Economics 0 Comments ,

Peak Oil, A Disaster that never happened

Peak oil

Peak oil, In 1960 a best selling book called waste makers claimed that only a 13 year supply of oil remained for the United States. If the US continued at the same rate the 32 billion barrels of the oil supply would be gone by 1973. The only problem with that theory was that in 1973 the oil reserves were estimated at 36 billion barrels. A 4 billion barrel increase even after the 13 years of consumption.

The author wrote an entire book but what happened? Did the US get lucky and find more oil? Or did the author manage to avoid a fundamental part of economics?

The latter is the case. If it cost 2 dollars to get a barrel of oil out of the ground and a barrel is only selling for 1 dollar then that oil may as well not even exist because its worthless at the current price. This is what was missed by the author, not all oil is counted in the total supply of oil.

 

Fuel tax protests in Paris

Fuel tax protests in Paris

Oil exploration

Oil is generated deep in the earth, from the crushed remains of the continent’s rotting organic matter — phytoplankton, plants, algae. Over millions of years, given the presence of precisely the right time, temperature and pressure, this material can cook into oil. Exploration of oil is very costly, not only is there the cost of geological exploration and drilling dry holes the price of oil can drop as even more oil is discovered around the world. This can widen the gap between what prices are and what the Possible exploration findings could be. It might not be worth spending that money on exploration until prices reach a certain level

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Supply and demand

It is the Basic rule of supply and demand that was missed and it applies to everything, including all natural resources (not including cartels or monopolies).  As the supply of a given item increases the price will drop as competition to get sales increases. or if a new method of cheaper supply is discovered the industry must find a way to match the new lower price or loose selling their product altogether. The best example of this was when John D Rockefeller changed the way oil was transported, as it was once transported by truck in barrels (Hence why we still count oil in barrels). He started shipping oil by railroad tank cars, this reduced the price of oil and made it more available and so cheap that this then allowed new uses of oil to be discovered.

In short

There is no fixed supply of oil. The only way to find true peak oil would be to survey the entire earth and develop all the possible technologies to extract oil then calculate where the halfway point is. This can not happen. So when you hear of or see something about dwindling amounts of resource X  remember that it may require for its prices to increase for that resource to begin to be counted in the total supply.

Sernie Banders

 

 

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