Let’s do a thought experiment. Say the world’s proven oil reserves are 400 million barrels. And say world oil consumption is 20 million barrels a year, growing at 5 percent annually.
Question: when will earth’s oil reserves be 100 percent depleted?
OK, timeout. Before you scratch your head and break out the scratch paper, I should warn you — the answer isn’t 14.2 years. Or 20.4 years. Or any other number of years.
That answer strikes most non-economists as an astonishing — and possibly immoral — claim. So let me explain. Consider the following example:
Imagine it’s your 10th birthday, and you really like pistachio nuts. For a present, your folks give you an entire room full of pistachios — a 4-foot-deep sea of tasty, salted treats.
Sounds delicious. At first, they’re easy to eat. Pick one up, eat it, and throw back the shells. But over time, pistachios get harder to find. As you eat, there are fewer nuts, and more shells. Eventually you get frusterated, spending more and more time sifting through shells looking for a single pistachio.
This continues until, finally, you give up altogether. It’s just too costly to find those last pistachios. You decide it’s cheaper to go to the kitchen for a different snack, and abandon the pistachio room forever — even though you haven’t “run out” of pistachios in any absolute sense.
OK, now back to oil markets.
Just like pistachios, as we deplete easily-drilled oil reserves, oil gets harder and harder to extract. As it does, market prices rise to reflect this. These rising prices encourage people to 1) conserve oil, and 2) find substitutes. And the process continues until the price of oil rises to the point where it equals the price of the next-best substitute — whatever that is — and we stop using it. We never actually “run out” of oil in any technical sense.
Now, that’s a simple but powerful story. Of course, it doesn’t settle every question about oil use. For example, it says nothing about oil’s impact on the environment, what technology we’ll switch to when supplies get low, or whether dependence on imported oil is corrupting America’s foreign policy.
But what it does do is important. It provides a useful mental framework when thinking about articles like this, in which authors worry about everyone’s lack of foresight but their own, instead of putting their money where their mouth is by placing bets in commodities futures markets.
And that’s what economics is supposed to do. Pass it on.
[The pistachio example is originally from economist Russell Roberts.]