Why we’ll never run out of oil

Posted by Jason | Posted in Economics | Posted on 20-10-2009


Our government has been pushing alternative energy like they stand to make profits personally from the success of the green businesses. Hmm, could it be? How much has Gore made? Last I heard he’s made over $100 million. But profits are fine when they come from liberal causes, right?

Anyways, the reason I am writing this post is we’ve been told for generations now that we are going to run out of oil. Oil is a fossil fuel, and there is only so much of it. We are told we must not drill basically anywhere. This issue came to mind when I was out driving around looking at houses with my family. Although we have no intentions on buying any of the houses, this is just something we enjoy. While driving around, the following example became apparent. It applies to all limited commodities, and it highlights the fallacy that government must act so we don’t use all the world’s oil.

Have you ever noticed how older houses seem to have the best yards? At least where I live in Pittsburgh, the older houses seem to have the nice, flat yards. All the new houses are built with a cliff for a back yard. This is a constant complaint, but it is very simple to explain. It will highlight the fashion by which the market conserves resources. In a free market, home builders look to build houses for the lowest possible price. The lower the price the more purchasers. The more purchasers, the easier it will be to sell and make a profit. Developing a home on a flat lot is much cheaper than developing on a hill. Developing on a hill requires tons of expensive excavation. This is why the flat land is developed first.  Over time, more and more of the flat areas are developed. As the flat areas are used up, they become more expensive.  Supply shrinks while demand doesn’t. As they become more expensive, developing the hilly area starts to become more reasonable. Eventually, the flat land, because of low supply, costs more to develop than the hill.

The developers begin developing the hills because they can offer them cheaper than the remaining flat lots that as we already said have risen in price. Developers will continue this process moving to more and more difficult and expensive developments as the price of the low hanging fruit increases because of decreasing supply. Ultimately, the remaining supply becomes so expensive that more expensive substitutes are used, in this case hilly land. This will leave flat land that is untouched. As the supply of easier to develop hill begin to dwindle, developers will move on to harder and harder to develop areas. The cost of developing the harder areas would more than likely lead to some recycling of the old flat lots that have houses on them already.

This is no different with oil. The technologies that are now too expensive to develop, mass produce, and distribute will get more and more economical as supply of oil shrinks and prices increase to reflect the shrinking supply. Similar to land development, as energy supplies get more expensive we will always move on to the previous uneconomical sources that have now become economical.  Because of the skyrocketing price, it would not make economical sense to use the remaining supply.

How do you run out of oil? You could run out of oil if the government decides to nationalize the oil supply for say “the public good”. Government also could impose price controls, which would prevent the price signals from having their effect on demand. These are the circumstances that spell disaster for conservation. As with most things, the government isn’t the solution, and as we know in many cases can be the biggest problem. The free market requires no compulsion, no taking of liberties, and would preserve our resources without force. No bureaucratic idiocy is needed for the free market to prevent us from using all the world’s oil. Well, unless someone in government is in the business of making unearned profits, maybe by forcing the world to buy carbon credits from a former Vice President who shall remain nameless.

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