Don't Worry About Running Out Of Oil

Two young men join the communist party in the 1930s. Years pass. They grow up, lose their illusions, leave the party and rejoin normal American life. More years pass. They achieve some intellectual renown, are offered teaching posts at major universities and settle into comfortable middle age. Then the 1960s hit, and one of the two old communists suddenly veers leftward again. Over dinner one evening, the reinvigorated leftie harangues his former comrade about Marx, Engels, Lenin and all the rest of the dusty antique crew. The comrade replies: "Phil, your answers are so old that I've forgotten the questions."

Sooner or later, I suppose, something like this happens to all of us. Me, for example. I grew up in the 1970s, the age of the so-called energy shortage. Politicians, newspapers, television broadcasts, policy experts all confirmed that the world was running out of oil. In a televised address on April 18, 1977, president Jimmy Carter delivered a chilling prediction: "Unless profound changes are made to lower oil consumption, we now believe that early in the 1980s the world will be demanding more oil that it can produce. ... Within 10 years we would not be able to import enough oil from any country, at any acceptable price."

Instead, within 10 years the price of oil collapsed. In mid-1986, the price of a barrel of oil tumbled to US$10 a barrel. Prices struggled upward in the later 1980s, but except for a brief spurt upward during the Gulf War, oil remained cheap until the end of the century. Now of course the price has risen high again -- high enough and for long enough that the Phils of the energy world are offering up all their old answers once again, and people in the policy world are worrying about a new "Hubbert's peak."

M. King Hubbert was an American geophysicist who predicted in 1956 that U.S. oil production would peak in the early 1970s and decline thereafter. Hubbert's prediction proved accurate, and now many oil experts fear that world oil production may likewise soon hit its maximum. Perhaps they are right: world oil production has to hit a maximum someday, and who knows, the year 2015 may well be the year. But if it is the year, that will not mean that the world is "running out" of oil in the sense that Jimmy Carter used those words almost 30 years ago.

Many of us think of the world's oil reserves as a finite resource: There's only so much there, and when it's used up, there won't be any more. But as one of the world's great oil economists, M.A. Adelman, has observed, this way of thinking is all wrong. Oil reserves, Adelman writes, "are no gift of nature. They [are] a growth of knowledge, paid for by heavy investment."

The world's oil supply of oil is not finite. It is more like a supermarket's supply of canned tomatoes. At any given moment, there may be a dozen cases in the store, but that inventory is constantly being replenished with the money the customers pay for the cans they remove, and the more tomatoes that customers buy, the bigger an inventory the store will carry.

For example, at the time of Carter's speech, the Persian Gulf region was authoritatively reported to hold some 74 billion barrels of oil. And today, after three decades of frantic pumping, the region is estimated to hold almost 700 billion barrels of oil, or almost 10 times as much. These reserves may continue to grow. Or they may not. Everything depends on the market's expectations for the future price of oil. Those expectations in turn depend not just on the ability of producers to produce, but on the willingness of consumers to consume.

Back in the Carter era, experts believed that consumer demand for oil was bound to go up and up and up until it was restrained by government. That certainly seemed like a reasonable guess: In the 20 years from 1960 to the oil shock of 1979, U.S. oil consumption almost doubled, from 9.8 million barrels a day to 18.6 million barrels per day.

But consider what happened next: in the years after the price hikes of 1979, U.S. oil consumption actually dropped, to a low of 15.2 million barrels per day in 1982 and 1983. Oil use picked up slightly in the 1980s, but not until 1996 did American oil use catch up to its levels of the late 1970s. In 2003, Americans used just a fraction over 20 million barrels of oil per day, and this despite huge increases in the number of cars on the road and the number of miles driven.

Similar trends can be seen in other developed countries. Canada, for example, used 1.97 million barrels of oil per day in 1979; it used 2.09 million barrels per day in 2002.

Consumers respond to price signals. Even in the low-price years from 1985 to 2000, they remembered the high cost of oil in the 1970s and adjusted. Utilities stopped burning oil to generate electricity and opted for coal or nuclear power or taxpayer-subsidized wind and solar power instead. Cars became more efficient (at least until the SUV came along in the late 1990s). Homeowners installed superior insulation and switched from oil to natural gas heat.

In this new era of expensive oil, the process of substitution will accelerate. It may reach too into growing markets such as India and China. As it does, oil in the ground may become less valuable. And we will move closer to the day when M.A. Adelman's ultimate prediction comes true: As consumers substitute other energy sources for oil, oil in the ground will gradually become less valuable and producers will gradually lose interest in searching for more.

The world will never run out of oil. It will just stop using it. When that happens, the world will never know and never care how much oil remains in the Earth.