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June 26, 2007

Arthur Foulkes: We will never run out of oil

By Arthur Foulkes

TERRE HAUTE — The world is never going to run out of oil.

This may sound like a brash prediction, but I’m sure it’s true.

First, there is still a lot of oil around – at least 45 years worth according to official estimates, with “probable” supplies reaching 114 years.

But that’s not why we will never run out.

One of the best ways of explaining why human beings will never use up the last drop of the world’s oil comes from George Mason University economist Russell Roberts.

In his 2001 book “The Invisible Heart,” Roberts tells of a high-school teacher who asks one of his students if she likes pistachio nuts.

“Doesn’t everyone?” she answers.

“Suppose for your birthday I gave you a room full of pistachio nuts in the shell. It’s a big room … The nuts in the room are yours for the taking.”

Roberts’ teacher then explains that outside the “nut room,” pistachio nuts are expensive; inside, they are free. There is only one catch. After the student or her friends eat a pistachio nut they must leave the shells in the room.

For a long time this is no problem, but after a while – say several years – the student finds it takes longer and longer to find a pistachio nut because of all the discarded shells.

Soon, just finding one nut can take nearly an hour, so the student, when she really wants a pistachio nut, is willing to pay for some in the world outside the “nut room.”

Why is this?

“The nuts aren’t free any more,” the student tells her teacher. They are becoming expensive in terms of time.

So long before the last nut is removed from the student’s “nut room,” she will have walked away from the room and gotten nuts in other ways.

“It’s the same with oil,” the teacher explains. “Years before the last drop of oil is found and extracted, we’ll walk away from oil as an energy source.”

In short, just as higher pistachio “prices” led the student to alternative sources of nuts, higher oil prices, caused by a growing scarcity, will encourage the discovery of new sources of energy long before oil runs out.

The Stone Age ended, Sheik Yamani of Saudi Arabia famously once said, not because of a lack of stones. “The oil age will end,” he added, “but not for a lack of oil.”

When the Industrial Revolution began, steam power was generated using burning wood. As wood became more scarce in England and America (and thus more expensive) this brought about a search for cheaper sources of energy, namely coal.

In the late 19th century, as coal prices rose, a similar transformation took place from coal to oil.

In addition to encouraging creative new ways of generating energy, higher prices also encourage the search for undiscovered deposits of known energy sources. For instance, according to statistician and environmentalist Bjorn Lomborg, even the most modern methods for extracting oil from underground wells leaves more than half the oil in the fields unexploited.

“Consequently,” Lomborg writes, “there is still much to be reaped in this area.” According to the U.S. Geological Survey, technological improvements are expected to increase known oil reserves by more than 50 percent.

Higher prices also encourage more efficient uses of what oil (or other energy source) is available. Many energy-consuming appliances and automobiles have become much more efficient since the “oil shock” of 1973. Indeed, according to the World Bank, almost twice as much wealth was produced per unit of energy in 1992 as in 1971.

We have long been subject to dire predictions that we are running out of oil, coal or whatever.

In 1865, famous British economist Stanley Jevons predicted industrialization would come to a screeching halt because coal, which by then powered most factories, was running out.

In 1914, the U.S. Bureau of Mines calculated there was only enough oil left for 10 years. In 1939, the Department of Interior projected there was only 13 years supply of oil remaining and in 1972, the author of a famous book called “Limits to Growth” foresaw the world running out of oil by 1992.

The future is unknowable, but the fact is, mankind is inventive, resourceful and creative. When certain resources become scarce and their prices rise, new methods for finding the resource are discovered or alternatives to that resource are found.

Oil prices are higher today than they have been in a while. This is largely due to political instability in the Middle East, where at least half of the world’s known oil reserves are located and – more importantly – growing demand for oil and gasoline from India and China, the world’s two most populous nations where dramatically increasing prosperity has led to more energy usage.

Despite today’s prices at the pump, the fact is, in real, inflation-adjusted terms, gas prices are around what they were in the early to mid-1980s.

More importantly, wealth has increased since the 1980s so that whereas the average household spent around 9 percent of its real income on energy in the early ’80s, that figure today has fallen to around 3 percent.

In other words, as a percentage of household income, even at today’s prices, energy costs are taking a significantly smaller bite out of the average family’s real earnings. (This may help explain why sport-utility vehicle and large truck sales have rebounded despite $3 per gallon gas prices).

At present, higher oil and gas prices have politicians and others clamoring for government-supported energy alternatives, such as ethanol. But it’s quite possible a perceived oil and gasoline “crisis” is simply opening the door for special interest politics and greater government meddling with market forces.

For example, Jerry Taylor of the Cato Institute estimates the ethanol industry, which got its first big boost with the first “oil shock,” is subsidized to the tune of between $5 billion to $6 billion annually and still a gallon of ethanol costs at least $2.50 to produce. In other words, Taylor said, “without the [government’s] ethanol program, the industry would collapse to dust. Nobody would make ethanol.”

Chasing after government-mandated “solutions” to the energy problem is creating new costs, new problems and considerable waste.

Government programs are not needed to “solve” our energy problems. Free market prices, private property rights and a non-interventionist government would go further toward securing a more prosperous and energy abundant future than all government programs combined.

Arthur Foulkes is a native of Terre Haute and a longtime resident. The Tribune-Star reporter writes a weekly column on business and economics. He can be reached at (812) 231-4232 or arthur.foulkes@

tribstar.com.

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