“Today’s reserve and resource estimates should be considered a minimum, not a maximum. By the end of the forecast period, reserves could be the same or higher depending on technological developments, capital availability, public policies, and commodity price levels.”
“The implication for business decision-making and public-policy analysis is that ‘depletable’ is not an operative concept for the world oil market, as it might be for an individual well, field, or geographical section…. [T]he concept of a nonrenewable resource is a heuristic, pedagogical device—an ideal type—not a principle that entrepreneurs can turn into profits and government officials can parlay into enlightened intervention.”
This essay, published by the Foundation for Economic Education (FEE) in the November 1999 issue of The Freeman, was subtitled, “Today’s Reserve and Resource Estimates Should Be Considered a Minimum.” From time to time, MasterResource reprints analyses from the past to show what has stood the test of time (e.g., resource abundance in the market order and what has not (Malthusian alarms).
The essay follows:
Only two decades ago nearly all academics, businessmen, oilmen, and policymakers agreed that the age of energy scarcity was upon us and that the depletion of fossil fuels was imminent. While some observers still cling to that view today, the intellectual tide has turned against doom and gloom on the energy front. Nearly all resource economists believe that fossil fuels will remain affordable in any reasonably foreseeable future.
Indeed, these fuels have become more abundant even in the face of record consumption. World oil reserves today are more than 15 times greater than they were when record keeping began in 1948; world gas reserves are almost four times greater than they were 30 years ago; world coal reserves have risen 75 percent in the last 20 years. Proven world reserves of oil, gas, and coal are officially estimated to be 45, 63, and 230 years of current consumption, respectively. Probable resources of oil, gas, and coal are officially forecast to be 114, 200, and 1,884 years of present usage, respectively.
Moreover, an array of unconventional fossil-fuel sources promises that, when crude oil, natural gas, and coal become scarcer (hence, more expensive) in the future, other fossil fuels may still be the best substitutes before synthetic substitutes come into play.
The most promising unconventional fossil fuel today is orimulsion, a tarlike substance that can be burned to make electricity or refined into petroleum. Orimulsion became the “fourth fossil fuel” in the mid-1980s when technological improvements made Venezuela’s reserves commercially exploitable. Venezuela’s reserve equivalent of 1.2 trillion barrels of oil exceeds the world’s known reserves of crude oil, and other countries’ more modest supplies of the natural bitumen add to the total.
With economic and environmental (post-scrubbing) characteristics superior to those of fuel oil and coal when used for electricity generation, orimulsion is an attractive conversion opportunity for facilities located near waterways with convenient access to Venezuelan shipping. While political opposition (in Florida, in particular) has slowed the introduction of orimulsion in the United States, it has already penetrated markets in Denmark and Lithuania and, to a lesser extent, Germany and Italy. India could soon join that list. Marketing issues aside, this here-and-now fuel source represents an abundant backstop fuel at worst and a significant extension of the petroleum age at best.
The significance of orimulsion for the electricity-generation market may be matched by technological breakthroughs commercializing the conversion of natural gas to synthetic-oil products. For remote gas fields, gas-to-liquids processing can replace the more expensive alternative of liquefaction. In mature markets with air quality concerns, such as in California, natural gas could become a key feedstock from which to distill the cleanest reformulated gasoline and reformulated diesel fuel yet.
A half dozen competing technologies have been developed, several by oil majors that are committing substantial investments relative to government support. The widespread adaptation of gas-to-oil technologies could commercialize up to 40 percent of the world’s natural gas fields that hitherto have been uneconomic.
In addition to orimulsion and synthesized natural gas, tar sand, shale oil, and various replenishable crops also have great promise, however uneconomic they now are, given today’s technology and best practices.
Michael Lynch of the Massachusetts Institute of Technology estimates that more than six trillion barrels of potentially recoverable conventional oil and another 15 trillion barrels of unconventional oil (excluding coal liquefaction) are identifiable today, an estimate that moves the day of reckoning for petroleum centuries into the future.
The gas resource base is similarly loaded with potential substitutions. Advances in coal-bed methane and tight-sands gas technology show immediate potential, and synthetic substitutes from oil crops have long-run promise. If crude oil and natural gas are retired from the economic playing field, fossil fuels boast a strong bench of clean and abundant alternatives. Even the cautious Energy Information Administration of the U.S. Department of Energy concedes that “as technology brings the cost of producing an unconventional barrel of oil closer to that of a conventional barrel, it becomes reasonable to view oil as a viable energy source well into the twenty-second century.”1
Today’s reserve and resource estimates should be considered a minimum, not a maximum. By the end of the forecast period, reserves could be the same or higher depending on technological developments, capital availability, public policies, and commodity price levels.
Technological advances continue to substantially improve finding rates and individual well productivity. Offshore drilling was once confined to fields several hundred feet below the ocean, for instance, but it now reaches depths of several thousand feet. Designs are being considered for drilling beyond 12,000 feet.
Predictably, advances in production technology are driving down the cost of finding oil. In the early 1980s finding-costs for new crude oil reserves averaged between $11.50 and $12.50 per barrel in the United States and most areas of the world. In the mid-1990s they had fallen to around $7 per barrel despite 40 percent inflation in the interim. In the United States alone, finding-costs dropped 40 percent between 1992 and 1996. That is perhaps the best indicator that oil is growing more abundant, not scarcer.
Finally, the amount of energy needed to produce a unit of economic goods or services has been declining more or less steadily. New technologies and incremental gains in production and consumption efficiency make the services performed by energy cheaper even if the original resource has grown more (or less) expensive in its own right.
How is the increasing abundance of fossil fuels squared with the obviously finite nature of those resources?
“To explain the price of oil, we must discard all assumptions of a fixed stock and an inevitable long-run rise and rule out nothing a priori,” says M. A. Adelman of MIT. “Whether scarcity has been or is increasing is a question of fact. Development cost and reserve values are both measures of long-run scarcity. So is reserve value, which is driven by future revenues.”2
Natural-resource economists have been unable to find a “depletion signal” in the data. A comprehensive search in 1984 by two economists at Resources for the Future found “gaps among theory, methodology, and data” that prevented a clear delineation between depletion and the “noise” of technological change, regulatory change, and entrepreneurial expectations.3
A more recent search for the depletion signal by Richard O’Neill and colleagues concluded: “Care must be taken to avoid the seductiveness of conventional wisdom and wishful thinking. While the theory of exhaustible resources is seductive, the empirical evidence would be more like the bible story of the loaves and fishes. What matters is not exhaustible resource theories (true but practically dull) but getting supply to market (logistics) without disruption (geopolitics). While it is easy to see how political events may disrupt supply, it is hard to contrive an overall resource depletion effect on prices.”4
The facts, however, are explainable. Says Adelman: “What we observe is the net result of two contrary forces: diminishing returns, as the industry moves from larger to smaller deposits and from better to poorer quality, versus increasing knowledge of science and technology generally, and of local government structures. So far, knowledge has won.”5
Human ingenuity and financial wherewithal, two key ingredients in the supply brew, are not finite but expansive. The most binding resource constraint on fossil fuels is the “petrotechnicals” needed to locate and extract the energy. Congruent with Julian Simon’s theory that the most scarce resource is human capital, wages in the energy industry can be expected to increase over time, while real prices for energy can be expected to fall under market conditions. Under political conditions such as those that existed during the 1970s, however, the record of energy prices can be quite different.
There is no reason to believe that energy per se (as opposed to particular energy sources) will grow less abundant (more expensive) in our lifetimes or for future generations. “Energy,” as Paul Ballonoff has concluded, “is simply another technological product whose economics are subject to the ordinary market effects of supply and demand.”6
Thus, a negative externality cannot be assigned to today’s fossil-fuel consumption to account for intergenerational “depletion.” A better case can be made that a positive intergenerational externality is created, since today’s base of knowledge and application subsidizes tomorrow’s resource base and consumption.
The implication for business decision-making and public-policy analysis is that “depletable” is not an operative concept for the world oil market, as it might be for an individual well, field, or geographical section. Like the economists’ concept of “perfect competition,” the concept of a nonrenewable resource is a heuristic, pedagogical device—an ideal type—not a principle that entrepreneurs can turn into profits and government officials can parlay into enlightened intervention. The time horizon is too short, and technological and economic change is too uncertain, discontinuous, and open-ended.