In January 2001 an electricity shortage in California and an apparent economic slow down in the U.S. once again have combined to cause observers to declare that the new economy is subject to the same economic laws as the old economy. But is it really? Let’s take a look at one such “law”.
No notion regarding economics and human life itself is more entrenched than that of scarcity. We are constantly reminded in ways both direct and indirect that the world is a place of scarce resources, for which humans must compete. Further, we are reminded that most resources will eventually run out, leaving an odor of impending doom always lingering near us.
The scarcity assumption is applied when thinking about land, air, water, food, and raw materials of all kinds. Life is depicted, and often believed to be, a struggle between too many people competing for too few resources.
Following presentations that I make, I am frequently cornered afterward by someone who says, “Well, you might be optimistic now, but what about the fact that we are going to run out of ____ soon?” You can fill in your own ____. In fact, in a famous wager, population environmentalist Paul Erlich bet economist Julian Simon in 1980 that prices of five key natural resources would rise in the ensuing ten years, indicating growing shortages of these resources. The five selected were copper, chrome, nickel, tin and tungsten. Dr. Simon bet that the prices of the five metals would fall because any excess demand would spur research on alternatives. In 1990 he received a check from Ehrlich for $576.07, which was the amount the prices had fallen in the 10-year period.
The scarcity assumption has been particularly dominant when it comes to crude oil reserves. There were many confident predictions at the time of the original Earth Day in 1970 that by about 2001 reserves of oil would be approaching zero. Since the first barrel of oil was pumped in 1859 about 820 billion barrels have been used, and three-fourths of that total used just since 1973. But the proven oil reserves in the world today are fifty percent larger than in 1970, and ten times larger than in the 1950’s. How could this be?
It is becoming increasingly apparent that oil may be subject to the rules of the new economy, as in fact are most raw materials. The old economy scarcity notion suggests that growing demand eventually outpaces supply, leading to rapid inflation and to supply problems that take years to correct, if they can be corrected at all. In the new economy the marginal cost of adding capacity falls toward zero, and new capacity can be added very quickly, because the key product is informational, not. This makes sense when we think of software or bandwidth, but how could oil work in this way. The answer is simple, and suggested in a recent article by Jonathan Rauch. “Knowledge, not petroleum, is becoming the critical resource in the oil business.”
Knowledge in the oil business is growing because of the computing and information revolution, which is no big surprise. By now finding oil was supposed to be harder and more expensive than ever. But the average exploratory well yields four times as much as the average in 1980. The cost of finding new oil has dropped from about $12-$16 a barrel in the 1970’s and 1980’s to about $4-$8 today. The big jump in yield and drop in cost started about 1990.
We all know what was happening with computing and productivity beginning about 1990. It was happening with oil exploration as well. The ability to place sensors in an area of exploration, generate sound waves that are heard by the sensors, and then compute 3-D images of the interior of the earth based on those sounds jumped by orders of magnitude. What it took supercomputers hours to do a decade or two ago, oil exploration companies now do using standard Pentium desktop computers. If you apply supercomputing capacity to this imaging task, the results are stunning and powerful in their utility to the oil business.
Earth’s insides, visualized via sound waves, at Magic Earth, one of the leading earth visualization companies.
Finding oil requires poking holes in the ground and capturing what comes out. The finding has been boosted tremendously by computing advances. The capturing has been amplified by drilling technologies that allow much deeper and much longer drilling pipelines, and thus access to fields that may have been suspected but never reached before.
The bottom line is this. Obviously there is some fixed amount of oil in the earth at the present moment. But we’ll not run out of oil any time soon. If your legitimate worry is air pollution and its impact on global warming, then hoping that oil will run out is not the answer. In fact, the safest bet is that we will switch to substitutes for oil, first in transportation, later in heating and electricity generation, long before the oil ever runs dry. We will switch because the information revolution has led to a better idea, or convinced us that the time to switch is now. But not because of scarcity.
