The Case for Increasing Supplies of Petroleum

by Don Boudreaux on September 25, 2007

in Energy, Environment, Myths and Fallacies, Seen and Unseen

A few Cafe patrons have, quite reasonably, questioned my claim that it is not at all obvious that we’re running out of oil.  The main point common to all of the e-mails that I’ve received on this matter is that, even though proved reserves of oil are today higher than they were in decades past, the actual, physical amount of oil in the ground must be less than it was back then.  After all, the more oil we use the less oil there must be remaining in the ground.

This fact is almost surely true.  But economically it might be irrelevant.  I reprise below one of my earliest posts here at Cafe Hayek:

Is it Possible that the Quantity of Oil is Practically Infinite?

Don Boudreaux

It seems obvious that we’re destined to encounter seriously reduced supplies (and higher prices) of oil.  Even physics professors say so.

But consider a couple of scenarios.

Scenario One: You’re a hungry mosquito on the surface of an enormous balloon. The balloon contains as much blood as an Olympic-size swimming pool contains water. You, hungry mosquito that you are, inject your snoot into the balloon and enjoy a meal. Of course, by doing so you negligibly reduce the volume of blood in the balloon. But 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 far more blood remaining in the balloon at your death than you’ve consumed during your lifetime.

Scenario Two: You’re a hungry mosquito on a balloon the size of child’s marble. You take 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 humanity and its demand for oil is like the mosquito in scenario one, but I’m sure that we are not like the mosquito in scenario two. We might be in some intermediate scenario – say, like a mosquito sitting atop a blood-filled balloon the size of a large beach ball.

But we could be like the mosquito in scenario one. That mosquito needn’t know – probably wouldn’t know – that she’s atop a physical quantity of blood that is practically limitless. If she’s told, accurately, that the amount of blood in her balloon is finite, she might worry that she’ll run out of blood, or that she’ll drink so much that what eventually remains in the balloon will be too costly for her to suck out; she might persuade herself to drink less blood. Would she be wise to do so?

If scenario #1 is closer to reality — and the evidence so far is consistent with that possibility — then the relevant constraint on our getting oil out of the ground is not any scarcity of the physical amount of oil that exists in the ground as much as it is the scarcity of our ingenuity and resources for use in that endeavor.  As this ingenuity and these resources become more abundant — as their effectiveness in finding and extracting crude oil improves — the amount of oil available for our use does indeed increase, in a very real way, over time even as we consume more oil.

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{ 49 comments }

shawn September 25, 2007 at 12:02 pm

…i really liked Prof. Roberts' 'pistachio' analogy in Invisible Heart…helped me out a lot in understanding this.

lowcountryjoe September 25, 2007 at 12:07 pm

When the mosquito population does become aware of the finite amount of oil — whether on a beach ball or marble sized container — they will, without the aid of government, probe other parts of the container [Mosquito Coast, perhaps?] in order to seek the path of least resistance (costs) to get at the blood. The mosquito population may even need to evolve and develop a longer snoot [but will they be bright enough to cooperatively establish property rights to the blood?].

And finally, if the finite supply of blood does indeed become exhausted, the mosquito population would have to find a new food source; or perish. That is, of course, if climate change from blood refining and blood byproduct usage has not killed them off first. Fortunately, oil byproducts run machinery and are not food for humans. Why is it, anyway, that those with environmental concerns regarding the externalities of oil consumption are also concerned — and make dire arguments/predictions regarding — a dwindling oil supply. Be consistent, Mr. Environmentalist, celebrate the coming day when oil has been exhausted.

Flash Gordon September 25, 2007 at 12:13 pm

Unfortunately, most Americans are completely unaware of the rapid pace of engineering technology in the mineral extraction industry. Because of the ingenuity of engineers and geologists we are able to extract oil and gas from new sources and in greater and greater quantities.

A wonderful example is the new technology that permits the extraction of methane from coal seams. Just 20 years ago methane was considered a dangerous waste product in coal mining.

Methane is CH4, same as natural gas from any other source, and occurs in almost all coal beds. It is what kills miners in underground mine explosions. Previously, it was released to the atmosphere. Now it is extracted before the coal is mined. This not only provides us with a new source of natural gas, but also makes coal mining safer and more environmentally friendly.

The really big story is how environmentally friendly oil and gas extraction has become. This has so frustrated radical environmentalists that the only complaints they can come up with against oil drilling is that it destroys wildlife habitat, causes lots of road building, and pollutes the air with diesel emissions.

Problem is, none of that is true. Deer and elk don't seem to mind oil rigs, heater treaters or pump jacks one bit. In fact, well head equipment provide a sort of sanctuary for them because it is warmer near these facilities in winter and hunters can't shoot them there. As to road building, there are obvious economic incentives for oil companies to build as few roads as possible since it is a costly activity. One oil rig uses only one or two diesel engines only during actual drilling while thousands of diesel engines travel our interstates every day of the year so this complaint is non-sensical.

diz September 25, 2007 at 12:42 pm

I did pointed out the difference between "Proved Reserves" and "Oil in the ground", but I hope it was clear that I essentially agree with your position.

"Peak Oil" will be more an economic event (influenced by technogical developments) just as "Peak Whale" and "Peak Horse" were before it. Just as prices dictated when our lighting needs were better met by rock oil than whale oil, prices will tell is when our transportation needs are better met by some other fuel than petroleum.

This may be because supply curve issues cause oil prices to rise to the point where oil is a disadvantaged fuel, or it may be because technological developments cause the cost of an alternate fuel to fall to the point where oil is a disadvantaged fuel. The electric power industry experienced "peak oil" decades ago, with out much fanfare. Markets, which once told power generators to build oil fired plants, eventually told them to build natural gas fired plants instead. Oil is now pretty much relegated to use in transportation fuels, because that's where it enjoys its highest advantage versus possible competitive fuels.

Prices contain information about how our needs are best met, and where our resources have their highest value.

And here I really am using "prices" as a shorthand. I don't intend to exclude the theoretical possibility of externalities, nor the fact that some fuels aren't as good as others at meeting our needs (I understand horses lacked air conditioning and CD players, for example)

ScentOfViolets September 25, 2007 at 12:46 pm

So, let me get this straight: We're pretty certain that zero-point energy exists, we just don't know how to tap it. But it's only a matter of time until we do; one day everything will be powered by compact, pollutionless, zero-point extractors.

And how about: At present, we don't have the foggiest idea of how to go faster than light. But at some future point, we'll be able to, thus setting the stage for the sort of space opera we only see on the big screen.

We don't know how to indefinitely prolong youth, or even life. Yet. But it's only a matter of time until we start seeing twenty-something looking immortals running around.

Need I comment on the level of ignorance, the complete lack of any technical sophistication shown by these types of speculations?

M. Hodak September 25, 2007 at 3:28 pm

"Need I comment on the level of ignorance, the complete lack of any technical sophistication shown by these types of speculations?"

SOV – I need to comment on the lack of logic and imagination associated with that comment.

The logical failing is conflating examples of speed of light and immortality. The speed of light is a physical constant that is (highly likely) insurmountable. Every physicist would be skeptical that we could ever overcome it, though few would exhibit the bald certainty your comment suggests. Immortality is completely different. There is no biological law that sets mortality in stone.

I haven't seen a poll of this sort, but I'd bet that most people educated in the medical arts would be highly confident that by the year 3,000 we'll have treatments and regenerative techniques to indefinitely prolong the average human life. The big debate is how many generations away we are from such treatments.

I take it you're not in any rush. If enough people like you are convinced that we've pretty much hit the wall on life extension, and now all that is left is to distribute current technology as equitably as possible at the cost of medical innovation, then we're surely pushing off the time to immortality by several more generations.

And most of the people pushing that agenda will no doubt be doing it in the name of the children.

Chris September 25, 2007 at 3:47 pm

The much bigger risk than running out of oil is the risk that the people telling us about their reserves are lying. As Russ noted in the most recent podcast, and as Don has alluded to, we are getting better and better at using oil. Right now, assuming we are allocating our resource correctly (i.e. assuming that we have enough information), technology will presumably keep pace with the available supply of oil.

The problem, though, is that everybody's usage and activity today is geared around what we believe the reserves will be. For example, nobody is concentrating on figuring out how to get cars to run on asphalt (basically, the lowest-grade sludge in an oil field) because everybody believes that there is still plenty of higher-grade oil available and that asphalt research wouldn't be cost-effective right now.

The problem is that OPEC members have an incentive to exaggerate about their reserves. Under OPEC policy, the amount of oil each country can produce each year is proportionate to its reserves, which it self-reports. So, OPEC countries are probably over-estimating the size of their reserves. Heck, once one country over-estimates, the other countries have an even stronger incentive to fib on their own.

The risk, of course, is not that we will "run out of oil," per se, but that we will experience shortages of the highest grades of oil when nobody expects us to. And, that could cause some rather severe macroeconomic headaches.

ScentOfViolets September 25, 2007 at 3:55 pm

You missed the point I was trying to make, missed it by a clean mile, and in fact, went on to make it for me.

The point is that the author is making the indefensible assumption that something better will most likely come along, and this assumption is justified because something better has come along in this particular field in the past.

This strikes me as willfully ignorant – hence my comparisons with some of the more ludicrous science-fictional predictions as a reducto absurdum.

This sort of idiocy comes up among non-tchenical people often enough that there's even a phrase for it 'Fifty years after saying hydrogen fusion is less than fifty years away, fusion is less than fifty years away.'

Now, I frankly don't know if these extraction technologies are plausible or even plausible, or if there is or is not a superior alternative to hydrocarbon fuels. And I don't know anybody else who knows either.

And yet – this it the meat of the matter – the original author thinks he knows enough to make affirmative declarations about a priori probabilities, is confident enough, in fact, to say that we're not in 'scenario one'.

Rank idiocy, as I said.

Dr. Troy Camplin September 25, 2007 at 4:29 pm

Basic economics shows that we will never run out of oil. As we use up the supply of oil, the price will go up. This will make it more economical to locate and drill harder-to-reach reserves. Higher oil prices will also result in the creation of alternatives, as it will be worth looking for and developing those alternatives. Over longer periods of time, as oil gets used up and the price of oil goes up in response to supply, less oil will be used, and more alternatives will be created, until we are completely converted to the alternatives — sometime before we ever use up all the oil. There will eventually be a price where nobody cares to get any of the oil, and what is left will stay there. Thus, we will never, ever run out of oil. It's basic economic principles.

rufus September 25, 2007 at 4:42 pm

I think they said the same thing about Hubbert's prediction. They were wrong.

Worldwide Crude "Production" peaked in 2005. We're expected to have a producion-demand shortfall of at least 2 million barrels/day by Christmas. No expert in the world (that I know of) thinks there will be more "Production" next year than there was this year. They all, as far as I know, think Demand will increase. It's looking pretty "Peaky," to me.

Jason September 25, 2007 at 5:03 pm

"Worldwide Crude "Production" peaked in 2005. We're expected to have a producion-demand shortfall of at least 2 million barrels/day by Christmas. No expert in the world (that I know of) thinks there will be more "Production" next year than there was this year. They all, as far as I know, think Demand will increase. It's looking pretty "Peaky," to me."

Then you know exactly how to make lots of money, buy the long term oil contracts. Nov '07 closed today at $79.51 but you can buy the April '08 contracts for $76.88 or even the Dec '15 contracts at $71.82. Obviously the markets dont think we are in a Peak oil senario.

rufus September 25, 2007 at 5:28 pm

Jason, does the phrase "shoulder months" mean anything to you? Go back and look at the crude price for Aril 97'

As for Dec. 2015: Man, I've bet on some "far-out" things, but Oil, eight years hence? Never nothing like that.

LowcountryJoe September 25, 2007 at 5:51 pm

Chris,

The OPEC cartel, acting as though it were a single company, with many owners each having varying degrees of ownership stake in its net profits, are possibly conflicted when setting their proven reserve volume. On the one hand there's the proportional arrangment that you mention — I'm assuming that what you contibuted is true. But on the other hand, there's also an incentive for the cartel to make the aggregate volume seem lower so that there's a percieved scarcity which will allow them ask more per barrel. The trick is to keep everyone in the cartel happy and maximizing profits while not giving so dire of a volume number that it encourages governments to press for alternative fuel discovery…not that governments will do best in that regard.

blake September 25, 2007 at 6:09 pm

Whether humankind becomes more efficient at extracting oil isn't really the point, is it? What matters is the amount of oil left and the fact that if supplies dwindle faster than our technological prowess we face difficult price rises at exactly the same moment that we need inexpensive energy to fuel us into finding the next gen solution. We've gotten where we are today because no other form of energy is so cheap, plentiful and portable. You can't ignore the fact that many industry insiders have published solid science on showing that reserves are finite. It is pure fantasy to trust in the market to spontaneously produce an economic corrective measure that automagically provides an energy alternative. Our wealth and economy are interwoven with and literally driven by this inexpensive (relatively) energy. Peak oil has to be taken seriously so funding to invent an alternative is earmarked today. The scientific case of peak oil is there before your eyes and I'm sure you know how to use google effectively. Or are these scientifically peer-reviewed papers that discuss the difficulty of finding and extracting oil today some sort of conspiracy to force our hand regarding oil when there is no need? I'm afraid you are not contributing to the debate, for you are not aligning yourself with the people who research and publish on behalf of the exploration and refining industry. It's also a too cute by half analogy, the mosquito. Don't forget what happens to the mozzie that drinks too much blood: he explodes in a red geyser. The peak oil controversy simply goes away the moment we commit to guzzle less and invest in science so as to ripen the next gen solution(s) to market. Then the public will choose. We have to petition our lawmakers then vote with our bucks. And change the minds of those who prefer to put their heads in the sand and state the problem doesn't even exist because there just might be an infinite amount of oil, either because previously undiscovered reserves are magically discovered and we've simply got to invent the technology to get it, or because prices rise to where suddenly nobody's buying oil and it becomes uneconomical to extract it. The former is a flat-earth response, the latter is verbal sophistry of the highest order, ie. Imagine I've got a ball of string at home, hidden in a box, with just a small opening to feed out the string. I keep feeding out string, but nobody knows how much string remains in the box. I can claim its length is infinite if I am sure it is either too boring or too uneconomical to unravel it all. But I am being disingenious to say the least. The earth has been a big enough box up to now, but the oil is flying out of the ground at a dizzying pace. To state we cannot exhaust this resource is infotoxic.

diz September 25, 2007 at 6:36 pm

"Worldwide Crude "Production" peaked in 2005. We're expected to have a producion-demand shortfall of at least 2 million barrels/day by Christmas.

What exactly is a "production-demand shortfall"?

I seem to recall that demand (and supply) are functions of price.

If there a new theory of demand I missed?

ScentOfViolets September 25, 2007 at 7:26 pm

Over longer periods of time, as oil gets used up and the price of oil goes up in response to supply, less oil will be used, and more alternatives will be created, until we are completely converted to the alternatives — sometime before we ever use up all the oil.

Do you think these alternatives are magically created, that they will always exist? Or maybe you are using the word 'alternatives' in a nonstandard way. Maybe you meant (greatly inferior) alternatives. Well, yes, in extremis, we could resort to battery powered vehicles, to name one substitution. But that is not what is generally meant by an 'alternative'. By this nomenclature, civilization could collapse, billions could starve, we could find ourselves in a horse-and-buggy steam era, and that would be an 'alternative'.

qwer September 25, 2007 at 7:45 pm

"because there just might be an infinite amount of oil, either because previously undiscovered reserves are magically discovered …, or because prices rise to where suddenly nobody's buying oil and it becomes uneconomical to extract it. The former is a flat-earth response"
Oddly, the former "magically" has been a historical fact.

"I'm afraid you are not contributing to the debate, for you are not aligning yourself with the people who research and publish on behalf of the exploration and refining industry."
An argument style reminiscent of the Man-Made Global Warming "debate" — if you're not "with us" then you're not "contributing".

lowcountryjoe September 25, 2007 at 8:19 pm

It is pure fantasy to trust in the market to spontaneously produce an economic corrective measure that automagically provides an energy alternative.

Imagine telling someone in 1940 that you just got off a computer but that while you were on it, you managed, from the comfort of your own home, to share your idea about a valuable commidity with an educated audience that was distributed around the United States and even across the world. Imagine that you told that someone that you could also use a wireless phone device — a device that also granted access to share your ideas and sell your version of Chicken Little. Yep, pure fantasy! Right Henny Penny?

To state we cannot exhaust this resource is infotoxic.

No, seriously, the sky is falling.

ScentOfViolets September 25, 2007 at 8:43 pm

Another idiot who can't tell the difference between postdiction and prediction. Assuming he even understood the point at all, rather than deliberately posting something not relevant.

shawn September 25, 2007 at 8:47 pm

…after all this, the pistachio's still help more.

shawn September 25, 2007 at 8:48 pm

Scent…ya know…calling people 'idiots' never works well. Have you been on these here internets very long? How's that strategy worked out for you?

shawn September 25, 2007 at 8:49 pm

rats…nix that apostrophe. "pistachios"

ScentOfViolets September 25, 2007 at 8:54 pm

Really? Then tell me what does, in this case, you being such a dab hand and all, and given that it's only been said about eight times now that a blind reliance on the notion that 'something will turn up' is a pretty presumption on which to base future acts.

Go ahead. I'm sure I will be _fascinated_ by what you have to say.

REW September 25, 2007 at 9:09 pm

Oil production is not the same as the quanitity of available oil.

The theory of Peak Oil is based on oil successfully brought to the surface, not the amount of oil on(in) the earth.

Consider three observations.
1. There were no oil shortages prior to the abandonment of the gold standard (or its proxy) by Nixon. On the gold standard, the value of the dollar was fixed, so the only impacts on the price of oil were true supply and demand factors. With a stable dollar, oil companies routinely kept an inventory on hand to cover shortages. With a floating dollar, oil companies get burned for holding inventory of any consequence. Shortages can be a result of financial parameters, not physical ones. Fix the dollar, solve peak oil.
2. The portion of the earth that has been explored for oil is miniscule. Making a projection about the remaining supply of oil based on such an insignificantly small sample is misleading at best. The late Jude Wanniski used to relate how all the oil ever removed from the earth (since it was discovered in 1857) would not even fill Lake Tahoe halfway. Most of the exploration, by far, has occurred in the U.S. because here, almost exclusively, individual property owners retain mineral rights on their property. Change the governmental policies, solve peak oil.
3. Peak oil is based entirely on the premise that oil is like real estate; they ain't making any more of the stuff. However, there is significant evidence that the conventional theory about the source of petroleum (i.e., decay from dinosaurs and vegation) is seriously flawed. Oil may just be an inorganic byproduct of a natural process. The research suggests oil is sustainable. Prove the theory, solve peak oil.
Russ

diz September 25, 2007 at 10:00 pm

Do you think these alternatives are magically created, that they will always exist?

Alternatives already exist. We don't use them because they cost more. When oil costs more than them, we will start to use them.

Now, it's important to note that we don't know which alternative will win the race to be chepaer than oil. In the interim, we may have developed different, better alternatives.

One thing that ought to be stunningly obvious is we're not going to achieve greater prosperity by forcing ourselves to use more costly alternatives now (*cough* ethanol *cough*).

Or maybe you are using the word 'alternatives' in a nonstandard way. Maybe you meant (greatly inferior) alternatives.

Alternatives already exist that are about as functional cheaper as petroleum but cost more (compressed natural gas, bio fuel, gas-to-liquids via fischer-tropsch come to mind). Other alternatives are not as functional and cost more – electric cars come to mind. Others, are not as functional but cost less. Riding your bike to work is not only cost effective but provides a nice positive health care benefit.

rufus September 25, 2007 at 10:03 pm

Diz, oil demand has proven to be pretty inelastic. It's also worth noting, I believe, that the poorest (and, fastest growing-economy wise) parts of the world are those parts where oil tends to get subsidized. There's also the matter of "inventories." At a certain price companies will dig into their inventories on the possibility that more product will come on the market, or that a drop in demand, will drive prices down.

Perhaps my terminology was a bit off the economic-wall, or whatever; but, I think the important take-away might be that we see, in the not too distant future, prices that will make you long for the good old days of $80.00 oil.

rufus September 25, 2007 at 10:09 pm

Wholesale ethanol, without farmer subsidies, or "Blender's subsidies" were $1.52/gal, Today. Oh, and when the cars are tuned for it (increased compression) as in Brazil they get the same "mileage," and greater power than gasoline

Jes sayin

lowcountryjoe September 25, 2007 at 10:13 pm

…that it's only been said about eight times now that a blind reliance on the notion that 'something will turn up' is a pretty presumption on which to base future acts.

So Black Swans never occur, huh? Okay, fine! Call it blind reliance, blind faith, call me an idiot, too…whatever. But, pessimistic people just like you have been predicting gloom from since the birth of language. But the only gloom that ever really comes to pass is that the pessimistic voices get loud and often times sucessfully advocate for limits on personal liberty.

"Where did my food famine go? Why haven't an increasing number of people on this earth created mass scarcities in the essentials of life? Why isn't the end times coming yet?" Sorry, I wont subscribe to it, wont worry needlessly, and definitely wont sweat it when you tell me I'm being blind to your so-called facts. I will respond to it though in a mocking manner.

We, as a species of animals whom happen to have superior intellect to other animals [maybe you're an exception, though], will find a way to do (or just do) one of three things: devolop an alternative fuel; find alternate, perhaps manual (perhaps not), modes of transportation; or adjust our life styles and perhaps hasten our biological evolution into something else that enables us to adapt.

ScentOfViolets September 25, 2007 at 11:24 pm

No, you are an idiot, pure and simple, and no, I did not state that certain events would not come to pass (what you no doubt wish I had said), I said, along with many others, that assuming there's always a way is foolish.

But hey, let's get concete. Let's look at a few 'expert' predictions from 50 years ago. Here are a few things that were predicted for the early 21st century, as percieved by someone from the late 50's:

Moon bases, maybe even indpedpendent polities like Luna City.

Permanent manned space stations, with artificial gravity and populations in the thousands.

Manned exploration of Mars, quite possibly Jupiter and beyond.

'Cheap, clean fusion', or 'energy too cheap to meter'.

Undresea resorts, if not undersea cities.

Domed cities for air-conditioning.

Buildings rising half mile into the air or higher.

Flying cars.

Automatically piloted cars.

Artificial intelligence – talking robots, super-smart computers.

Cancer, a thing of the past.

. . . and on and on.

Now, maybe I don't get out much. But I don't see any of that stuff. And yet, according to you, the evidence of all that and more should be all around me. So where's my flying car? My 3-D TV? My personal jetpack?

Hey, it's only a matter of can-do, right? Yankee ingenuity, yes?

Or is it, as I said earlier, that you're an idiot?

ScentOfViolets September 25, 2007 at 11:26 pm

Uh, rufus, you got a cite for all that?

colson September 26, 2007 at 1:39 am

Scentofviolets,

I think you miss the point entirely on what is being referred to as a "better" alternative. Dr. B isn't suggesting that we assume better alternatives will arrive in the conventional sense, but in the economic, market-oriented sense.

As the price of oil rises, the value proposition of 'alternative' fuels increases. When the price of oil eclipses the economic costs of finding and delivering oil into the market, such alternative fuels will become more popular because they are (or become) cheaper to produce and deliver to the marketplace than oil.

Now I say "cost" here in the economic sense that it must be delivered at a cost consisting of the full opportunity cost (fuel efficiency, long-term viability, monetary, etc.). It isn't a matter of there being some misguided belief that we'll "think of something" in the future but we will turn to something as it becomes a more economically viable option.

Is there some hope that we will come up with ultimately better alternatives? Sure. But there are viable alternatives in the marketplace once we begin to see the opp. cost of existing alternative fuels dive below the opportunity costs of delivering fossil derived fuels. While it may be technologically less efficient to burn ethanol in current engines (as an example, not debating whether it is or isn't), it would become more efficient if the cost of gasoline were $400.00 per gallon after you factor the entire opportunity cost involved.

To put it more practically:

As an example, not as some scientific proof: A gallon of "pure" gas is $3.00 at the gas station. Let's say a gallon of E10 (a gas, less mechanically efficient, substitute) (10% ethanol) gasoline costs $2.85 per gallon. Now my VW doesn't like Ethanol. AT ALL. My car isn't "tuned" for it so I lose a few miles per gallon based on the inefficiency of my vehicle and the fuel combination. Now I have a choice. I can keep pumping $3.00 per gallon of gas and get "normal" gas mileage; or I can put in E85 at $2.85 per gallon, lose a few mpg and have to make a fractional increase in the number of stops I have to make at the gas station. Now at a price difference of $.15 per gallon, I have to consider whether whether the opportunity cost is really worth $.15 per gallon. To me, that means $1.50 per week in monetary costs (I use ~10 gallons). Over the course of time, instead of having to stop four times a month at the gas station, I stop five times. That extra trip has an opportunity cost involved. At this price point, the opportunity cost involved for changing to more inefficient gas is too high. If I truly wanted to get the best advantage, I could take my car in and get it re-tuned. But again, this has an opportunity cost involved and over the life of the vehicle under my ownership, I have to determine whether that opportunity cost is justified. But let's say the costs of oil production continue to rise. If the price of E10 and "pure" gas is not parallel, eventually it would begin to make more and more sense to have my car retuned and/or switch to the E10 because the full opportunity cost of using pure gas is higher than that of the alternative fuel. Sure, the fuel may be less efficient in my vehicle without re-tuning, but considering the full set of opportunity costs involved I will eventually make the switch. So thus, the "better" alternative arrives without much fanfare because we're stuck arguing over whether E10 is more or less efficient in an engine without considering the ancillary costs involved in the decision over which fuel to use.

I know E10 is actually a gas/ethanol mix, but for the example, assume it is a separate, fictional gas substitute with similar characteristics to E10 that can run in a regular engine. People will switch before oil runs out, not because an alternative is markedly better or more efficient when isolated to narrow constraints of measurement, but when the opportunity cost difference becomes too great.

Russell Nelson September 26, 2007 at 2:09 am

ScentOfViolets is pretty obviously ignorant of economics. I propose that he/she go away and come back when he/she can say something intelligible and intelligent.

But I completely get why ScentOfViolets isn't posting under his/her real name <— shame at being caught saying something stupid is the most plausible explanation.

johngaltline September 26, 2007 at 6:44 am

ScentOfViolets:
Do you think these alternatives are magically created, that they will always exist? Or maybe you are using the word 'alternatives' in a nonstandard way. Maybe you meant (greatly inferior) alternatives. Well, yes, in extremis, we could resort to battery powered vehicles, to name one substitution. But that is not what is generally meant by an 'alternative'.

The problem with replacing oil is not that there is a shortage of alternatives. The problem is that it's hard to compete with something that bubbles freely from the ground and burns readily.

Of course, oil is in the ground, and only so much of it will bubble up on its own. After a while you have to actually pump it out, and that was the first alternative to utopian lakes of surface oil fed from underground springs.

Eventually, some of the wells ran "dry," and the next alternative was oil obtained with improved drilling methods and scavenging techniques.

Two additional alternatives that come to mind are oil locked up in sand and stone. Once, we knew these reserves were there, but the cost of extracting them made them unviable as fuel sources. After all, it's hard to compete with something that pretty much burns "as is" when it bubbles up out of the ground. These alternatives require a bit more processing, which adds to the cost.

While demand for crude oil has been pushing the price up, it's become more and more worthwhile to tap those alternatives. It helps that entrepreneurs (and no doubt corporate welfare programs) have invested money in trying to figure out how to get oil from these sources more cheaply.

For decades, some sources (like the Canadian Oil Sands) have been marginally profitable, but these ventures run with the risk that any huge oil discovery will lower the price of crude to a point they can't compete with. Canada has been operating solidly "in the black" for a few years now, and it appears that oil sand production will only expand there and in other places.

If you apply that logic to the oil shale reserves known to exist in the U.S., you get a huge supply estimated at twice the size of Saudi Arabia's. That's not counting our oil in the lower 48, the Gulf of Mexico, or Alaska.

Of course, for that oil shale to pay for itself with current technologies, crude has to not only run in the $80/bbl range; it has to be forecast to stay there — something nobody's expecting in the near future.

It goes without saying that there are people working all the time to make that particular alternative affordable now, and it will probably become viable at a price point even lower than that at some point in the future.

My point is that not only are there alternatives, but that we've been using them all along. Heck, as someone alluded, even petroleum itself is a substitute for whale oil. And even if you take the most conservative approach of measuring only known deposits, the U.S. is destined to become a self-sufficient, even oil-exporting nation when the decreasing cost of refining oil shale finally intersects with the rising cost of crude.

lowcountryjoe September 26, 2007 at 7:07 am

No, you are an idiot, pure and simple, and no, I did not state that certain events would not come to pass (what you no doubt wish I had said), I said, along with many others, that assuming there's always a way is foolish.

But hey, let's get concete. Let's look at a few 'expert' predictions from 50 years ago. Here are a few things that were predicted for the early 21st century, as percieved by someone from the late 50's:

Project much? While it might be true that I attempted to corner you by suggesting that you might not believe that technological leaps were possible, you've just done the same to me and to a much larger extent. You have just lumped me into the camp of a few dreamers from Popular Science Magazine (and science fiction novels) when all I'm suggesting is that we will find an alternative fuel that will not disrupt our lives or we will find a way to adapt to potential disruptions without a fuel being developed.

Now, maybe I don't get out much. But I don't see any of that stuff. And yet, according to you, the evidence of all that and more should be all around me. So where's my flying car? My 3-D TV? My personal jetpack?

Well, there's evidence of huge technological advances but that's not what I wish to advance. What I am more concerned about is the lack of evidence of the 'dooms day'. Would you like me to cite some of the predictions of those that said the sky was falling and that we would be starving or that climate change would have severely disrupted our lives already? Because, truth be told (from my perspective, at least), you sound an awful lot like Henny Penny.

So, all I am asking is that you tell me of a time that has occuered when there was a global shortage of some critical material that humans need for their well being (and it must have not been a shortage created by governmental disincentives). Well?

Perhaps your side's Black Swan is coming and I am the one who is wrong. But, I'll choose optimism until that day comes, thank you very much.

Lee Kelly September 26, 2007 at 7:29 am

It is worth noting that there was a time when there was no oil resource at all, despite there being a greater physical quantity of oil. In fact, there was a time when oil was garbage, and an owner would need to pay another to take or dispose of it.

There is nothing which is intrinsically a resource, but only with the help of human ingenuity do we make it a resource.

Gil September 26, 2007 at 9:42 am

Then again and on the other hand, to say that technology and clever folks will automatically find solutions to various problems ahead of time can be disproven somewhat by one crash-and-burn dead-end field of science – namely space travel. I doubt there been a real space travel innovation since the '60s. The electronics used in the crafts are shiploads more advanced but the actual rocket technology hasn't budged. My preferred space opera is an animated show called Star Blazers which was originally released in 1974 (set in 2199AD) and I think it was rather insightful for its time when right in the start where the human race are using spaceships not much advanced than now and the fictional characters can't even get out of Solar System until they get outside help. :P As opposed to every other space opera where space travel is supposed to be a cinch despite any real world evidence.

Paul D September 26, 2007 at 9:45 am

I remember debating this issues endlessly when I was in law school with fellow students who were convinced that we would be out of oil within the next decade or so. The general arguments were pretty much the same as outlined in the comments to the post, although some of the details have changed. The biggest difference, however, is that we are now in 2007 and I attended law school in the early 1980's.

Paul D September 26, 2007 at 9:50 am

"Then again and on the other hand, to say that technology and clever folks will automatically find solutions to various problems ahead of time can be disproven somewhat by one crash-and-burn dead-end field of science – namely space travel."

I don't think that space travel is a good example. It is a government run program. There are not signficant economic incentives in the private sector to develop better means of space travel. So private firms are barely involved in the market at all, at least compared to the type of investments that private firms are making in the energy market.

Dr. Troy Camplin September 26, 2007 at 10:29 am

There are many reasons why the private sector is not involved in space — all of them having to do with the government. For example, it is illegal under anti-trust laws for a company to create a launch pad because the first company that did so would then have a monopoly on private launch pads (this according to a U.S. Senator with whom I discussed the issue once). If we could elminate the government barriers to private entry into space, private companies would be there by now. The whole push for space planes is precisely in response to such government barriers to entry (on what they consider to be their turf).

As for the thread I started, others have done a good job of explaining my position — I will only note that the market has always "magically" come up with alternatives. I have both history and economic theory on my side.

John Dewey September 26, 2007 at 10:40 am

gil: "Then again and on the other hand, to say that technology and clever folks will automatically find solutions to various problems ahead of time can be disproven somewhat by one crash-and-burn dead-end field of science – namely space travel."

I'm not sure I understand, Gil. What problem is it that you expected space travel to solve? I can see how air pollution, energy scarcity, disease, law enforcement, and agriculture efficiency were problems for humans to solve. Is there a real problem that space travel – not satellites, but space travel – was supposed to solve? Is it possible that there have been no advances in space travel because there were no real problems deserving of additional resources?

John Dewey September 26, 2007 at 11:05 am

johngaltline: "The problem with replacing oil is not that there is a shortage of alternatives. The problem is that it's hard to compete with something that bubbles freely from the ground and burns readily."

Good point.

I am confident that, in addition to oil shale, humans will eventually find ways to efficiently capture geothermal energy, tidal energy, wind power, and solar energy. The idea that energy is finite or exhaustible, at least on a human race scale, is really just ignorance.

Gil September 26, 2007 at 12:09 pm

Tug, tug, tug. Blame the Government for space travel. Sure. ;) Plenty of private researchers are looking at commercial spaceflights and haven't developed any new technology . . . yet.

John Dewey September 26, 2007 at 12:46 pm

Gil: "Plenty of private researchers are looking at commercial spaceflights and haven't developed any new technology . . . yet."

How do define "plenty", Gil? Is there as much private money being invested in space flight as there was invested in:

- alternate energy?
- plant biotechnology to increase crop yields?
- development of MRI scanners?
- perfecting organ transplants?
- eliminating automobile emissions?

Of course not. Those investments were directed at real problems. Space flight is just not very important. Why should we expect advancements in space travel?

diz September 26, 2007 at 2:51 pm

Is there anyone here that would not stipulate that the rate of technological advance of various technologies is uncertain?

Whether those be technologies to increase the supply of oil, reduce the demand for it, or lower the cost of alternatives.

What I find I ironic is that it's usually the people pushing subsidization of alternatives who rely on faith in future technological developments.

I wish I had a nickel for everytime I heard "Sure, ethanol (or solar photovoltaics, or palm biodiesel) is uneconomic now, but if we subsidize it into existence the technology will improve and it will cost less than oil in the future".

Diz, oil demand has proven to be pretty inelastic.

It's probably fair to say that oil demand is pretty inelastic in the short run, in the current price range.

It's worth pausing to reflect why this is:

The reason for this is that oil is so much more efficient than its next closest competitor at meeting needs we consider pretty important.

At $1 per gallon oil was way ahead of the next best option. At $3 per gallon, oil is still ahead. So demand is pretty inelastic between $1 and $3. At some price, this will no longer be the case.

We used to use much more oil generating electricity than we do now. Peak Oil use for the electric sector occured in 1978.

shawn September 26, 2007 at 3:34 pm

What I find I ironic is that it's usually the people pushing subsidization of alternatives who rely on faith in future technological developments.

Those are actually not the same people…at least, not with the typical individual on this blog. Most here would not want to subsidize the alternatives…at some point, they'll just become better alternatives, and we'll switch over to using them. Problem solved without wasting money on subsidizing…we get "selfish" entrepreneurs bearing the costs of development in order to get rich.

Fine with me. :)

skh.pcola September 26, 2007 at 4:24 pm

Y'all go easy on ScentOfViolets. He's a contentious guy who gets into arguments almost everywhere he goes, and is a pretentious, egotistical person. I guess when you are an math instructor at a hayseed university in Missouri, things get boring enough to lash out at humanity.

[/offtopic]

I'm going with whoever mentioned the possible abiotic formation of oil. It's never been proven that oil is a "fossil fuel," and replenishment of depleted reserves has been. It makes no sense to me to dismiss that possibility out-of-hand.

diz September 26, 2007 at 5:40 pm

Those are actually not the same people…at least, not with the typical individual on this blog. Most here would not want to subsidize the alternatives

Understood, and agreed. I am just struggling with why someone would consider technological uncertainty would consider it an argument for anything other than using the most efficient fuel we have today.

I work in the energy industry and have a reasonable amount of exposure to the economics of fossil and alternative fuels.

I'm a fuel agnostic. There are far too many people who root for a fuel as if it's a college football team. (Woo, go Solar PV!)

It's never been proven that oil is a "fossil fuel," and replenishment of depleted reserves has been. It makes no sense to me to dismiss that possibility out-of-hand.

Per Professor Boudreaux's point, the physics probably matter a lot less than the economics.

I think it helps to think of our energy problem as more logistics than anything else. The goal is not "energy", it's "energy delivered at a time to a place in a form where it can meet a human need".

Solar fans, for example, love to point out the sun has a lot of energy. The problem is it is quite expensive to deliver that energy to a place in a form that can meet our human needs.

So, anyway, I'm not sure the potential existence abiotic generation of oil changes the equation in any material way.

ScentOfViolets September 26, 2007 at 8:05 pm

As for the thread I started, others have done a good job of explaining my position — I will only note that the market has always "magically" come up with alternatives. I have both history and economic theory on my side.

In point of fact, you have amply demonstrated that you have neither. In fact, all you've demonstrated is that you have no compuction about changing the definitions of words to suit you. Now, you can either stick with 'alternatives' in the vacuous sense that there will always be an 'alternative' to oil, even if that alternative means going back to steam power and horses (and that is clearly _not_ what most people mean when they talk about alternatives. Nor is it difficult to parse the meaning.)

Or you can admit that the alternatives we do have are inferior by objective criteria like energy density, simplicity of use, relatively low technical sophistication, etc. And that to date, despite a lot of research, gas, oil, what have you seem to seem to emerge as clear winners for the foreseeable future.

Those are your only viable 'alternatives'. Now, which definition do you want to use?

Rufus, still waiting for your cite about that ethanol/gas mix that was so very cheap without any subsidy, and which got 'comparable gas mileage'. But I'm not holding my breath.

Finally, keerist – you've got idiots here blathering on about 'abiotic oil' . . . and not a one of you who should know better slapped them down? What does that have to say about your opinions on general matters in that case?

here are a few links, btw:

http://en.wikipedia.org/wiki/Abiogenic_petroleum_origin

http://www.peakoil.com/contentid-25.html

http://www.fromthewilderness.com/free/ww3/100404_abiotic_oil.shtml

http://www.rense.com/general58/biot.htm

Yes, yes, I know, there are those who blather on about abiogenic oil not being disproven. But that is semantic hokery and basic bad argumentation. I can't disprove that there is an advanced civilization residing deep in the Earth's crust whose founders were Refugees from Atlantis either. Does anyone really believe that's the case? No, the burden of proof is upon those advancing the theory, not on those who are skeptical.

And _no_one_ here caught this? Feh.

Troy Camplin, Ph.D. September 26, 2007 at 8:56 pm

The car is an alternative ot the horse. A plane is an alternative to either one. A computer is an alternative to the abacus, to pen and paper, etc. During the bronze age, who would have thought of iron as an alternative? The microwave is an alternative to fire. Someone has already pointed out that petroleum, when whale oil became expensive due to a shørtage of whales, became an alternative. Some of these pre-existed. Some were invented later.

An alternative in the economic sense is not necessarily something that replaces another object exactly. When we run out of oil, it will become more economically feasible to come up with alternatives — many of which, like so many things in the past — haven't even been thought of yet.

I have no doubt that it will happen, because it has always happened. Always. If you can't see it, it is either because you are completely ignorant of any history whatsoever — meaning you think the world came into being when you were born, and nothing has changed in your world since — or you are choosing to act ignorant, though for what purpose other than to support an otherwise insupportable ideology, I don't know.

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