Ever since the 1973 oil embargo our country has had to suck-up to murderous potentates like Saudi Crown Prince Mohammed bin Salman, and send our soldiers to die in endless Middle East wars to keep the imports flowing.
Meanwhile, some clever and well incentivized entrepreneurs figured out how to frack oil and gas from previously worthless shale formations in North Dakota, Texas, and Pennsylvania. And, as of September, we are now a net oil exporter. for the first time since 1949. If current trends continue, in ten years we will be exporting more oil to Europe and China than Saudi Arabia does:
Of course current trends will not continue. Alternative clean energy sources are already cheaper than oil for many uses, and that will only accelerate the ending of this phase of history.
7/18/2018: Peak Oil Fears
Back in 2006 EWEB invited author Richard Heinberg to Eugene, to give a talk about Peak Oil. Heinberg had just published a scary book about this, claiming :
The world is about to run out of cheap oil and change dramatically. Within the next few years, global production will peak. Thereafter, even if industrial societies begin to switch to alternative energy sources, they will have less net energy each year to do all the work essential to the survival of complex societies.
This got an enthusiastic response in Eugene. Since I’d spent some time in the oil fields doing seismic exploration, and had been hired by UO in part on the basis of my claim to be an environmental economist, I thought I should respond. So I wrote this Op-Ed for the RG, which they published in Feb 2006. It’s no longer on their website, so here’s the version I submitted:
Peak Oil and Other Fears
I’ve been following the reports about the enthusiastic reception that Professor Heinberg’s talk about peak oil and industrial collapse have received in Eugene. Here’s a related problem that I give in class: World oil reserves are 600 billion barrels, and we are using it at 20 billion barrels per year. How long until we run out? Please write down your answer before you read any more of this op-ed.
My students do the math and they tell me 30 years – maybe just 20, if we add growth in consumption and population. Good try, I tell them, but these numbers are from 1950. Hmm.
The idea of economic collapse from resource exhaustion used to be mainstream economics – a long time ago. In 1798, Thomas Malthus argued that population would soon outstrip food production, and that mass starvation would result. During the potato famine, English politicians used his economics as an excuse not to waste money on relief for the starving Irish. Stanley Jevons, in 1865, argued that England’s industrial revolution would soon come to a halt because the country was using up its supply of coal. Actually, England still has plenty of coal, though not much use for it. As for the starving Irish, well, today 57% of them are now officially “overweight or obese.” Whoops.
While this embarrassing failure to explain reality sent economists back to the drawing board, apparently it has left the peak oil cult untroubled – their forecasts of doom and gloom are just a recycled version of Malthus’s logic, which treats humans as if we are mindless sheep, and which shows no understanding of markets or incentives.
The new model that economists came up with starts from sensible assumptions – business people aren’t idiots, they want to make money, and consumers don’t like to waste money. As more people use up an exhaustible resource like oil, the owners see the scarcity coming and they start demanding higher prices. This gives consumers an incentive to conserve, and oil companies incentives to find more oil. Companies that don’t own oil start to develop alternative energy sources. Combine these effects, and scarcity tends to go away. Add in a little technical progress and prices will fall, not rise. Sure enough, measured by how many hours we have to work to pay for a barrel, the long trend of oil prices has been downward, except for a few short spikes during wars.
The list of alternatives to oil is very long. On the production side, there’s solar energy, wind energy, nuclear/hydrogen energy, coal, tar sands, or just plain drilling more oil wells. On the consumption side, there’s insulating your house, buying a small car, or riding your bike. (If you haven’t ridden it since the last oil crisis, lube the brake cables first. I learned that one the hard way.) We don’t use these substitutes much, yet, because they are still a bit more expensive or inconvenient than oil is. But they are still out there, waiting for us.
Here’s some evidence of how painless the transition to these alternatives will be. Since it peaked around 1970, US energy use per dollar of economic output has been falling steadily. It is now half what it was. You are probably surprised to hear this – unless you are in a business that uses a lot of energy. If you are, you’ve worked like a dog to make this happen, and you’ve increased your profits along the way. But for the average person, all this has been done without much trouble or even notice by you. This is why we call the market “the invisible hand.”
I don’t understand why people continue to give predictions of resource exhaustion and economic collapse so much attention. The prior history of these predictions is simple – they have always been wrong. The theory they are built on is also simple – and also obviously wrong. But then I don’t understand why people like reading Stephen King either. Is it possible that a nice simple story about imaginary scary things is just a fun distraction for the evening?
What scares me is that with all the attention they are devoting to oil scarcity and the coming collapse of civilization, Eugene and its politicians are getting distracted from working on the many things that markets don’t reliably deliver – like health care access, affordable housing, transportation, good paying jobs, and education – and which we rely on good government to help provide.
Bill Harbaugh, Associate Professor of Economics, University of Oregon
I soon started getting angry emails about my claims, including one from a Portland businessman who accepted my offer to bet that the price of oil wouldn’t go above $200 in real terms within the next 10 years. He backed out when he realized I was prepared to put $10K on it.
So what’s happened? I haven’t been keeping an eye on global production, but today the Dept of Energy’s weekly report is out, and US oil production has now hit 11M barrels a day, up from 5M in 2006:
The price of sweet West Texas Intermediate, which was $78 at the time, briefly got up to $161 in 2008, but it’s currently about $70. (All in 2018 dollars). So what are the predictions for future oil output and prices? If you’re still asking that question, you didn’t understand my op-ed.