A Crude Guess About The Future

Though it has an upside for the biosphere that shouldn’t be ignored, $100/barrel oil definitely isn’t much fun for our pocketbooks or the world economy. And could worse times be ahead?

When we see spikes like this, there are inevitably voices predicting stratospheric prices for crude just beyond the horizon. The basic reasoning is that oil supplies are finite (clearly, in the very big picture they are), and that world oil demand is set to skyrocket thanks in large part to the motorization of India and China (it is—see my last post.) “Peak oil” advocates maintain that at some point we are simply bound to run out of the stuff.

I’ve never been a big fan of the peak oil story. First, price signals will encourage conservation as oil gets more dear, reducing demand pressure. We’ve already come a long way on that front; in 1970, the average car on the road got about 14 mpg, and the average van, light truck or SUV about 10. Today, the averages for new cars and trucks sold are considerably more than double those figures, and things continue to move in the right direction thanks to government regulation (rising CAFE mpg standards), new technology (including but not limited to hybrids), and the fact that consumers respond to oil price increases pretty much like economists predict they should, changing purchasing, travel and location decisions in order to conserve when oil prices rise.

Much more dramatic than anything on the demand side, though, has been our stunning record at increasing supply, which has been a true testament to the power of human ingenuity.

Consider this variant on the Simon-Ehrlich wager, in which an ecologist (Ehrlich) bet an economist (Simon) that the inflation-adjusted prices of five commodities would rise in the 1980s. (All five fell, and Ehrlich lost.) This table (below) shows historical gas prices stretching back to 1919. At 25 cents per gallon in that year, I’ll grant that you’d probably give your right arm for a time machine big enough to fit you and your Toyota Tundra. (Be sure to get your influenza inoculation before you go, however.)

Source: Energy Information Administration (Mar 2005).

But in constant 2010 dollars, that 1919 price of gas was $3.14. True, at the moment we’re paying a bit more—about $3.96. However, keep in mind that in 1919 there were 7.58 million motor vehicles on America’s roads. Today, Americans own about 254 million vehicles. That means that gas prices have risen 26 percent since 1919, while US vehicle ownership has risen 3,250 percent. And those vehicles are being driven more intensively than their 1919 counterparts. We now drive 6,800 percent more miles per year than in 1919, while gas prices have stayed pretty much stable.

Much as I’d love to, it’s beyond my power to conduct a séance and call up the spirits of oil executives and petroleum engineers from 1919. (Besides, if I could raise the dead I’d be concentrating my efforts on Jerry Garcia.) But I bet if I could conjure up oilmen from the past, they’d tell me that thanks to the wondrous, futuristic science of 1919, most of the oil that the laws of engineering and physics would permit man to cost-effectively extract had been discovered, and that supplying 800 million vehicles worldwide would be a mathematical and physical impossibility, by orders of magnitude.

As they say in the investment biz, past performance is no guarantee of future returns. But to this point man has managed to keep up with the demand curve, and just as it’s a certainty that the world’s oil supply is limited, it’s also a certainty that human creativity is limitless.

TAGS:

Leave A Comment

Comments are moderated and generally will be posted if they are on-topic and not abusive.

 

COMMENTS: 45

View All Comments »
  1. Tom says:

    “Thanks to government regulation”

    Seriously?

    I think government regulation is the last thing we should “thank” when it comes to energy. The government has done nothing but slow and impede progress in this area. The reason cars are more “green” today is because there is consumer demand for green cars.

    Hot debate. What do you think? Thumb up 29 Thumb down 29
  2. Douglas says:

    “But to this point man has managed to keep up with the demand curve…”

    Until he doesn’t.

    Well-loved. Like or Dislike: Thumb up 11 Thumb down 6
    • Christopher Strom says:

      “…just as it’s a certainty that the world’s oil supply is limited, it’s also a certainty that human creativity is limitless.”

      And that limitless creativity will allow us to find and extract every barrel of oil (from our finite supply) that costs less than a barrel-of-oil’s worth of energy to extract. And we will. And as we approach the end of the extractable supply, our civilization will undergo just as impressive and fundamental a change as it did when we learned to harness that energy.

      Well-loved. Like or Dislike: Thumb up 21 Thumb down 3
  3. Ezzie says:

    What Tom said re: Gov’t regulation.

    Why compare to the price per gallon, when there are so many other factors that go into that cost? The cost of pulling crude from the ground has gone down tremendously, and if as you note above the supply has been dramatically increased through ingenuity, then that offsets a large chunk of the increased demand as well.

    Thumb up 4 Thumb down 4
  4. RogerP says:

    Oil is not the only commodity with “peak” scenarios than haven’t panned out. In the 1960s, we were told that there was only 5 yearsworth of mercury because the US was spreading it all over Viet Nam in fuses as mercury fulminate. As my dental amalgam manufacturing colleague will attest, there’s still plenty of mercury around.

    Today, speculators are saying the same thing about silver, as though industry won’t respond to skyrocketing prices.

    Perhaps I should haul out my copy of “Limits to Growth”. I could use a laugh

    Well-loved. Like or Dislike: Thumb up 11 Thumb down 4
  5. Daniel says:

    Hidden due to low comment rating. Click here to see.

    Disliked! Like or Dislike: Thumb up 0 Thumb down 5
    • Clancy says:

      I interpret it as a non-normative statement of fact. As in: Government regulation (along with the other factors mentioned) has helped push gas mileage up. Whether or not you think it is moral for them to do so is not what the post is about.

      Well-loved. Like or Dislike: Thumb up 9 Thumb down 1
  6. Myron says:

    Your argument of human creativity as a counter to a finite resource is short sighted. It’s like drinking a Big Gulp, you can grab bigger and bigger straws to satiate your thirst but at some point there just wont be any more liquid left. While you can look in your Big Gulp and see how much you have left, you can’t do that with oil. The industry revolves around discovering more and more, but what happens when that stops? All the human creativity in the world won’t stop the economic devastation that will certainly occur.

    Hot debate. What do you think? Thumb up 9 Thumb down 13
    • headhunt23 says:

      Isn’t that analogy supposed to be with a Slurpee?

      Thumb up 2 Thumb down 1
    • MS says:

      The problem with that analogy is that the last sip is just as easy (cheap) as the first sip. If every drink was harder to take than the previous one, the drinker may switch to coffee before the drink runs dry.

      It’s not a story of of us hitting the bottom of the global oil slurpee with all of our drilling. We’re tapping the most cost-effective (financially, politically, environmentally) sources now. As those become harder to access/”dry up” we go to more expensive options. As this happens, the price of oil energy will go up, and conservation/alternative energy will be more attractive.

      Thumb up 1 Thumb down 1
  7. zach says:

    What is the inflation adjusted $ per mile change from 1919 to 2010?

    Well-loved. Like or Dislike: Thumb up 10 Thumb down 0
  8. GT says:

    Hidden due to low comment rating. Click here to see.

    Disliked! Like or Dislike: Thumb up 9 Thumb down 15
    • Simon Farnsworth says:

      The statement that a country’s demand is new, and is set to massively increase doesn’t imply that they don’t have as much right to the commodity as the existing users. It’s simply a statement of fact; if India and China had bypassed oil for their cars, and were using SuperMagicImaginaryFuel instead, they would not be increasing demand for oil.

      There is a separate discussion about whose demand has “right” on its side.

      Well-loved. Like or Dislike: Thumb up 6 Thumb down 1