The peak oil movement, now trying to turn itself into a pro-government-intervention political movement, draws the wrong conclusion by logically progressing from the wrong assumption.
This post revisits this wrong assumption: fixity. From mineral fixity, it is concluded that every act of production and consumption leaves less supply. In this Harold Hotelling world, costs must go up and prices must go up….
But going from the natural science, perfect knowledge, hypothetical world to the real world, just the opposite is true. There is not a fixed supply, known or unknown, from which extractions leave less supply for the future. Costs do not have to go up, and neither do prices.
Try answering this question to see how the peak oilers have it wrong for the business/economic real world. Do we have more or less oil today than when the nation was founded in 1776? Does the world have more or less oil in 2010 than in 1910?
The natural-science answer is that in a physical sense, there is less oil today that then by the amount of extraction. But in a social science sense, we have much more oil today than in 1776 or in 1910 because today’s supply is inventoried and produced from known reservoirs. The same promises to hold true in the future in a consumer-driven, entrepreneur friendly world.
Erich Zimmermann (1888–1961) of the Institutional school of economics called his real world theory the functional theory of resources. His followers have coined the term resourceship to describe the theory.
The following quotations elucidate his theory to inform the current debate over the future of global oil supply. Resources are seen as open-ended, and the brake to production is identified as more man-made (institutional ) than physical nature.
“A functional interpretation of resources…makes any static interpretation of a region’s resources appear futile; for resources change not only with every change of social objectives, respond to every revision of the standard of living, change with each new alignment of classes and individuals, but also with every change in the state of the arts—institutional as well as technological.”
- Erich Zimmermann, “Resources of the South,” The South Atlantic Quarterly, July 1933, p. 216.
“If petroleum resources were in their entirety available from the beginning and could not increase but only decrease through use, it might be correct to advocate ‘sparing use so as to delay inevitable exhaustion.’ But if petroleum resources are dynamic entities that are unfolded only gradually in response to human efforts and cultural impacts, it would seem that the living might do more for posterity by creating a climate in which these resource-making forces thrive and, thriving, permit the full unfolding of petroleum reserves than by urging premature restraint in use long before the resources have been fully developed.”
- Erich Zimmermann, Conservation in the Production of Petroleum: A Study in Industrial Control (New Haven; Yale University Press, 1957), pp. 8–9.
“Nothing is more fatal to a realistic and usable understanding of resources than the failure to differentiate between the constants of natural science and the relatives of social science, between the totality of the universe or of the planet earth, legitimate domains of the natural scientist, and that small portion of these totalities which constitutes the ever changing resources of a given group of people at a given time and place, the bailiwick of the social scientist.”
- Erich Zimmermann, “Resources—an Evolving Concept,” Proceedings and Transactions of the Texas Academy of Science, 1944 (Houston: Texas Academy of Science, 1945), p. 160.
“Resources are highly dynamic functional concepts; they are not, they become, they evolve out of the triune interaction of nature, man, and culture, in which nature sets outer limits, but man and culture are largely responsible for the portion of physical totality that is made available for human use” (1951, pp. 814-15). Zimmermann’s conclusion, “knowledge is truly the mother of all resources”
- Erich Zimmermann, World Resources and Industries (New York: Harper & Brothers, 1951), p. 10.
Culture and Institutions Drive Supply
“The resources at the disposal of man evolve out of the working combination of natural, human, and cultural aspects—a combination which expands with every advance of human knowledge and wisdom and contracts with every relapse into the barbarism of war and civil strife.”
- Erich Zimmermann, “Resources—an Evolving Concept,” Proceedings and Transactions of the Texas Academy of Science, 1944 (Houston” Texas Academy of Science, 1945), p. 160.
“Nature and culture have become so intertwined that little can be gained from an attempt to isolate the natural resources. Cultural and natural resources are inseparable and can only be considered together.”
- Erich Zimmermann, “Resources of the South,” The South Atlantic Quarterly, July 1933, p. 215.