Exhaustible Recourses Will Never Run Out!

For centuries, people have been worried that exhaustible resources,such as oil, will eventually run out. By researching on internet, you can easily find something like this, “BP's Statistical Review of World Energy, published yesterday, appears to show that the world still has enough "proven" oil reserves to provide 40 years of consumption at current rates. The assessment, based on officially reported figures, has once again pushed back the estimate of when the world will run dry” (Daniel Howden, 2007). I believe you can always heard predictions like this from scientists about how“we will run out of oil” in the daily news or online articles, even though they have been proven wrong again and again. As a matter of fact, any economist will tell you that we will never run out of oil.

In Economics, there is a term called the “Invisible Hand”. It simply metaphorizes the supply and demand that guides free market through competition for scarce resources. In other words, as oil becomes more scarce, the quantity of supply decreases and the price increases. This result will affect both demand and supply. On the demand side, people start to purchase less oil due to increase in price. They might also start to look for substitutes that are more affordable compared to gasoline. On the supply side, price increases on inelastic goods will increase revenue, which leads to extensive drilling. More drilling will lead to a more scarce supply of oil, and the scarcity of this supply will drive prices higher and higher. The price will keep rising until it reaches a point where gasoline becomes a niche good purchased by very few consumers. However, this does not necessarily means that people will drive less. It means that people should have already discovered or invented other alternatives to substitute gasoline such as natural gas, or hybrid cars.

Once we understand that the “invisible hand” automatically conserves exhaustible resource for us, it is clear that various conservation energy programs imposed by government is superfluous.

The following graph is a cost and benefit analysis of energy conserve program. This graph will show you the gain and loss of the community.

  

(P=Price, Q= Quantity)

The vertical line S is the supply curve for the oil. Since the amount of the oil is fixed, let us assume it will always be 100. The D1 represents the community’s demand for oil in next year, which is 40 units in this case. The D0 represents the demand for oil in this year, which is 60 units. Now let us just focus on the area A, B, and C, which will tells you the cost and benefit of our society. By imposing on the energy conservation program, the community of next year will gain from 40-45 units, that is the benefit represented by the area of A.At the same time, this year community needs to conserve oil from 60-55 units, which will lose the area of B+C. Needless to say, B+C is bigger than A, which means the loss of this year is bigger than the gain of next year. Therefore, the total community is worse off than without impose conservation program.

From this example, now you can see that any government’s attempt to save resources will actually waste more than it conserves. You can treat this as an example of opportunity cost. This years’ community loss is an opportunity cost to conserve resource for next year. To understand this, imagine when you try to recycle plastic bottles. You spend times to gather all of the bottles to a space, and drive to Recycling Station in exchange for few dollars. Have you thought about the cost of your time, plus the cost of your space, plus the cost of your gasoline has already exceeded the benefit of recycling? I am not trying to say that the entire recycling program is futile, but trying letting people be aware of the fact that recycling are not as effective as we thought when we take opportunity cost into account.