Enough is Enough

Repeat after me: the world will never run out of oil. NEVER.

This has been bothering me for awhile. I apologize to those of you for which this is glaringly obvious. For many, it is not.

There is a common notion that we are fast approaching the day when we will wring the last drop of oil from the planet; and if we don’t prepare, the very next day will be Armageddon. This misconception not only grossly underestimates the availability of oil; it also gets the economics pathetically wrong.

Petroleum is a fungible resource that is traded on a global market based on world supply and demand. For much of the last century the supply has been constrained not by the ability to extract oil from the earth, but rather by refining capacity and, to a limited degree, by politics. In other words, the past and present supply of oil is bounded by capital and technological limitations and by regulatory and political conditions. These factors are pretty tangential to this discussion, but even (especially) if we were to completely remove these constraints there would be exactly enough oil to go around.

The significance of that last statement hinges on our understanding of “enough”.

Oil’s usefulness is based on potential benefit and marginal cost (i.e. the sum of the cost to mine, refine, manufacture and distribute each additional barrel). Benefits are aggregated into world demand. Costs are captured in world supply. It is true that the planet does not contain a limitless amount of oil. However, the cost of oil will gradually (*gradually*) increase as it becomes more scarce. Meanwhile new technology will gradually (*gradually*) decrease the relative value of oil and as a result, global demand will fall. Eventually, but long before we’ve sapped all of the oil from the earth, oil will become an inefficient and useless resource. It is a matter of semantics to interpret it as oil becoming prohibitively costly through scarcity or by being replaced by a more cost efficient resource; in either case, the outcome is exactly the same.

This slow but sure evolution toward the day when oil is essentially useless is cause for optimism. As oil is phased out it will likely be replaced by energy technologies that have less of an environmental impact, contain considerably more energy potential, and require substantially less human labor to manufacture. This is unambiguously good, no?!? We should probably even be making efforts to internalize more of the cost of oil consumption with the effect of speeding this process along.

So, the next time you hear someone whine about our need for oil security or independence, or worse, that we are draining the planet’s oil reserves; tell them to pull their head out of their ass. We have exactly enough black gold!