Sunday, February 04, 2007

Are we running out of oil?

With my background, people often ask questions about energy. Things like "Are we running out of oil?"

My answer: It depends on the intention of the question. There is almost certainly less oil today than yesterday and there will be even less tomorrow. There are some theories which hold that oil and gas are being generated deep within the earth and continue to fill the traps, and of course more petroleum could be generated by decaying organisms, but nearly everyone agrees that we are using much more than is being generated.

But will we ever run completely out of oil? I don't think so. The reason lies more in economics than in geology. As more energy is used and less remains, inevitably the supply-demand curve will dictate higher prices until either production increases, demand decreases or alternatives become viable. Eventually, demand for petroleum will decrease, leaving the most difficult to develop resources still in the ground.

The really difficult part is predicting the schedule of these events, the prices we'll see and the alternatives which emerge. Petroleum is subject to booms and busts, because both supply and demand are very inelastic in the short term but very elastic in the long term. This is because the actions which produce higher production, lower demand or viable alteratives run on long term cycles. It can take many years to develop additional supplies in response to higher prices, and once they are in the pipeline they produce for years, regardless of the price. Demand is a bit better, since there are things we can do almost immediately to conserve, but any less painful conservation takes years of changing the infrastructure to improve efficiency of things like cars, factories, etc. This is the reason increasing prices seem so painful.

Hope this helps in understanding the petroleum industry.