For decades, the threat of “peak oil” has hung over policymakers of the developed world. The basic premise of peak oil is simple and difficult to argue with: At a certain point, we’ll extract as much petroleum as possible, and after that “peak,” our rate of extraction will inevitably decline. Since it takes so long for petroleum to develop naturally, there’s for all intents and purposes a finite amount of it on Earth. So, our rate of extraction can’t possibly continue rising forever. At some point, we will hit peak oil.
Of course, that’s not the whole theory. Nearly all peak oil theorists argue that following peak oil, chaos will erupt. As so many of our energy needs and products in the developed world rely on the energy produced from petroleum, an inexorable decline in its supply will wreak havoc on our society. This declining supply combined with the rising demand for oil will lead to higher and higher prices. Now, they’re not arguing that the exact moment we hit peak oil will immediately devastate our society or something along those lines. In fact, many don’t consider the actual timing of peak oil to be very important.
However, most do believe that the negative consequences of declining oil production associated with peak oil will rapidly become severe, as the rising price of oil will impact every sector of the economy. Modern peak oil theorists grant that the rising price of oil may occasionally dip as new discoveries are found and more efficient technologies are invented, but they don’t consider either of these periodic drops in the price of oil very important in the long-run. Finally, they argue that peak oil is right around the corner. Are they correct?
I don’t believe so. First, I want to address the idea that we’re about to hit peak oil. Second, I’ll try to make the case that there’s no reason to obsess over “peak oil” in the first place.
Are we on the verge of Peak Oil?
No, and we probably won’t be for a while. Last month, the Belfer Center of Science and International Affairs of Harvard University released a policy brief explaining the current high cost of oil:
“The oil market is already adequately supplied with spare capacity of around 4 mbd. This should be able to absorb a major disruption even from a major oil producer like Iran. Furthermore, global production capacity is regularly surpassing demand, in spite of the political and infrastructural problems of several producing countries. In fact, the mere dynamics of supply, demand, and spare capacity cannot explain the high level of oil prices today.
At more than $100 per barrel, the international benchmark crude, Brent, is $20 to $25 above the marginal cost of oil production. Only geopolitical factors (above all, a major crisis related to Iran) and a persistent belief that oil is about to become a scarce commodity can explain the departure of oil prices from economic fundamentals of demand and supply.”
The policy brief concludes:
“Oil is not in short supply. From a purely physical point of view, there are huge volumes of conventional and unconventional oils still to be developed, with no “peak-oil” in sight. The full deployment of the world’s oil potential depends only on price, technology, and political factors. More than 80 percent of the additional production under development globally appears to be profitable with a price of oil higher than $70 per barrel.” - (Emphasis added)
The policy brief grants that “cheap oil” may no longer be prevalent, due to many of these new discoveries being more remote, unconventional, and difficult to access, thereby raising costs and prices. However, the author correctly adds that new and improving technologies could very well change that, and even suggests that a period of “overproduction” is very feasible.
I won’t keep hammering on this point, but it’s clear that peak oil is still a ways off. This certainly doesn’t disprove the basis of peak oil theory, but it should allay some of the panic and fear felt by those concerned about peak oil.
Should we worry about Peak Oil?
I don’t think we should, and I would argue that basic economic theory supports that assertion. The rising cost of extracting petroleum will incentivize the creation, improvement, and use of alternate energy sources. Eventually, these other energy sources will be cheaper to produce than oil. In other words, we’ll never run out of oil because it’ll become too expensive to extract. The return on the investment will be too low.
This argument doesn’t satisfy peak oil theorists, who argue that current alternative energies are insufficient to replace oil. They don’t believe that the free market will create new alternatives or significantly improve existing ones. I’ve seen more than a few outright mock the very idea of the “invisible hand” saving us. Understandably, they’re worried about the idea of relying on technologies and innovations that haven’t been invented yet.
It’s easy to make fun of abstract economic concepts such as the “invisible hand,” but the historical evidence for free markets producing innovation and lowered costs is overwhelming. Even now, in what I couldn’t possibly call a “free” energy market, the costs of producing many alternative energies continue to drop as we invent new technologies. I don’t believe that I’ll ever convince those who doubt the power of market forces that they’re wrong, but I do think that history presents a compelling case.
Some peak oil theorists will acknowledge that new alternative energies will be created and that existing ones will drop in cost and rise in efficiency, but they insist that this won’t fix the problem. They point to the vital role that oil plays in the production of most, if not all of these alternative energies. If the cost of oil rises, and oil is a necessary input to any given alternative energy, then shifting to alternative energies won’t fix the problem.
However, oil isn’t a necessary input for producing alternative energies. Yes, we currently use oil to produce these other energy sources, but all we need is energy to produce them, not specifically oil. We could use coal, for instance. So, this isn’t a serious problem with producing and using alternative energies.
By the way, the popular solution amongst peak oil theorists is to increase the government’s role in the energy market. They want the government to lead the charge on producing viable alternative energies and reducing the use of oil. If you’re a regular reader, you probably won’t be surprised to learn that I don’t agree with this proposal.
Expanding government intervention isn’t the solution to peak oil. In fact, government is exacerbating the problem by pouring massive subsidies into inefficient alternative energies such as ethanol, and by heavily subsidizing petroleum. These government interferences into the energy market are distorting price signals and disrupting the market forces which would reduce the impact of declining oil production and rising oil prices.
Instead, we should be reducing government regulations in the energy market in order to encourage innovators to develop alternative energies. The profit motive will lead entrepreneurs and existing businesses to find new alternative energies while improving the efficiency and lowering the costs of existing ones.
Well, what if we hit peak oil before these alternative energies are invented or have time to mature? As I made clear earlier, peak oil is still a ways off, so we have time. Is it technically still possible that we could hit peak oil first? Yes, but it would require a very long period of stagnation and an absence of innovation, which won’t happen in a free market.
The problem with peak oil isn’t the basic theory. The problem is the fear and anxiety that alarmist peak oil theorists attempt to instill in the public about the theory. The gradual transition from oil to other energy sources probably won’t be seamless, and it could very well cause some market volatility over time. However, it won’t be a world-shattering event. The quality of life in the developed world won’t take a dramatic nosedive. Society won’t collapse.
I think it’s fair to wonder if many peak oil theorists actually have another reason for promoting these doomsday scenarios to the public. My guess would be that these theorists are legitimately concerned about peak oil, but they’re more worried about the environment. A quick Google search turned up more than a few peak oil theorists and environmentalists who admit that peak oil isn’t a serious problem. One succinctly complained, “There is enough oil in the ground to deep-fry the lot of us.”
Environmentalists have demanded that society shift to using “clean” and “green” energy resources instead of oil. They argue that the widespread use of oil is damaging the environment, and that new extraction technologies such as fracking will devastate entire ecosystems.
Due to a lack of personal knowledge about environmental policy and a desire to keep this post reasonably short and focused, I won’t get into whether or not these claims are accurate. Still, I will say that I consider these theorists deceptive and manipulative for hiding their political agenda behind a scare tactic such as peak oil.
It’s time to stop worrying about peak oil and to start worrying about the regulatory state. The market will develop real energy solutions long before we hit peak oil, unless the heavy hand of government prevents it from doing so.