Why we should reduce our insatiable thirst for oil

“The Stone Age did not end because the world ran out of stones, and the Oil Age will not end because we run out of oil,” the legendary Minister of Petroleum and Mineral Resources of Saudi Arabia Ahmed Zaki Yamani once said. Indeed, it is highly unlikely that we will run out of oil and we should not expect it. Then why should we reduce our consumption of inexhaustible non-renewable resources? NES Professor Gerhard Toews explains in his column for GURU.

The peak oil hypothesis has become well-known even among the general public. You can google it, if you are not familiar with the hypothesis. Most people have little trouble convincing themselves of the idea when they hear it for the first time. The hypothesis is rooted in the recognition that oil is a physically finite and non-renewable resource that requires millions of years for its regeneration. Due to the rapid consumption of oil, the peak oil hypothesis encapsulates the concern that this resource will eventually be exhausted, leading to sever economic consequences due to our heavy reliance on oil.

These concerns are not new. About 150 years ago, British economist William Stanley Jevons was particularly concerned about the exhaustion of coal, arguing that humanity should be more careful with the wasteful consumption of coal at the time. Even a century before him, Thomas Robert Malthus worried about the exponentially growing population, which could lead to a catastrophe due to the increasing scarcity of fixed or much slower-growing availability of essential resources at the time. Thus, the concern of depleting non-renewable resources is not new and has been a concern for economists and non-economists alike. But does it make any sense to worry?

Theoretically, it does not. While most people will argue that the total amount of a resource is physically bounded and can be exhausted, economists have a different perspective. To extract a non-renewable resource from below the earth’s crust, firms need to invest. Initially, such investments are small as firms search for the most lucrative places to extract. Once the easily accessible reserves are depleted, firms move on to more complicated environments, requiring much larger investments. Once such investments are no longer profitable, the firms stop investing and move to a different reserve or even industry. The amount of resources left in the ground is unknown, perhaps unknowable, and certainly irrelevant from an economic perspective. Thus, the very existence of high extraction costs protects all non-renewable resources from complete exhaustion.

On the other hand, there are industries that have much lower entry cost barriers and, therefore, less protection from investing firms, for example timber and fishing. More importantly, to exhaust a renewable resource, it is not necessary to cut the last tree, or catch the last fish. It is sufficient to reduce the population to a level at which regeneration becomes, if not impossible, at least very difficult. Theoretically, this is sufficient to completely exhaust a renewable resource.

We can now look for evidence that either supports or undermines the theoretically derived hypotheses above. In a recent paper by Pretis and co-authors, the research group examined trends in prices and production for a large sample of non-renewable resources and found no evidence of upward-trending prices (economic indicator for scarcity) or any exhaustion. At the same time, production has increased. Jointly, this suggests that price signals have guided consumption and investments and provided incentives for innovation and substitution. 

On the other hand, we have substantial evidence of the exhaustion of renewable resources, which reportedly also led to the collapse of societies dependent on them. Most famously, Jared Diamond in his famous book of 2005 Collapse: How Societies Choose to Fail or Succeed documented the collapse of societies on Easter Island and the Norse settlements on the western shore of Greenland. According to historians, both societies exhausted their timber supply to a level that resulted in the disappearance of local forests, one of the bases for their survival, and eventually leading to societal collapse.

Does this mean that we can and should happily consume available non-renewable resources? Most certainly not. We should restrict our consumption for different reasons, not because we can exhaust them, but because the use of most non-renewable resources significantly contributes to local and global pollution. Most prominently, there is substantial evidence that the accelerating use of fossil fuels over the last century contributed to an increased concentration of carbon dioxide in the atmosphere and climate change. Changes in the climate may have economic as well as non-economic and negative consequences, which we already observe and which are difficult to predict. This is a much more important reason for why we should reduce our insatiable thirst for oil.

In summary, the use of non-renewable resources should indeed be of great concern to humanity, but not for the reasons many people seem to worry about. We are unlikely to exhaust any of the non-renewable resources that represent an essential part of our economy in the near future. However, uncontrolled use of non-renewables may contribute to changes in local and global climatic conditions, which in the past has also contributed to societal collapse, as has already been popularised by Jared Diamond.

The views expressed in the section "Opinions" do not necessarily reflect the views or positions of the GURU.