Tuesday, September 21, 2004

Oil Me Down

It seems as if no matter how much evidence there is, people always get resource economics wrong. Dr. Colin Campbell, the leader of the peak-oil movement, claims that there will come a time very soon that oil companies will have produced half of all the oil there is in the world. After that day, prices will skyrocket and governments will be forced to sponsor alternatives lest we run out of oil and the economy grinds to a halt. According to today's Wall Street Journal, Dr. Campbell is claiming that peak day arrived last week.

For the moment, let’s set aside that Dr. Campbell is apparently magical; oil companies, whose very livelihood depends on being right about this exact thing, say the amount of recoverable oil in the world is over 10 trillion barrels, far greater than Campbell’s projected 900 billion. The only way he could be right is if he knows something they don’t; that’s highly unlikely.

Campbell’s claims point to the deeper problem of his argument, one that’s emulated in most glances of resource economics. He premises, “if things continue as they are now…” If you’re projecting years down the road, as Dr. Campbell is, that’s a ridiculous assumption. By assuming a static world, we can also conclude that people never get raises, student loans will never have to be repaid and no one would ever die. I’m writing this in the afternoon. If all things stay exactly as they are, night would never come.

We don’t live in a static world; the nature of economic activity is fluxing, constantly making billions of tiny adjustments (and thousands of big ones) every day. Casual observers rarely notice all the nuances of change so they assume they can predict the future. The reality is far more dynamic, especially now because the rate of technological change is more pronounced than it ever has been.

We will never run out of oil. As the world supply decreases, oil prices will rise, that’s true. But prices will rise steadily, not violently—it’s simply not possible to extract oil that quickly. Alternatives will be created and improved on while current reserves will be stretched. Mass transit will become more popular. Solar panel sales will rise (as they did during the California energy crisis). People, all by themselves, will adapt.

Some people demand that I tell them what the new source of energy will be. I have no idea. That’s part of the point. If I did, I would be developing it to make my first billion. But the people who do have an idea are trying to form it because the rewards of wealth are so great. We know this happens because that’s how polymers (instead of rubber), computers (instead of the abacus) and plastics (instead of metals) developed in the first place. The alternative was too expensive.

I’m occasionally confronted with people that are still skeptical because they feel we’ve reached the limit of technological growth. There are few statements as arrogant as that. These doomsayers are literally saying because they can’t imagine what form new inventions could take, we’ve reached the apex of progress.

No one has a monopoly on innovation. The collective inventions that make up our world were once thought impossible or fanciful in another time. Anyone who declares that humanity can’t invent or adapt fast enough is either a crackpot or a deity. Considering Dr. Campbell already had to change his projection once, he’s clearly no god.


Chris said...

David, a brief question for you concerning this article: Why does Dr. Campbell mean by "peak-oil?" Is this a bell shaped curve that describes the amount of oil consumed over time or does it reflect the discovery of new oil deposits? I'm assuming since he said that the halfway point was reached last week that it must reflect instead the total of all consumed oil over time. But, please let me know what exactly is meant by the phrase "peak-oil." Other than that, great summation of the economic fundamentals, it's hard to believe this guy can be a Ph.D. without even understanding something as simple as this ;)

David said...

Yes, it is shapped off a bell curve, one presented by oil geologist M. King Hubbert in 1956. Thus, the halfway point is the peak of the curve. Of course, as a geologist, Hubbert has a tendency to only concern himself with things he can prove, not things he can imagine.

David said...

To add, it doesn't surprise me at all that this person has a PhD (to my dismay). Resource economics is really counterintuitive stuff and at a glance, the good arguments don't make sense. When I say that we will never run out of oil and there is a finite amount of oil paired with an increasing consumption of it, I must seem really stupid. It's really easy to forget oil is just a means to an end and that humanity capacity for invention might well be limitless. Only by looking at the past do we get that kind of perspective and truly understand how much potential we have. Sadly, far too few people prefer to look at history as a snapshot (probably because the alternative requires yet more research).