Got Oil?

Nearly 30 years ago, economist Julian Simon, who believed that Earth’s natural resources were infinite, and biologist Paul Ehrlich, who believed that Earth was going to run into massive scarcity problems decided to place a bet on their respective predictions. Ehrlich would get to select a number of any five metals he wanted with a value of $1,000 in 1980. If after ten years, the price of the metals was worth more than $1,000 after accounting for inflation, Ehrlich would be judged the winner. If smaller, Simon would win. Ehrlich took the bet.

He shouldn’t have. In 1990, Ehrlich was adjudged the loser of the bet and as the link points out, Ehrlich would have lost even if the price of the metals was not adjusted for inflation after ten years. It’s a good thing for Ehrlich that Simon did not offer to wager on Ehrlich’s statement that “If I were a gambler, I would take even money that England will not exist in the year 2000.” Who knows how much money Ehrlich would have lost on that proposition?

Paul Ehrlich’s famous pessimism concerning the scarcity of natural resources was typical of the times. Today’s successors to Ehrlich haven’t learned from his example. They are too busy propagating the theory of “peak oil.”

The “peak oil” theory states that at a certain point in time, oil production will go into permanent decline. The dire warnings behind the movement are often cited by those who believe that humankind must make the switch from fossil fuels to alternative forms of energy. The current high price of a barrel of oil and the correspondingly high price of a gallon of gasoline is often cited as evidence that oil is reaching a point of scarcity. The smaller the amount of oil, the higher the price of an individual barrel of oil.

Now, having alternative forms of energy available is not a bad idea. In fact, if we gravitate towards a certain tried and true alternative form of energy — namely, nuclear power — the results could be quite beneficial indeed. But if we employ nuclear power as an alternative resource, it should be because of the advantages offered by nuclear power. It should not be because of any fear resulting from listening to the prophets of “peak oil” theory.

Put simply, “peak oil” is a bogus theory. Why? Because we are able to extract more oil from the Earth’s surface than ever before. Don’t believe me? Then read this:

The Kern River oil field, discovered in 1899, was revived when Chevron engineers here started injecting high-pressured steam to pump out more oil. The field, whose production had slumped to 10,000 barrels a day in the 1960s, now has a daily output of 85,000 barrels.

In Indonesia, Chevron has applied the same technology to the giant Duri oil field, discovered in 1941, boosting production there to more than 200,000 barrels a day, up from 65,000 barrels in the mid-1980s.

And in Texas, Exxon Mobil expects to double the amount of oil it extracts from its Means field, which dates back to the 1930s. Exxon, like Chevron, will use three-dimensional imaging of the underground field and the injection of a gas — in this case, carbon dioxide — to flush out the oil.

Within the last decade, technology advances have made it possible to unlock more oil from old fields, and, at the same time, higher oil prices have made it economical for companies to go after reserves that are harder to reach. With plenty of oil still left in familiar locations, forecasts that the world’s reserves are drying out have given way to predictions that more oil can be found than ever before.

Don’t believe that? Then read this:

How much oil lies beneath the Earth’s crust? The only thing we know for sure is that history is littered with estimates so far off the mark–usually below the mark–that they border on the comical. In the 1920s, for instance, the Anglo-Persian Oil Co. (now BP) refused to take a stake in Saudi Arabia, thinking that the country didn’t hold a single drop of oil. In 1919, the U.S. Geological Survey predicted that the United States would run out of oil in nine years. Yet by the time nine years had passed, huge discoveries, topped by the Black Giant field in Texas, had created a massive oil glut that almost destroyed the industry. In the 1970s, the consensus turned grim again: oil production would peak in the mid-1980s and then drop precipitously. A famous CIA report predicted the "rapid exhaustion" of accessible fields, while President Jimmy Carter warned that oil wells were "drying up all over the world." Instead, in 1986, oil prices collapsed in the midst of a huge supply boom, as they had done many times before.

Now doomsday forecasts are back, predicting the end of oil in this decade or the next. The verdict of the new catastrophists may appear more convincing because they use statistical and probability models that appear to penetrate the mysteries of our planet’s subsoil. In fact, they do no such thing. In sum, what little is known about the world’s underground resources justifies a positive view of the future.

There are a lot more articles where that came from, all of which show that we are not even close to a situation where we need to worry about oil production peaking.
It’s true that the “peak oil” crowd doesn’t take into account the many different ways in which technological advances have enabled us to extract more oil from the Earth. But there is an even more fundamental flaw behind the “peak oil” argument; an inability by its proponents to understand basic economics. As economics professor Steven Levitt points out, oil is subject to the same laws of supply and demand that any other commodity is governed by. Because changes in supply and demand concerning a particular commodity are incremental in nature, prices may rise, but only a little bit. The increase in the price of a particular commodity does not constitute evidence that we are reaching a point where that commodity will be scarce. Indeed, as Levitt goes on to show, the very people who predict “peak oil” doom are forced to admit that there is a long history of oil prices crashing. If the high price of a barrel of oil means that “peak oil” is just around the corner, does the rock-bottom price of a barrel of oil mean that we have oil in abundance? I look forward to this admission being made when oil prices eventually drop — as they always do in response to market demand.

Dramatic advances in the technology of oil extraction now allow us to increase the supply of oil available to us in ways unimaginable only a few years ago. Supply and demand issues are further dealt with by market incentives in order to alleviate supply problems. It’s a good thing for the advocates of “peak oil” that Julian Simon is no longer alive to offer them a friendly wager on whether their predictions might come true. Otherwise, they might find themselves significantly lighter in the wallet.