Oil Worries?

by Elaine Schwartz    •    Sep 19, 2011    •    613 Views

Have you ever heard of Hubbert’s Peak?  No, it is not a mountain. Hubbert’s Peak refers to our oil supply. In 1956, Marion King Hubbert warned us that U.S. oil production would peak within 15 years. And, the only direction after the peak is straight down.

In a WSJ article, oil analyst and historian Daniel Yergin explains why he believes Hubbert and his contemporary followers have been wrong. As far back as the 1880s, when the experts said Pennsylvania would soon run out, the end seemed imminent. During both World Wars and the 1970s, again, oil worries resurfaced. Repeatedly though, new reserves and new technology have nudged the “peak” further into the future.

In this 2009 NY Times article, you can read more about both sides of the debate. You also might look at this “Remember the Pistachios” blog post.

The Economic Lesson

Marion Hubbert’s problem was ignoring the role of price. Every time price increased, the incentive to find new reserves and develop new technology soared. The result? More oil and price again declined.

Correspondingly, when the price of oil increases, the incentive to use alternative energy sources also rises. The result? More wind turbines, natural gas and other energy providers.

So, whereas Hubbard envisioned catastrophe, economists saw the market saving the world.

An Economic Question: How might you use opportunity cost to explain why the price of oil moves up and down?

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