Doomsayers no longer predict that we’ll run out of oil any time soon; they predict that we’ll reach peak oil. James Hamilton explains how to talk to an economist about peak oil:
Oil is going to become extremely valuable under this scenario in a very short period of time. Let’s say for discussion we’re talking about $200 a barrel two years hence. Then I would like to make the observation that, if the facts were indeed as we just conjectured, oil surely could not continue to sell for $60 a barrel today. Anybody who pumps a barrel out of a reservoir today to sell at $60 could make three times as much money if they just left it in the ground another two years before pumping it out. The same is true for anybody with above-ground storage facilities — they’re throwing away money, and lots of it, for every barrel they sell at $60 that they could have instead stored for two years and sold for $200. If oil producers did respond to these very strong incentives by holding back oil from today’s market, the effect would be to drive today’s price up. This profit-seeking wouldn’t drive the price all the way up to $200, because you have significant interest, storage, and idle capacity expenses from trying to wait around a couple of years before getting your profit. An economist would expect the end result of this profit-seeking to be that the price today is lower than what it will be in two years by an amount that reflects these interest and other expenses, but certainly far less than the difference between $60 and $200 a barrel.Suppose, again for sake of discussion, that the outcome of this profit-seeking behavior by oil sellers was to drive the price of oil to $180 a barrel today, (that is, supposing that $180 plus two years worth of forgone interest equals $200). What effects would that have? For one thing, it would be a very powerful and effective incentive to force today’s users of oil to reduce their consumption immediately. It would likewise be a very powerful incentive for investing heavily in oil sands and alternative technologies. And, of course, it would leave us more oil in the future to keep the economy going as we make the needed transitions. In other words, the consequence of oil producers trying to sell their oil for the highest price would be to help move society immediately and powerfully in the direction that we earlier determined it ought to move in anticipation of what is going to happen in the future.