We will never run out of oil, but that's not the point

Harvard economist Morris Adelman, famous for saying that we will never run out of oil, died last month. What followed the announcement of his death was a predictable set of encomiums like this one from defenders of the oil industry extolling Adelman's infinite wisdom.

Some (including my father, it seems) were so caught up in the odd celebratory mood – one that resurfaces every time people contemplate just how much stuff there is in the universe – that Adelman's rather narrow and almost meaningless dictum was being offered as the basis for a complete energy policy. (And, never mind that that energy policy makes absolutely no mention of climate change.)

All of this makes sense only if you keep yourself from thinking about it. But a simple illustration will show just how meaningless the notion that we will never run out of oil is. Imagine for a moment that starting tomorrow one-half of the oil that human society normally consumes each day is no longer available and that this goes on for several months.

This certainly would not mean that we have run out. We'd simply be getting significantly less oil than our current global system is designed to run on. The result would surely be a global economic depression. That's how dependent we are on the current RATE of oil production. That's how important the continuous input of high-quality energy from oil is to our collective well-being. This explains the concern of those who believe a decline in the worldwide rate of oil production may be coming within the next decade.

And, no one in this group has ever said that we will run out of oil. That's a canard used to confuse people about the real issue which is the RATE of production.

But, that's not reflected in Adelman's often truncated observation. Furthermore, what he actually said was that oil would never run out so long as technology advanced and prices were high enough to justify its extraction. Within the very narrow confines of this rather wishy-washy and almost tautological statement Adelman is right. The key word in this statement, however, is "enough."

What if technology does advance, but not enough, and what if the price of oil is high, but not high enough to justify bringing it out of the ground at the RATE required for the smooth functioning of global society? What then?

The irony is that while those allied with the oil industry are praising the honored dead, the oil industry itself is pulling back on investment in oil exploration and development even in the face of near record average daily prices for world crude. The reason: a five-fold increase in so-called upstream capital expenditures for exploration and development by the major oil companies since 2000 resulted in only a tiny increase in oil production at those companies. Even with oil prices above $100, the cost of and paltry return on exploration and development is forcing majors to cut back on their previous lavish expenditures.

All this can only mean one thing: less oil delivered in the future. And, all this runs contrary to Adelman's observation. Technological advances continue to be deployed by the industry including so-called high-volume slickwater hydraulic fracturing combined with horizontal drilling used to extract oil from deep shale deposits that were previously inaccessible. And, while these techniques have lifted production significantly in the United States, growth in overall world production in the seven years from 2005 to 2012 has actually slowed dramatically to about one-quarter of the pace of the previous seven years. And, this is in an era of new technologies, record high average daily prices, and, until now, record exploration and development expenditures by oil companies.

Yes, Adelman's conditions – high prices and advancing technology--have prevented us from running out. But that's hardly the point. These conditions should have produced a glut and low prices. They have failed to do so for one simple reason. In the race between the ever more challenging geology and locations of the world's remaining oil resources and the ever advancing technology of the oil industry, geology and locations are winning. And, they've actually been winning for quite a while as discoveries badly lag consumption. That means we are living on borrowed time using up easy-to-get reserves discovered long ago – and hoping against hope that somehow, new technologies will get the upper hand before actual declines in production set in.

This makes for very poor energy policy. Harvard economists would like to think that the world obeys a few simple principles that apply always and everywhere. But actually the world is far more complex than anything these economists imagine. Since we as humans are only privy to a very small portion of that complexity, humility and caution ought to be our watchwords when addressing momentous issues such as energy policy.

Major forecasts in the year 2000 from the US Energy Information Administration, the International Energy Agency, and the National Intelligence Council (which serves the US intelligence agencies) confidently proclaimed that oil production would soar in the next decade to meet rising demand and that prices would stay low. Bewitched by the simple but flawed logic of Adelman and others, they missed badly on production numbers--they were all far too optimistic--and even more so on prices predicting an average price of about $28 per barrel in 2010 when daily prices averaged close to $80.

Psychologists have learned from studies that even when people know that overly confident forecasters have been mostly wrong in the past, they will choose to believe them because of their confident presentation. And, people, in general, won't believe tentative presenters even if those people know that the tentative presenters have been more accurate in the past.

Adelman and his acolytes have delivered simple but misleading ideas confidently – and ones that are in line with what many people want to believe. Such ideologues will never be seen retracting their ideas when the facts prove them wrong. They'll just ignore the facts. And, they'll hope that you ignore the facts, too.