Peak Oil Theory: When Will We Run Out Of Oil?

September 27, 2012

There’s only so much oil. This means we can’t keep producing and consuming more of it every year forever — there has to be a point where we produce less of it than the year before.

Some people take this to mean that eventually the world economy will go off a “peak oil” cliff, and then there will be economic hell to pay. These people are popular. I just finished reading an energy economics textbook that had sections which sounded like they were ripped off a cheesy, low-budget film about the end of the world.

Other people, like myself, think we’ll see some bumps in the road, higher oil prices, but then we’ll transition to better long-term energy sources like natural gas and electric vehicles. Let’s talk about why this is the most likely scenario in this article.

Peak Oil: Different Definitions And Different Views.

There are two basic things people mean when they use the expression “peak oil”. Some people exploit the confusing two definitions to turn an obvious fact (we can’t just infinitely consume more oil than the year before) with a loopy economic theory (the transition from oil to alternatives will cause economic chaos and everyone suffers).

So for the purpose of this article, we’ll be focusing on just one concept of peak oil: the idea that production will necessarily fall because we just “can’t” produce as much as the year before. In other words, people will stop traveling and consuming as much energy as the year before — not stop consuming oil because they switched to natural gas or electric vehicles or something.

Will We Ever Completely Run Out Of Oil?

Economically speaking, we’ll never run out of oil. Eventually, the price of drilling for oil will make the oil too expensive to drill, meaning we’ll completely replace our consumption before we consume the last barrel. We’ll replace oil drilling with biofuels, electric cars, natural gas consumption, liquid coal fuels, or something else.

The question, however, is what that replacement will look like. Will we replace to a lower energy fuel, and experience our economy grind to a halt? Will people have to stop driving vehicles and go to bikes or walk to work? I think not, as I’ll explain immediately below.

Innovation Changes Economically Recoverable Oil Supply

Every year, innovation makes more oil reserves “appear”, because we can afford to drill to get the oil. Using 1920 technology, we’d already be at the end of our rope — but technology gets better every year.

We’re talking about the energy sources of human civilization. Untold billions are going toward research, development, and technological innovation. This buys us time, though this alone can’t “save” us from eventual peak oil. It’s the next two problems with peak oil that does that.

Higher Prices Change Economically Recoverable Oil Supply

This is very similar to the above. When the price goes up, say, 25%, this makes tons of oil that wasn’t economically recoverable suddenly available for drilling. It doesn’t happen instantly, but the price definitely frees up more and more oil.

Mixing this with the innovation discussed above and it should be obvious what’s been keeping our production of oil for the last fifty years, even as the quality of our crude oil has dropped.

Higher Prices Automatically Cut Demand For Oil Products

This is important, because this will be where our oil consumption will eventually drop. Every time oil goes up a few dollars, the alternatives to oil look better. Here are examples of alternatives:

a) Electric vehicles. Electric cars are starting to hit the scene just like “regular” petro cars. Tesla Motors is making headway in this industry. If prices continue to increase for oil, this will be one answer.

b) Biofuels. There’s research in turning algae into biodiesel. This saves an incredible amount of money and resources if honed. The same goes for energy from sugar and other agricultural products. Some are better than others, but overall this will likely just be a supplimental fuel source.

c) Natural gas. Natural gas production facilities in the United States and around the world. There is still plenty of natural gas in the world, and it’s a natural fuel source already for trucks, buses, and even tractors.

d) Coal fuel. Liquefied coal fuel sources are being tested as a fuel source with success. If suddenly we needed to switch to another fuel source, this one would certainly work to some extent. Remember, this is still a “baby” technology. Going into the future 10-30 years, it’ll be much better developed and will be more energy efficient.

This is all just the start. There are many different fuel sources that could be used, ranging from electricity to other carbon fuel sources. Those claiming that “the end is near” because we’re “running out” of oil are simply off base. There might be higher prices going forward, but it’ll just help us transition to other fuel sources at worst.

What The Transition Will Look Like

As oil becomes more and more expensive, oil and car companies, along with other corporations, will continue dumping untold billions into new energy sources for the future. No “one” energy source needs to win. Cars can be electric, trucks can run on natural gas, and some people will stick with petroleum for a while. Gas stations will become more all-purpose fuel stations.

A good portion of the money spent overseas will build new technology and factories closer to home. Overall, the impact to the environment will likely even be better. The transition won’t be painless — oil prices will keep increasing for a while before the transition really begins. But in the end, the alarmists will be proven wrong and the market will guide us yet again.

Are we running out of oil? Technically, yes, but the market will simply transition us eventually to other fuel sources. A crisis averted with basic economics, once again.

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