Elon Musk is one of the great inventors and industrialists of our time. His achievements are awe inspiring, and his company Tesla builds the best cars in the world. I enjoyed reading his 'Master Plan, Part Deux' for Tesla, but couldn't help reacting to one line. For someone who is arguably one of the most intelligent people on earth, he said something uncharacteristically... dumb. (Human after all.) He said "...we must at some point achieve a sustainable energy economy or we will run out of fossil fuels to burn and civilization will collapse."
Sustainable energy is a worthy goal no doubt, and is inevitable. It is this notion that humanity will run headlong off the petroleum cliff into a collapse of civilization that I cannot excuse. It has been repeated so many times I can hardly fault Elon for repeating it, despite my high expectations. But it is folly. Absolute rubbish. Forty years ago scientists (not economists) forecasted we would run out of oil in ten years. Literally the same prediction was made again in 1980 (approximately) and 1990. In spite of a massive expansion of industry and significant population growth, we have more proven reserves today than we did 40 years ago. How is this possible?
It's not only possible, but entirely predictable. Question: Why haven't we 'run out' of gold? Man's lust for gold is about 3,000 years old - give or take a millennia. Yet there's still plenty around to be purchased; still plenty waiting to be pulled from the ground. No, we don't burn it like oil, but we do use it to make things that we hoard endlessly. So why haven't we reached the end? Two words hold the solution: free markets.
Free markets balance the production and consumption of all raw materials like magic. We have more proven oil reserves today because markets are free to float. Speculators - motivated by profit - watch our consumption of oil carefully. If they perceive that present or future demand is exceeding supply, they will begin to buy oil or contracts for oil in the future, which will cause the price of oil to climb. When the price of oil climbs two critical things happen.
First, the utility of 'hard to reach' oil goes up. Some oil costs too much to go after, and is only useful when the price of oil is over $60 or $80 per barrel. Higher prices make such reserves viable. Second, consumers start making alternate choices in higher and higher percentages. They buy more fuel efficient vehicles, use alternatives, or consume less. This process continues until the price of oil levels out and consumption of oil once again comes in line with the growth of reserves.
In the 1970's the Carter Administration, in their infinite wisdom, decided that they were a better judge of how petroleum products should be distributed than some evil, free-market profiteers. Price controls and distribution restrictions were put in place, and immediately the shortages occurred. After being elected president, Ronald Reagan (an Econ major) removed the price controls and restrictions and the lines disappeared - like magic. The only scenario for a 'run out' is with price controls.
Ultimately, oil is doomed. It's relative value will probably slide for many years, if not plunge. We have so massively developed our reserves that new technological advancements (like Tesla's cars) will increasingly render it less useful and therefore less valuable long before we approach depletion. Any country or economy dependent on the sale of this natural resource will suffer.
The risk petroleum burning poses to our climate is 10x more compelling than the prospect of running out. Perhaps Elon should stick to that theme.
