Will we run out of fossil fuels?
Or more precisely, will a gradual scarcity of fossil fuels
drive up their price so that alternatives out-compete them?
Much of our modern thinking about this is driven by a very famous 1956 lecture
by a petroleum geologist called M. King Hubbert.
He used a bell shaped curve to predict the US oil production.
And correctly predicted the peak in 1970.
In 1973, the Arab oil shock drove fears of oil scarcity
that persist to this day.
But Hubbert did not predict correctly the future of US oil production, which
has since rebounded.
But since that time, fears about peak oil,
fears about an end to the oil age driven by scarcity,
have centered around Hubbert's prediction of a peak.
My view is that we are threatened more by the abundance of fossil fuels
than by scarcity.
Of course there will be local scarcity of some fuels.
And there's a turbulence in the push and pull between oil supply and oil demand.
But there are at least four forces that in the long run
suggest that fossil fuels will be widely available.
The first is technological change.
The second is the geological diversity of the resource.
The third is price elasticity.
And the fourth is interfuel substitution and conversion.
In the next sections, we'll explore these four factors in order
and look at how they explain the history of oil production in the world.
First, technological change-- the technologies for finding and extracting
oil and gas just keep getting better.
Two examples, one is the shale gas revolution,
where technologies for drilling long horizontal wells
and for making fractures in precise locations
that allow the oil or gas to seep out of rock that otherwise would be too
tight, too impermeable, to allow it to flow naturally
have allowed an enormous expansion of US oil and gas
production using new technologies.
Second, the gradual increase in the size and efficiency, and now automation,
of mining equipment allows very large scale coal production
at ever declining costs.
Second, geological diversity-- when one hears about an oil resource,
it's very tempting to imagine a fixed reservoir, like a tank,
and imagine that as that tank is gradually depleted,
you get to some point where it's all gone.
That's true for some conventional so-called volumetric oil reservoirs.
But hydrocarbons occur in a vast diversity of forms.
There are immense reservoirs, for example, of Canadian oil or tar
sands that are well known deposits.
It's easy to know precisely where they are.
But they're very expensive to extract and turn into oil.
There are other deposits, like ultra deep finds recently made
off the coast of Brazil, where production is well understood, but finding them
is very difficult. When you look across the whole world,
there is enormous diversity of different kinds of oil and gas reservoirs.
And that diversity means that there's no reason
to think about a single fixed supply.
There are larger and larger supplies of materials
that are harder and harder to get at.
Third, price elasticity-- when prices go up, people work harder to get the oil.
You can see this in this time series that shows the oil price,
along with a number of working US oil rigs.
See how the two move together.
They are correlated.
Indeed, the technical definition of oil reserves
is the amount of oil that can be produced using current technology
at the current market price.
This means that if oil price suddenly goes up,
oil reserves actually go up overnight, with no change in technology
and no change in the actual oil in the ground.
Oil reserves are, in this sense, partly an economic definition.
The McKelvey box provides a good way to think
about the role of price, technology, and geology in determining the availability
of a resource like oil and gas.
This is a system that is used by economic geologists studying
both oil and gas and other resources like, say minerals.
The vertical axis shows the cost of producing
a resource with current technology.
While the horizontal axis shows the certainty that resource exists,
geological certainty.
So you can think about existing oil and gas reserves or resources
on these two axes.
The Canadian oil or tar sands, for example,
are geologically certain in that we know precisely where they are.
But the cost of accessing them, the cost of extracting that oil from the sands
and turning it into a marketable product, has been very high.
Although it's gradually declining as the technology improves.
Finally, the fourth factor driving the availability of fossil fuels
is interfuel substitution and conversion.
Substitution is when a user, for example a electricity plant,
can choose between using gas or coal and oil.
And so they shift to the cheapest fuel.
This means that when one fuel is scarce, they can shift to another fuel.
And this provides a kind of economic interchange between the three fuels.
As well as an economic interchange when users actually switch,
it's physically possible to turn one fuel into another.
For example, we can turn coal into a gaseous fuel, so-called coal
gasification.
And we can turn gaseous fuels into liquid fuels, so called gas to liquids.
So in the world today, we both turn coal all the way
into liquid fuels, much higher value fuels that are used for transportation.
And we turn natural gas into liquid fuels.
This conversion allows another kind of substitution separate
from the economic substitution.
It means that even if one fossil fuel runs short,
for example that we run out of oil.
Running out of oil doesn't mean running out
of hydrocarbon fuels produced from fossil fuels.
Because we could produce that same oil from coal or gas.
To review, we've examined four factors that
shape the long-run availability of fossil fuels.
First, technological change; second, geological diversity;
third, price elasticity; and fourth, interfuel substitution.
Together these have shaped the history of the oil age since the 1850s.
As an example, look at the global history of oil production.
Note, for example, that between about 1930 and 1973 the price of oil
was roughly constant in inflation-adjusted terms.
While the quantity of oil increased 10 fold.
How did that happen?
It's the story we've been telling, a story
of technological change, increasing ease of access,
competing against scarcity of the easy resources.
And over that time period, the competition between those two
came out about even.
But note, the sharp discontinuities, discontinuities in 1973 and since then,
and some discontinuities in the late 19th century.
Those were caused by regional pushes and pull, a turbulence between the dynamics
of oil production and oil demand.
There's no doubt that the turbulence in oil prices will continue.
I don't claim to be able to predict oil prices a year or five years hence.
A single disaster, natural disaster or attack on, for example,
the major Saudi loading terminal, could drive oil prices enormously high.
While a global economic recession could drive them much lower.
What these factors do is predict that the long run
availability of fossil fuels is large.
And that it's unlikely that, in the long run, sheer scarcity of fossil fuels
will limit our ability to use them, at least not for centuries.