Earthwatch Watch  

The Myth of Peak Oil

by Randal O'Toole

Some people assess a hypothesis by how well it matches their ideology, rather than by how well it fits the data. Consider the case of "peak oil". . .

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The world is running out of oil. Demand in China and other Asian nations is rising rapidly, yet total oil production will soon peak and then decline. As a result, today's high oil prices, driven by Katrina and Rita, are only a harbinger of even higher prices to come. Such high prices mean an end to life as we know it — life in the suburbs with automobiles, Wal-Marts, and other modern conveniences.

Those, at least, are the claims of the peak-oil theorists. Some proponents of peak oil are actually petroleum geologists who have some idea what they are talking about. But many are simply people who hate suburbs and automobiles and are gleeful at the thought that they will soon go away. "Forget Wal-Mart and another $286 billion to pave over good land. Finally!" one group happily reports.

Of course, if what they say is true, we should stop building any more low-density suburbs or highways, and instead build New Urban communities and rail transit. The peak-oil theory thereby helps politicians justify intrusive land-use regulations and wasteful transportation projects.

Leading the charge in this field is James Howard Kunstler, author of "The Geography of Nowhere," which argued that suburbs were "trashy and preposterous"; "Home from Nowhere," which advocated New Urbanism as a replacement for traditional suburbs; and now "The Long Emergency." As summarized in Rolling Stone, Kunstler's latest book argues that oil prices are rising to catastrophic levels, and that we will only be saved by building "walkable, human-scale towns."

Kunstler is no petroleum geologist. As his earlier books show, he simply considers suburbs abominable. If peak oil means an end to the suburbs, then he is all for it. This attitude blinds him to any realistic assessment of his argument.

Broken down, Kunstler's conclusions depend on four separate hypotheses:

1. We are rapidly running out of oil, and fuel prices will soon become unaffordable for ordinary auto drivers.
2. For powering automobiles, there is no substitute for oil.
3. Higher prices will necessarily mean less driving.
4. Less driving will favor New Urbanism over low-density suburbs.

If any one of these four hypotheses are wrong, then Kunstler's conclusions are unwarranted. All four must be true for there to be any support for the diversion of highway funds to rail transit, or for government regulations or subsidies that favor New Urbanism over low-density suburbs.

Let's look at each hypothesis in detail.

Are we running out of oil?

In 1920, the United States Geological Survey officially estimated that the U.S. had just 6.7 billion barrels of oil left, including undiscovered oil fields. Eighty-two years later, the U.S. had produced 180 billion barrels of oil and still had 22 billion barrels of proven reserves. The USGS's 1920 estimate was off by a mere 2900%.

People have long feared running out of oil, but doomsayers' predictions have all proven false. Given that there is a fixed amount of oil in the world, someday we will doubtless see prices rise due to disappearing supplies. But that hasn't happened yet, and probably won't happen for at least 30–100 years.

Virtually all fluctuations in gasoline prices have been due to political events and natural disasters, not to actual shortages of oil in the ground. Though Katrina and Rita have driven oil prices today to $65 a barrel, this is less, after adjusting for inflation, than prices in 1979–1981.

Some geologists estimate that 150 years ago the earth contained 6–8 trillion barrels of oil. We've used 1 trillion barrels since then. That leaves 5–7 trillion barrels which, if we can extract them, will easily last another century. The problem is that most of this is not "cheap oil," and so is not included in listings of "proven reserves," which amount to just over 1 trillion barrels. That supply is forecast to last about 30 years.

The estimate of 1 trillion barrels of cheap oil is almost certainly conservative. In an article titled "Crying Wolf," MIT energy economist Michael Lynch documents that the geologists who lead the peak-oil debate have a long track record of underestimating future oil production from known reserves. Plus there are still parts of the globe that have not yet been fully explored. Thus, the 30-year time horizon for cheap oil is also conservative; while demand is increasing, known reserves of such cheap oil are also increasing.

After cheap oil is exhausted, there will still be plenty of oil in the ground. Radford University Professor Bill Kovarik points out that:

• Venezuela estimates it has at least 1.2 trillion barrels of "heavy oil," which is thicker and more expensive to refine than ordinary oil.
• Alberta is estimated to have another 1.8 trillion barrels in tar sands, which will be more expensive to extract than liquid oil in the ground.
• Wyoming, Colorado, and Utah are estimated to have 2.6 trillion barrels in oil shales, which will be even harder to extract than oil from tar sands.

Other parts of the world are supposed to have another trillion or so barrels of oil shales. Taken together, these "unconventional" oil reserves add up to more than 6.5 trillion barrels — enough, if they can be extracted, to last more than 40 years even in the unlikely event that everyone in the world increases their oil consumption to U.S. levels of about 24 barrels per person per year.

"More expensive to refine or extract" does not necessarily mean significantly higher prices at the pump. Typically, people go after the cheapest sources of a raw material first, then move on to the more expensive sources. But when they start on the more expensive sources, often they quickly develop techniques of extracting and using the resource much more cheaply. As long as cheap Saudi Arabian oil is available, there is little incentive to find ways to cheaply refine heavy oil or extract oil from tar sands or shales. But when the incentive arrives, expect the costs of refining and extraction to drop.

For example, U.S. production of iron once centered on the Great Lakes region, where high-grade ores were mined from about 1870 through 1950. When those ores were running out, scientists developed a process of mining low-grade ores, known as taconite, which continued through 1995 or so. Despite having to rely on low-grade ores, U.S. steel production peaked in 1969, and pig iron prices were no greater than in 1900, 1910, or 1920, when top quality ores were still being mined.

Since then, U.S. steel production has fallen by nearly a third, and someone could easily write a "long emergency" book about "peak iron." Yet after adjusting for inflation, the price of steel today is considerably lower than it was in 1969.

This is because raw materials make up only part of the cost of production. As resource prices rise, producers can respond by making other production costs more efficient. Similarly, while the costs of extracting oil may rise — though to nowhere near the levels projected by Kunstler — the cost of gasoline and other refined products may not appreciably increase at all.

In short, there is no clear proof that any shortage-induced price increases will happen soon. For the next 30 years, at least, oil prices will depend more on political events and natural disasters than on natural supplies or extraction costs. After that time, extraction costs may rise, but those costs may not lead to significantly higher fuel prices for many decades.

Are there substitutes for oil?

While it seems intuitive that the world's oil supply is ultimately limited, it is not so intuitive that there are no substitutes for oil. Yet Kunstler has to take this as a given, because if there are substitutes his entire argument falls apart. "No combination of alternative fuels will allow us to run American life the way we have been used to running it," he asserts.

It doesn't take a genius to think of several potential substitutes:

• Modest increases in gasoline prices could lead car makers to switch almost entirely to hybrid automobiles and make other improvements that could nearly double fuel economy, as Toyota has already said it will do. Along with efficiency gains in other industries, this could nearly double our effective oil reserves. We know such a response is possible. In 1983, Americans drove 26% more miles than in 1973, yet used only 5% more fuel. Between 1973 and 1991, the fuel efficiency of the average American car increased by 42%. Since then, cheap oil has given people no incentive to buy more fuel-efficient cars, so fuel economy has remained constant. But that will change if fuel prices remain permanently high.

• Nuclear power could easily turn water into hydrogen that could be used in fuel-cell-powered automobiles without posing any risk of global warming. China is currently building dozens of nuclear power plants using new technologies that are supposed to be far safer than any used in the United States. Kunstler dismisses this possibility by saying Americans won't accept nuclear power. (I'm not enamored with it.) But rather than totally give up on the automotive lifestyle, Americans may be quite willing to accept safe nuclear technologies, especially if rival countries use them to gain economic power.

• There are several other potential power sources, although some of them may contribute to global warming. Solar power hasn't yet been fully explored. The United States has a huge supply of coal, and coal gasification can keep automobiles rolling — albeit while producing greenhouse gases. The idea of turning corn into ethanol is mainly a subsidy to Archer Daniels Midland and corn farmers, and probably requires more oil than it saves. But who knows? Someone might figure out how to do it right.

While I suspect hybrid cars will be the short-term response, I can't begin to guess what technology will ultimately replace oil, and neither can anyone else. We may not even find out within our lifetimes, if oil turns out to be plentiful for the next century. It would be absurdly expensive for the government to promote one technology over others (as it currently is doing by subsidizing ethanol, among other things). Worse, government support could lock us in to the wrong technology, leading to long-term waste.

One thing is certain: light-rail transit will never replace petroleum-fueled autos. Most people just will not give up the mobility the automobile provides for a slow, clunky train that doesn't go where they want to go.

Will higher prices necessarily mean less driving?

At first glance, it may seem obvious that people will drive less if gasoline prices rise, but it is not that clear. Let's take a look at the history of spending on driving and gas and oil.

Since 1950, Americans have spent about 9% of their personal incomes on automotive transportation. The year-to-year variation has been quite small, from about 8.1 to 10.1%. This suggests that people have a consistent budget for travel based on a percentage of their incomes.

The percentage of driving costs that go for gas and oil, however, vary dramatically from year to year. In 1974, Americans spent a full third of their driving expenditures on gas and oil. By 1998, this had fallen to less than a fifth. In 1974, of course, people were responding to high gas prices by buying smaller, more fuel-efficient cars. In 1998, people were responding to low gas prices by buying large SUVs.

In other words, people trade fuel costs for other auto-related expenses. When fuel prices rise, people reduce other auto expenses in order to keep total costs (as a percentage of their incomes) constant. They may keep their cars a little longer, for example, or buy less luxurious cars. When fuel prices fall, people spend more on bigger or more luxurious cars.

People also seem to have two different budgets for travel: a dollar budget and a time budget. When incomes are low relative to the cost of driving, the dollar budget is the main limiting factor. When incomes are high enough, the time budget becomes the limiting factor. When your time budget is the limiting factor, you are much less sensitive to changes in fuel costs.

Most Americans have already reached the limit of their time budgets. That means their main response to increased fuel prices will be to spend less on other aspects of driving. Of course, some Americans still have incomes low enough that their dollar budgets will be their limit, so higher prices will cause them to drive less. The higher fuel prices that Kunstler eagerly anticipates will primarily hurt poorer drivers.

We can get some idea of the effects of high prices by looking at Europe, where high taxes have long made gas prices two to three times those in America. European incomes are lower than those in America, so even without higher gas taxes you would expect them to drive less. As it is, they drive about two-thirds as much per capita as Americans, and their growth in driving is faster. High prices don't seem to slow this growth down.

In short, higher prices will mainly affect driving among low-income families. Moderate- and high-income families will respond by making other changes in their transportation expenses, most likely by keeping their cars a little longer and, when they do buy new cars, buying more fuel-efficient or less luxurious cars.

Will less driving favor New Urbanism over low-density suburbs?

Before Americans had cars, they lived in denser "traditional" neighborhoods and many lived in mixed-use areas. New Urbanists such as Kunstler reason that, when cars disappear, people will cheerfully return to such neighborhoods. But is that the only possible outcome?

Before considering this question, it is worth asking: is that even a desirable outcome? Kunstler has no doubt that this would be "a glorious way to live."

"Imagine it's 1881," says Kunstler. "You leave the office on Wabash in the heart of vibrant Chicago, hop on a train in a handsome, dignified station full of well-behaved people, and in thirty minutes you're whisked away to a magnificent house surrounded by deep, cool porches, nestled in a lovely, tranquil, rural setting with not a single trace of industrial hubbub."

That sure sounds glorious. Of course, Kunstler isn't much of a historian, or he would know that only a tiny fraction of American urbanites lived this way in 1881. Most of them lived in high-density housing, better known as "tenements" or "slums." Their lives were a lot less glorious than Kunstler describes, characterized by sweatshop jobs, poor sanitation, and high crime.

As planning historian Peter Hall notes, "Twentieth-century city planning, as an intellectual and professional movement, essentially represents a reaction to the evils of the nineteenth-century city." Whereas the goal of 21st-century planning seems to be to return us to those evils.

Of course, Kunstler imagines that everyone could live in his traditional neighborhoods. Without the mobility provided by the automobile — the same mobility that led the descendents of the people living in 19th-century slums to increase their incomes and escape — this is unlikely.

But let's say Kunstler's dream is possible. Is it likely? Or could Americans respond to high gas prices in other ways?

One possibility is that more people will telecommute and move even further away from urban centers than today's suburbs. As Ted Balaker of the Reason Foundation observes, telecommuting is growing faster than commuting by transit. Although the Census Bureau doesn't measure exurbanization, some studies have concluded that the number of exurbanites (people with urban incomes living in rural areas) is growing far faster than the number of New Urban residents.

Another possibility is that more jobs than ever will move to the suburbs where people live and higher fuel prices will lead many of those people to live in suburbs close to their jobs. Such a "jobs-housing balance" is actually part of the smart growth platform, but it doesn't mean an end to low-density suburbs or an increase in New Urban residences. Moreover, it effectively destroys the utility of rail or other high-capacity transit, because there will be few or no job centers with enough jobs to attract that many transit commuters.

Even less pleasing to smart-growth advocates is a third possibility: more people and jobs move out of the cities and suburbs to the exurbs. One study notes that many manufacturing facilities are already moving to the countryside, where both factories and their employees can avoid high taxes, regulation, and congestion.

All of these trends could actually be accelerated by higher fuel prices. Why sit in traffic burning expensive gasoline when you can work at home some days and drive 20 or 30 miles to work on uncongested rural roads on other days?

Meanwhile, one retail analyst predicts that, far from putting Wal-Mart out of business, higher fuel prices will "create further opportunities for one-stop-shop retailers like supercenters and warehouse club stores to win more day-to-day shoppers." In other words, people will continue to drive to stores, but they will make fewer trips by going to bigger stores rather than the small shops that the New Urbanists favor.

Fuel costs influence two stages of the retail transaction: first, the cost of getting the customers to the stores, and second, the cost of getting the goods to the stores. Wal-Mart has become dominant because it minimizes the second cost, and higher fuel prices may actually help it. Higher-priced fuel will hit retailers located in congested urban areas the hardest, as their trucks are forced to burn fuel in stop-and-go traffic. Stores such as Wal-Mart and Costco that tend to be located in rural areas and on urban fringes can keep these costs down, thus allowing customers who have to drive to their stores to enjoy a net savings.

Far from devastating our economy, changes in energy supply will lead Americans to become more fuel efficient and explore new technologies for producing fuel. No matter what technology they select, they are not likely to drive significantly less than they do today. To the extent that higher fuel prices change their travel habits at all, those changes may actually accelerate the suburbanization and exurbanization trends that New Urbanists such as James Kunstler hate. If anything devastates our economy, it will be the intrusive government regulations and expensive rail transit systems that many New Urbanists want to impose on our urban areas.

© Copyright 2010, Liberty Foundation

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