Debate Over Depletion Is Silly
Jerry Taylor, Director of Natural Resource Studies – Cato Institute
Are we about to witness a long, slow decline in global oil production and, if so, what should we do about it? For those who demand answers, how about a) who knows?, and b) nothing.
There are a number of ways we might assess the likelihood of future scarcity. Unfortunately, none of them are very satisfactory.
First, we could examine price trends. Because the price of an asset is largely suggestive of expected future returns, informed expectations about future scarcity will be reflected in asset prices. Although data are hard to come by, what is known is that the value of oil reserves has not been trending upward prior to the current price spike.1 The weakness of this metric is that it reflects only what the consensus opinion is about future scarcity. And the consensus opinion may be wrong.
Second, we could examine finding costs. If oil is becoming scarce, it should cost more to find than in the past. Yet finding costs have plummeted over the past several decades.2 The chief weakness of this metric, however, is that data are not comparable between years because the economic incentives for exploration and development vary over time.
Third, we could look at the size of the world's petroleum reserves for clues about scarcity and – what do you know? – proved reserves have been growing steadily over time. At the end of 2004, for instance, proved reserves were 64 percent larger than they were at the end of 1984.3 We might also examine trends in reserves divided by production. At the end of 2004, the world had about 40 years' worth of reserves given current production rates. At the end of 1980, the world had about 29 years' worth of reserves given production rates at that time.4
The weakness of reserve data, however, is that it is analogous to data about what is presently in your kitchen cupboard rather than what is available from the grocery store. “Proved reserves” measure only what is available in the near term, not the long term.
Fourth, we might consider the rate at which major new oil fields are being discovered. Unfortunately, there are no statistics concerning oil discovered, only of oil developed. What evidence exists suggests that declines in new discoveries have been more than offset by increases in the amount of oil we can economically recover from older fields.
Fifth, we could consider estimates of the world's "ultimate recoverable stock" of oil. A study conducted by the U.S. Geological Survey in 2000, for instance, accessed an estimated 32,000 pages of data and found that the earth probably still held about 649 billion barrels of oil and that the figure would likely increase over time. The report concluded that only 24 percent of the world's endowment of oil has been produced so far and another 25 percent of it remains to be discovered.5
The weakness of such data is that it is thoroughly speculative. We can't with any authority estimate the amount of oil we have yet to discover. Moreover, the important thing is not how much oil exists, but how much profitably exploitable oil exists. "Profitable exploitation," however, is determined by oil prices, technology, and access, all of which varies over time.
In sum, we do not know with certainty whether we’re about to witness a long-term decline in oil production. Fortunately, the debate over the likelihood of declining production is in a sense irrelevant. If and when global oil production begins to decline, oil prices will march upward on a sustained basis, providing all the incentive necessary to consumers to conserve and for investors to put their money into alternative energy sources. When oil is more expensive than alternative fuels, consumers will switch to those alternatives of their own accord. No one needs to decide centrally through government action whether, how, or when this transition will take place or what fuels we should embrace after oil.
Sooner or later, society will abandon oil for some other fuel. When that might be – and what fuels lie in our future – is unknowable. That’s all the more reason to leave the details of the transition to market agents rather than government regulators. The former are far more likely to intelligently manage the uncertainties involved than the latter.
1. Morris Adelman, Genie Out of the Bottle: World Oil Since 1970 (Cambridge, MA: MIT Press, 1995), pp. 22-24.
2. Robert L. Bradley, The Increasing Sustainability of Conventional Energy, Policy Analysis no. 341, Cato Institute, April 22, 1999, p. 6.
3. BP Statistical Review of World Energy, June 2005, p. 4.
4. Ibid., p. 8.
5. Thomas Ahlbrandt and Gene Whitney, "New USGS Estimates of Undiscovered Oil and Gas," Newsletter of the International Association for Energy Economists, 3rd Quarter, 2000, p. 25.
Jerry Taylor challenges the "market failure" critique of free markets as they pertain to energy policy and environmental protection. Under Taylor's direction, the Cato Institute has become the nation's most influential critics of federal and state environmental policy. Taylor is a frequent contributor to a host of prominent newspapers and magazines, as well as one of the most frequently cited experts in energy and environmental policy in the nation.