A little background: Peak-Oil is the point at which oil production will reach its maximum output, and thus begin a terminal decline – accompanied by an indefinite rise in price for the remaining supply. Some economists and geologists are claiming that we’ve reached the peak, some even preaching apocalyptic social and economic consequences. It’s easy to be seduced by a doomsday scenario.
The theory is simple: Limited Resources + Geometric Growth = Only a matter of time. This is loosely known as “Peak-Oil”
The only problem I have with the formula “Peak Oil = The End of the World” is that it represents extreme pessimism. It doesn’t take into account energy potential from alternative sources and it assumes that the industrial complex will not innovate on oil based energy. I also believe that Peak Oil fails to take into account the magnitude of the effect of technological innovation. Peak-Oil seems to assume that after the peak has been reached – technology can do nothing to change the price of oil – it will continue to increase unchecked.
These assumptions pose a real problem for an economist endorsing this theory.
1.) Incentives are not taken into account. We saw empirical evidence in the 1970s of how the price of oil acts as an incentive to spur investment in alternative fuels. This was the birth of the green market: oil prices reached unsustainable levels and the market for alternative energy boomed into existence. Peak-Oil assumes that we have to allocate more resources to acquire more expensive oil – not that investments divest from oil towards alternative fuels. Prices soon corrected as political tensions eased and the market for alternative energy died as fast as it was born. Today, there are a number of economic controls in the forms of laws, tariffs, and social pressure that will preserve the alternatives market. This means the aggregate yield of alternative energy will increase arithmetically until a technological shift occurs to exponentiate its growth.
2.) Technology – Required reading. Thomas Malthus correctly assumed that the population of this world is increasing geometrically. He also correctly assumed that resources (specifically food) increase at an arithmetic rate. This is the basic framework for peak-oil: Demand is increasing geometrically as the population grows and countries like China and India continue their break-neck development, while discovery of new oil supplies occurs at an arithmetic rate. Peak-Oil theory makes the same fatal assumption as Malthus made in “The Principle of Population” – the theory cannot and does not account for technological advances. For Malthus, his theory became popular at the cusp of the industrial revolution, and prominent intellectuals bemoaned a reduction of the population on the scale of the black plague. Fortunately for the world, the industrial revolution spurred an exponential growth in sustenance. The eschatological implications of Peak-Oil will fail scrutiny the same way. Technological advances will allow for inexpensive harvesting of once hard to get oil, increased efficiency of oil-based products, and an increase in the energy yield from oil. When oil prices rise, the market reaction creates incentive for investment in alternative fuel technology. As the investment in alternative fuel increases, the aggregate energy yield increases and oil based technology is phased out. A small break-through in any alternative research could have huge implications in global markets, ushering in a new era of global industrialization. Perhaps such a break-through could keep us dependent on oil longer, but not long enough for eschatological consequences. Only now are we beginning to apply technologies that were spawned by the oil crisis of the late 70s. Each rise in the price of oil throughout its natural ebb and flow will spur a new round of investment, planting the seeds for tomorrow’s energy.
Word of the day:
Eschatology – Noun – any system of doctrines concerning last, or final, matters, as death, the Judgment, the future state, etc.