Sunday, December 27, 2009

Oil scarcity

Predictions of a collapse in oil supplies are nothing new, as illustrated by this excerpt from The Prize:
There were many in America, at the beginning of the automotive age, who worried that supplies of the "new fuel" were about to give out. The years 1917-20 had been generally disappointing in terms of new discoveries. Leading geologists prophesied gloomily that the limits on U.S. production were near. Post-World War I pressure on supplies reinforced the expectation of shortage among refiners as well. Some refiners could run at only 50 percent of their capacity because crude oil was in short supply, and local retailers around the country kept running out of kerosene and gasoline. Indeed, shortage was so much the dominant view in the industry that Walter Teagle [the CEO] of Standard Oil of New Jersey once remarked that pessimism over crude supplies had become a chronic malady in the oil business.

But the wheel had already begun to turn. The search for new sources of supply was nothing short of frantic, fueled by the expectation of shortage itself and reinforced by the powerfully alluring incentive of rising prices. Oklahoma crude, which had been $1.20 a barrel in 196, rose to $3.36 by 1920 as refiners, who had run short, bid up the price; and a record number of oil wells were drilled.

The technology for finding oil was also about to improve. Up to 1920, geology, as it applied to the oil industry, had meant what was know as "surface geology," the mapping and identification of likely prospects on the basis of the visible landscape. But, by 1920, surface geology had gone almost as far as it could. Many of the visible prospects had been identified. Explorers had to find a way to "see" underground, in order to figure out whether the subsurface structures were the kind that might trap oil. The emerging science of geophysics provided that new way of "seeing."
This is econ 101 at work. When prices go up the incentive increases to develop new sources of fuel, new technology to find that fuel, innovations to make more efficient use of the fuel and even incentives to develop new ways to harness energy (e.g. wind, solar, etc.). We may someday run out of oil, but we will never run out of energy as long as the price mechanism is allowed to work its magic.

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