X-Message-Number: 24222 Subject: Oil depletion From: Michael Hartl <> Date: 10 Jun 2004 18:59:43 -0700 Readers of this list have a vested interest in understanding any factors which might make the future much better or much worse than it is today, since many of us plan to be around when it happens. As a result, the issue of oil depletion is a relevant topic for discussion. Among other things, if civilization faces possible collapse in 50 years because we run out of oil -- as some serious thinkers have proposed -- it certainly has implications for the potential success of cryonics. Most people, and especially most scientists, don't have a good understanding of economics, and as a result there is much confusion on the subject of oil depletion. My own thinking on the subject was sparked by David Goodstein, a physics professor at Caltech (where I got my physics Ph.D. and where I remain a visitor in the department). David is a principal exponent of the view that oil production will peak very soon (within one or two decades), and has expressed his view clearly in lectures and in his book, _Out of Gas: The End of the Age of Oil_. David is a clear thinker and an accomplished scientist, and he makes a compelling case; I am inclined to believe his claim that we are "running out of oil". And yet, unlike him, I am not particularly worried. How can this be? The answer begins with the Law of Diminishing Returns, mentioned at one of the sites liked to by Mark Plus: http://www.abelard.org/briefings/energy-economics.asp#diminishing_returns The definition there is essentially correct; the Law of Diminishing Returns says that people tend to exploit the best resources first, so that over time the quality of these resources tends to decrease. This might seem obvious, and it should. Unfortunately, the site fails to mention by far the most interesting aspect of the Law: despite the Law of Diminishing Returns, the price of material goods tends to decrease over time. Virtually all resources are cheaper now than they were in antiquity, for example. The reason for this is simple, yet profound: the productivity of human labor tends to increase fast enough to overcome diminishing returns. Despite diminishing returns, human beings are materially much better off now than our ancestors were, simply because we are so much more productive. It is worth reflecting on how remarkable this is, and how contrary it is to our naive intuition. A second part of the answer lies with free markets and the price system. As a material resource becomes depleted, its price rises, for a fixed quantity demanded. The increasing price provides an incentive to search out new sources of the material, to develop new technology to extract the resource in a new way, or to find a substitute for the resource. There is, of course, no guarantee that these new sources will be found, that the requisite technology will be developed, or that a suitable substitute will be found,but the historical evidence is unambiguous: humanity has never "run out" of any resource when free markets have been allowed to operate. Quite the opposite -- using price as the (correct) measure of scarcity, we are forced to conclude that we have more now of virtually everything. Consider now the case of oil. If oil production soon peaks, its supply will then decrease; for a fixed (or growing) quantity demanded, the price will increase. As the price climbs ever higher, the incentive to exploit currently marginal oil sources (such as tar sands) will increase; sources unprofitable at $40/barrel might be highly profitable at $100/barrel. (As an aside, please understand and reject the nonsensical pseudo-thermodynamic arguments against tar sands and the like. The so-called energy return on energy invested [EROEI], which supposedly makes tar sands unviable, is not fixed by physical law, but rather is a function of the technology used in extraction. Some sources of oil today, including many deep-sea deposits, had an EROEI less than one using the technology of 20 years ago, making their extraction uneconomical at the time. It is perfectly possible for a resource with an EROEI less than one now to have an EROEI greater than one in the future.) If, as has happened historically, the improved technology more than compensates for the inferior quality of the source, then the price of oil will eventually drop below the price that originally provided the incentive to develop the technology. Of course, in a physical sense there must be a finite amount of oil, so we must "run out" eventually even if my claims about improved technology are right. Luckily, oil is not the only source of energy; whether or not we run out of oil is irrelevant if we can find substitutes for its uses. Unfortunately, current "alternative energy" sources are not price-competitive with petroleum; fortunately, as scarcity forces the price of oil up they will become so. Moreover, the incentive to invest in, say, solar energy will be much higher if oil is trading at $100/barrel than it is at $40/barrel. As a result, if history is any guide, there will be some major breakthrough in one or more alternative sources of energy, and ultimately the price of energy will actually decrease, as it has for centuries. (As an aside, I should note that petroleum has costs not reflected in its current price, most notably the cost of pollution and the taxes spent on military efforts to maintain stability in the oil-rich Middle East. It would probably be a step forward to include these costs in the price of oil somehow, such as a special tax on gasoline; alternative sources still wouldn't be price-competitive, but the cross-over point would certainly come sooner.) Improvements in the productivity of labor, as the result of specialization and improving technology, have always allowed humanity to overcome the Law of Diminishing Returns. It is possible that oil will be the exception; perhaps no one will figure out how to make tar sands a viable resource, or perhaps a "major breakthrough" in alternative energy won't occur. Given the historical evidence, though, the onus is on those who think oil is different from other resources to prove their case. Moreover, for those who are optimistic enough to think that disaster might be averted somehow, the onus is on them to show that their preferred solution is better than the one provided by free markets and the price system. When allowed to interact in free markets, human beings have shown a remarkable ability to overcome all manner of challenges, including the supposed depletion of natural resources. I am therefore sanguine about our prospects of thriving, even as we run out of oil. Michael -- Michael Hartl http://michaelhartl.org/ Rate This Message: http://www.cryonet.org/cgi-bin/rate.cgi?msg=24222