Sunday, June 7, 2009

Are We Running Out of Oil?

When applying for graduate school a while back, I wrote a 250-word essay. I chose to write about supposed impending oil shortages. I think the arguments are still relevant today.

Here's my essay (slightly modified):

Even economists make mistakes. William Jevons’ book The Coal Question provides a prime example. Jevons was a brilliant nineteenth century intellectual. He was not, however, infallible. In his treatise, Jevons predicted the collapse of England’s economy due to impending coal shortages: “[the current] rate of growth will before long render our consumption of coal comparable with the total supply...we shall meet that vague but inevitable boundary that will stop our progress.” W. Stanley Jevons, The Coal Question: An Inquiry Concerning the Progress of The Nation, and the Probable Exhaustion of Our Coal-Mines 200 (3rd ed. 1906) (1865).

Jevons disregarded the underlying economic principles he professed. If less coal is available, its price increases. This leads to three effects. First, because each lump of coal costs more, people are conservative in their coal use. Second, coal’s higher price serves as an impetus for exploration; entrepreneurs seek new deposits. Finally, lucrative markets for substitutes emerge.
What happened in Great Britain? Was Jevons right? Clearly, coal has not vanished. Furthermore, the economy has increasingly relied on another energy source: oil. Adam Smith’s invisible hand works.

Modern forecasters are raising similar concerns about the coming oil crisis. We have reached “peak oil,” and our economy must soon change how it meets its energy needs. Current naysayers present arguments that are eerily similar to Jevons’: “[as] consumption begins to exceed production by even a small amount,” there will be “a global recession.” Such alarmists likewise fail to consider fundamental truths. Though society must eventually shift to other energy sources, the conversion will be neither catastrophic nor expeditious. Markets will facilitate the change through gradual adjustments in price, conservation techniques, and alternative energy options. There is no impending oil crisis.

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