The Fallacy of Peak Oil

There's an interesting discussion going on over at Planet Gore: Peak Oil.

As The FDC is a student of Julian Simon as well as Adam Smith, Milton Friedman, and Thomas Sowell , and have learned from these teachers that the theory of Peak Oil is...well, a bunch of hooey.

I suppose that there is some finite amount of oil in the earth, but from an economic standpoint that is totally irrelevant. The idea of Peak Oil and that someday the gasoline pumps will just run dry is a popular concept among those with a casual understanding of supply and demand. But, casual knowledge of supply and demand doesn’t cut it. Casual obeservers don’t quite understand the miraculous role that prices play in the supply and demand equation – not to mention the role prices play in the incentives created to go out and discover more oil when higher prices dictate that it is needed. Low oil prices will dictate that lots of oil is not discovered – yet. Just as I have no need to have a lifetime supply of groceries available to me at all times, the world doesn’t need to acually discover now a well there is no economic need for - yet. When will this unknown well be discovered? If you guessed when the Central Planning Committee decides we need it, move to the back of the class. If you guessed when prices dictate and create incentives for further oil exploration(AKA, the Invisible Hand), move the front of the class.

The grocery example again: I’ll probably need to buy some groceries to feed myself for the second week in May of 2023. Why don’t I go out and buy them now? The easy answer is that I don’t need them now, because I’ll go out and buy them when I need them in 15 years. Right now, I’ve made the rational decision to apply my monetary resources to other goods and services that I’ve deemed are more important to me and my family in the nearer future. The groceries that I’ll need 15 years and three months from now is irrelevant. I am, however, applying some of my resources to more long-term needs, i.e. my retirement and my kids college education – because that is not irrelevant even at this time. But, as far as my groceries are concerned, I’ll just keep buying them about a week or so before I need them. But, of course, if the store has a real good sale on some items that are not perishable, I’ll probably stock up. There’s that miracle of prices again. Oil supply isn’t much different.

As I said, a casual knowledge of supply and demand won’t cut it here – the Peak Oil nuts are just going to have to read a few serious economics books to wrap their brain around this concept.

Julian Simon:

More people, and increased income, cause resources to become more scarce in the short run. Heightened scarcity causes prices to rise. The higher prices present opportunity, and prompt inventors and entrepreneurs to search for solutions. Many fail in the search, at cost to themselves. But in a free society, solutions are eventually found. And in the long run the new developments leave us better off than if the problems had not arisen. That is, prices eventually become lower than before the increased scarcity occurred.

A column by Nansen G. Salerit on tomorrow's Wall Street Journal Editorial Page agrees:

In fact, we are nowhere close to reaching a peak in global oil supplies.

Given a set of assumptions, forecasting the peak-oil-point -- defined as the onset of global production decline -- is a relatively trivial problem.

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