, perhaps never coming anywhere near exhaustion. How can this be? The answer lies in the fact that the effective stocks of natural resources are continually expanded by the same technological developments that have fueled the extraordinary growth in living standards since the industrial revolution. — The Concise Encyclopedia of Economics

That doesn’t mean that the price of oil won’t rise. Prices rise as a resource is consumed–that’s what stimulates innovation and competition, which is what increases the effective reserves. (It’s also important to note that oil is affected by a lot of political externalities that affect its current price. The war in Iraq and the artificial supply constraints practiced by OPEC are the most important.)

One camp (primarily geologists) argues that few, if any, major new oil fields remain to be found and that mathematical calculation demonstrates that production will peak at some point in the not-too-distant future and then begin a slow but steady decline. Another camp (primarily economists) contends that reserves are as much an economic as a geologic phenomenon. That is, reserves are discovered and counted when it makes economic sense to find them. Thus, we do not know how much economically profitable oil has yet to be “discovered.” Technological advances are adding reserves at a far greater rate than they are being depleted. For example, in 1970, non-OPEC countries had about 200 billion barrels in reserves. Through 2003, they had produced 460 billion barrels and still had 209 billion barrels remaining. Although the debate is inconclusive, the weight of the evidence suggests that economists have the better argument. — The Concise Encyclopedia of Economics

Resources aren’t just things, they’re things that get used and that’s important. If we’re trying to figure out how much of a resource we have, it’s important to look at how we use that resource. In that respect, it’s important to look at all the ways that use a resource and pay attention to whatever policy choices we make. Oil reserves may be effectively infinite, but that doesn’t mean that we shouldn’t pursue other forms of energy. Neither does it mean that we shouldn’t necessarily conserve our use of a resource, although it does mean that conservation efforts should be tailored to achieve some actual good other than mere conservation. Take CAFE, for example,

An example of the economic case against direct regulation is the fuel economy standards for cars and trucks. The Congressional Budget Office estimates that increasing the Corporate Average Fuel Efficiency (CAFE) standards to achieve a 10 percent reduction in gasoline consumption would cost producers and consumers about $3.6 billion a year more than the value of fuel savings, or about a net cost of $228 per new vehicle sold. Achieving the same reduction through a gasoline tax increase of 46 cents per gallon would cost producers and consumers about $2.9 billion a year, or $184 per new vehicle sold. While few dispute such observations, CAFE standards are more politically palatable than gasoline taxes because the costs of the former are hidden from consumers, while the costs of the latter are not.

CAFE standards not only cost more than gasoline taxes to achieve a specific consumption reduction, they also reduce the marginal cost of driving a mile—and thus, ironically, increase vehicle miles traveled. The economics literature suggests that for every 10 percent increase in fuel efficiency through standards, people increase their miles driven by 2 percent. In fact, any efficiency standard that reduces the marginal cost of consuming energy will have an analogous effect, known to economists as the “rebound effect.”

One of the consequences of the rebound effect in relation to CAFE standards is a net increase in air pollution. According to one recent study, a 50 percent increase in fuel efficiency standards would reduce gasoline consumption by about 21 percent, but would increase net emissions of volatile organic compounds by 1.9 percent, nitrogen oxides by 3.4 percent, and carbon monoxide by 4.6 percent. — The Concise Encyclopedia of Economics

Conservation efforts are fine, as long as the cost of the conservation doesn’t exceed the cost of the commodity conserved. It just doesn’t make sense for me to spend $100 to conserve $75 worth of oil. That kind of reasoning only makes sense if we care more about oil than we do about people.

Whenever we talk about a resource, we’re really talking about a thing that’s used by people. Resources are used to make our lives better. We quite literally cannot improve our lives by conserving resources, we can only improve our lives by consuming resources. Which is not to say that we cannot over-consume; we certainly can. Buy a bag of Doritos and you’ll find that out. But it is important to keep in mind that the consumption and use of resources is what makes our lives better. And that’s what matters.


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