Wednesday, 3 September 2008

We'll never run out

The ever great Donald J. Boudreaux writing in the National Post explains why We'll never run out .... of oil. Boudreaux writes
My colleague Russ Roberts explains why in his book The Invisible Heart. Imagine, Russ says, a room full of pistachio nuts. You love pistachios and can eat all that you wish as long as you throw each empty shell back into the room whenever you eat a nut. You might suppose that you'll eventually devour all of the nuts in the room. Their number, after all, is finite.

But some thought reveals this conclusion to be, well, nutty. At the start it's easy to find pistachio shells containing nuts. The more you eat, though, the more difficult it becomes to find uneaten nuts among the increasing number of empty shells. Eventually, it will not be worth the time and effort required to search amidst the empty shells for the relatively few remaining nuts. You'll voluntarily leave uneaten pistachios in the room.

And so it is with oil. As we continue using oil, getting more of it becomes increasingly difficult. This increasing difficulty of finding and extracting oil is reflected in its higher price -- a phenomenon that prompts consumers to consume oil more carefully and prompts producers to explore for alternatives.

Of course, advances in technology often render reality richer than this simple story. For example, if a new, lower-cost technique for extracting oil is invented, then oil that yesterday was too costly to get might today be profitably extracted and sold. It's highly doubtful, though, that the cost of extracting oil will ever fall so low -- or that the demand for it will ever rise so high -- that we will find it worthwhile to extract literally the Earth's last barrel of petroleum.

The economic limits on the supply of oil clearly differ from its physical limits.


Matt Nolan said...

Very true!

Paul Walker said...

Matt's Homework Assignment: Explain this to the Greens.