I’ve been following the Peak Oil debate with a mildly sceptical eye for some time, and it struck me a while ago that despite high prices, global oil output hadn’t grown much, but hadn’t declined either. I came up with the innovative description of our current position as “Plateau Oil“. If I had bothered with Google, I would have noticed that the International Energy Agency had offered the same description two weeks earlier. And if I’d thought about for more than a couple of seconds, I would have realised that the supply of topographical metaphors is so limited as to make this a forced move (We Australians use “Tableland” to describe the same landform and there’s also “mesa”, but Mesa Oil is taken, and “Tableland Oil” sounds silly)
Anyway, why are we (apparently) observing Plateau Oil and what does it mean?
The standard economic theory of exhaustible resources says that, on average, the price of an exhaustible resource should rise at a rate equal to the owner’s marginal time discount rate. With constant prices, producers would prefer immediate sales (bringing the current price down and the future price up) and if prices were rising fast and expected to continue doing so, producers would reduce sales bringing about an immediate increase in prices and lowering the expected rate of increase in the future. This theory isn’t always applicable, but something like oil, where most of the major discoveries have apparently already been made, seems like a good case.
Applying this model it seems reasonable to project price increases of 5-10 per cent a year into the future. In the long run, this should more than offset growth in demand arising from population and income growth, so consumption of oil should gradually decline over time, just as Peak Oil theory says it should. But right now, thanks particularly to China, demand growth is strong enough to counterbalance the large price increases we’ve seen in the past five years or so.
There is no reason to be particularly alarmed about a gradually rising price for oil. As I’ve said before, our main problem with carbon-based fuels is too much not too little. And a gradual decline in oil consumption over the next few decades is not going to cause any real problems.
Of course, on a long enough timespan, the history of aggregate oil consumption is going to look like a sharp spike, rising from zero to current levels over 150 years, and then declining to zero again in the future. But the scale that matters to us is the rate at which we turn over our capital stock of motor vehicles and other oil-using capital, and this is measured in decades, not centuries.