[Editor Note: This nearly decade-old article, Are We Running Out of Oil?, is reprinted by the author for its relevance today. A likely error in the article (even Julian Simon adherents can be too pessimistic!) is conceding that M. King Hubbert correctly predicted the 1970 peak of U.S. oil production (9.6 mmb/d then vs. 5.7 mmb/d in 2011). However, domestic output has increased 13% since 2008 and is rapidly rising. A March 4th article on the failure of peak-oil predictions inspired this look-back.]
“Vainly, economists working in the fixity paradigm have looked for a ‘depletion signal’ in the empirical record—some definitive turning point at which physical scarcity overcomes human ingenuity. A new research program is in order. Applied economists should focus upon institutional change to explain and quantify changes in resource scarcity.”
“This time it’s for real,” says the cover story of the June 2004 issue of National Geographic. “We’re at the beginning of the end of cheap oil.”
Books and articles written by geologists, environmentalists, and others regularly announce a new era of increasing oil scarcity. 1 Today’s resurrected hero of the depletionists is M. King Hubbert (1903–89), a Shell geologist who a half century ago presented a bell-shaped curve depicting oil production over time.
His model correctly predicted that U.S. oil production would peak around 1970. A sister prediction, that U.S. gas production would peak in 1970, was errant, however. And his prediction that global oil production would begin an irreversible decline around 2000 is off to a poor start (Hubbert, 1956). World oil production in 2003 was about 2.5 per cent above 2000.
The logic behind mineral-resource pessimism is simple. It goes like this: Oil is a finite resource, incapable of being reproduced in human time frames. Any usage reduces the stock, and geometric demand growth, such as the 1.9 percent annual increase in oil demand predicted for the next two decades (U.S. EIA, 2004, p. 167), will rapidly deplete remaining supplies. Fixed supply plus rising demand equals depletion and increasing economic scarcity.
“But look at the data,” cry expansionists. The resource base for different minerals has expanded tremendously over time to meet growing demand—and at steady, and even falling, prices (when adjusted for inflation). Resource availability has been positively, not negatively, correlated to consumption when human ingenuity has been allowed free rein.
The expansionist position is often associated with Julian Simon, who won the most famous wager in the history of economics in 1990. He bet Paul Ehrlich, John Holdren, and others that the inflation-adjusted price of mineral resources would be less in 1990 than in 1980, and it was. A similar bet undertaken today would likely be a winner too. Prices of global oil and North American natural gas in recent years have been higher than their historical average, but supply and demand adjustments promise to bring these prices down over time – given access to supply and entrepreneurial incentives.
The “Functional” Theory of Resources
The gulf between the depletionists and expansionists can be better understood—and even resolved—by appreciating the insights of the functional theory of mineral resources developed by Erich Zimmermann (1888–1961), an economist at the University of North Carolina and later the University of Texas. His insight provides a theoretical foundation for modern expansionist thought.
Zimmermann rejected the assumption of fixity. Resources are not known, fixed things; they are what humans employ to service wants at a given time. To Zimmermann, only human “appraisal” turns the “neutral stuff” of the earth into resources (1933, 3; 1951, 14). What are resources today may not be tomorrow, and vice versa.
“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, 814–15). Zimmermann concluded that “knowledge is truly the mother of all resources” (1951, 10).
Zimmermann drew a clear distinction between the ways in which natural scientists and social scientists view resources. “To the physicist the law of the conservation of matter and energy is basic. The economist, however, is less interested in the totality of the supply than in its availability” (1933, 45). He warned: “To those who are used to view resources as material fixtures of physical nature, this functional interpretation of resources must seem disconcerting” since “it robs the resource concept of its concreteness and turns it into an elusive vapor” (1933, 4).
Physical to functional; objective to subjective; absolute to relative; static to dynamic; one-dimensional to institutional—Zimmermann’s real world theory was ignored by the economic orthodoxy in their quest to remake their discipline into a “hard” science based on mathematical relationships. Economists embraced deterministic ideas of known, fixed resources that enabled them to calculate the “optimal” extraction rate of a “depletable” resource (Krautkraemer, 1998). But it was at the expense of understanding the dynamics of real world resources.
Depletionists-qua-alarmists err on their own ground by neglecting the vast size of the estimated carbon-energy resource base. The World Energy Council has concluded that “fossil fuel resources are adequate to meet a wide range of possible scenarios through to 2050 … and well beyond” (2001, 61). Similarly, the Intergovernmental Panel on Climate Change (IPCC) found that fossil fuels are so abundant that they “will not limit carbon emissions during the 21st century” (2001, p. 4). The IPCC estimates that only about 1.5 percent of the total physical resource base of the Earth’s crust was produced and consumed between 1860 and 1998 (2001, 236).
Geologists divide the earth’s resource base is three categories: “proved” (found and ready to be produced), “probable” (expected to become proved in time), and “speculative” (estimated but uneconomic). Resourceship turns probable into proved, and speculative into probable. What is high cost today becomes lower cost tomorrow. Heavy oils, such as orimulsion in Venezuela and bitumen in Alberta, Canada, are now rivals to crude oil. These are examples of “resources are not, they become” that Erich Zimmermann did not live to see.
Vainly, economists working in the fixity paradigm have looked for a “depletion signal” in the empirical record—some definitive turning point at which physical scarcity overcomes human ingenuity. A new research program is in order. Applied economists should focus upon institutional change to explain and quantify changes in resource scarcity. The legal framework of a country, and even a people’s customs, in particular, are causal for understanding the abundance or paucity of mineral development.
The 1970s price spikes with crude oil can be better understood in terms of an institutional rather than a depletion signal. Nature’s “tank” was not running low; rather, government–imposed price ceilings distorted market processes. Similarly, today’s high oil prices, at least in part, reflect an “institutional signal” such as an artificial scarcity partly caused by the political blockage of oil production in the Arctic National Wildlife Refuge in Alaska.
Resources grow with improving knowledge, expanding capital, and capitalistic policies, including privatization of the subsoil, that encourage market entrepreneurship. Resources shrink with war, revolution, strife, nationalization, taxation, price controls, and access restrictions. Man is the creator of resources, but man can also destroy and immobilize resources.
Whether or not oil, gas, and coal are exploited far into the future depends on whether government policies will allow the ultimate resource of human ingenuity to turn the “neutral stuff” of the earth into resources. With this understanding, it may be appropriate to join energy economist M.A. Adelman (1997, 26) and abandon the term “exhaustible” to describe mineral resources.2 The end of the misleading renewable-nonrenewable framework would bring Zimmermann’s functional theory to full flower and improve understanding for better real-world decision-making.
Adelman, M. A. 1997. “My Education in Mineral (Especially Oil) Economics,” Annual Review of Energy and the Environment, vol. 22.
Hoffert, Martin, et al. 2002. “Advanced Technology Paths to Global Climate Stability: Energy for a Greenhouse Planet,” Science, November 1.
Hubbert, M. King. “Nuclear Energy and Fossil Fuels,” in Drilling and Production Practice (1956) (Washington: American Petroleum Institute, 1956), pp. 7-25;
Intergovernmental Panel on Climate Change. 2001. Climate Change 2001: Mitigation. Cambridge, UK: Cambridge University Press.
Krautkraemer, Jeffrey. 1998. “Nonrenewable Resource Scarcity,” Journal of Economic Literature. December.
U.S. Energy Information Administration, 2004. International Energy Outlook 2004. Washington: Department of Energy.
World Energy Council. 2001. Living in One World: Sustainability from an Energy Perspective London: WEC.
Zimmermann, Erich. 1933. World Resources and Industries. New York: Harper & Brothers.
Zimmermann, Erich. 1951. World Resources and Industries. New York: Harper & Brothers.
Zimmermann, Erich. 1957. Conservation in the Production of Petroleum. New Haven: Yale University Press.
1 Four such books are: Kenneth Deffeyes, Hubbert’s Peak: The Impending World Oil Shortage (Princeton: Princeton University Press, 2001); Richard Heinberg, The Party’s Over: Oil, War and the Fate of Industrial Societies (Canada: New Society Publishers, 2003); David Goodstein, Out of Gas: The End of the Age of Oil (New York: W. W. Norton, 2004); and Stephen Leeb and Donna Leeb, The Oil Factor: Protect Yourself—AND PROFIT—from the Coming Energy Crisis (New York: Time Warner, 2004).