With oil at less than $80 per barrel, down from almost $104 per barrel earlier in the year, it might be time to examine the claims that we are going to run out of oil in the near future, or at least that oil production will decline sufficiently relative to demand and that oil prices will soar.
Oil prices have been volatile over the last decade, peaking at $140 per barrel in 2008 and plummeting to well less than $50 per barrel in 2009. But long-term it is probably not true that we are in for a sustained rise in the price of oil.
As I tell my college students, we never ran out of whale oil for lanterns. The reason is that as market prices rise, entrepreneurs have a greater incentive to innovate. They will find alternatives to the high priced resource, find alternative supplies of the resource, or invent less expensive ways to capture the resource.
World oil reserves today are not a very good indication of what oil production will look like in the future. This is because as oil prices rise, there is an incentive to go out and find new reserves. In 1935 U.S. oil reserves were estimated at 12.4 billion barrels. They were 31.3 billion in 1978 and 19 billion in 2008. Today they are estimated almost 31 billion barrels.
The new technologies of horizontal drilling and fracking (although fracking has been used in Michigan since 1952) have led to an expansion of the amount of oil that can now be taken from the ground and the discovery of vast new oil fields. This led to an expansion of U.S. oil production from 5 million barrels per day in 2008 to almost 7.5 million barrels per day last year. It is likely that this production will continue to increase.
This increased production is a boon for not only the U.S. economy but also to the world economy as a large increase in the amount of energy resources will allow for less expensive production and an expansion of economies around the world. It will also absorb any shocks from political instability in the other major oil producing regions.
There is little or no reason for governments to attempt to anticipate when oil production will peak and subsidize energy sources that are not commercially viable. When they become commercially viable they will come into existence.
In 1980 Julian Simon famously bet Paul Ehrlich that the price of five metals that Ehrlich argued would come into short supply due to increased demand and declining production would actually decline over the decade. Simon won the bet. This is because markets are marvelous drivers of innovation. Look at the phone in your pocket that is a computer, camera, video camera, calculator, and other things that my college students discover on a regular basis. The production of energy is best left to individuals rather than the theories of some central planner.
Gary Wolfram is William Simon Professor of Economics and Public Policy at Hillsdale College.