An Oil Plateau

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We are running out of oil, so the story goes. A finite resource with limited supply and massive consumption -- at some point the last drop will be used up, right? Wrong. The theory of peak oil is based on the assumption that global oil demand will continue to increase and as a result supply will eventually dwindle to nothing.  Both assumptions are myopic.

It is true that demand for oil has followed an increasing trend as developed and emerging countries increase use for production and personal vehicles. But at the same time efficiency has increased enabling us to get more power from less fuel.

On the supply side, proved oil reserves continue to grow. Yes, though a finite resource, the quantity that is economically viable to remove is increasing. Proved reserves are the known oil pools that are practical to access with current technology and price. As technology advances, so does the amount of oil that is economical to remove. While consumption in the decade between 1998 and 2008 was near 322 billion barrels, the available reserves grew by 480 billion barrels.

If supply does not keep up with demand, indeed, the price at the pump will rise. As it does, alternative energies become more appealing. They become more cost competitive and will be even more so with technological advances. The future will bring a transformation from the current-day oil economy to increased use of alternative energy sources. Daniel Yergin calls this the oil plateau in his recent persuasive article.

We did not depart the Stone Age by running out of stones. Nor will we run out of oil. It is markets that will determine the end of oil use. The last pools will be too expensive, relative to the alternatives, to extract. It is markets that will harness the next energy source that will lead us into the next era.

Originally posted at Environmental Trends.
Holly Fretwell is a Research Fellow at PERC and an adjunct instructor at Montana State University where she has taught  introductory economics, macroeconomics, natural resources and environmental economics. She works with the Foundation for Teaching Economics, giving workshops for  high school teachers to improve their skills in teaching and...
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