The Jevons Fallacy
Noah Smith writes:
And while our use of natural gas and coal doesn’t feed the coffers of unsavory regimes like Russia and Saudi Arabia the way our use of oil does, it’s still the case that these energy sources are limited. They run out.
Of course, all resources are limited. Even solar energy, which Smith is optimistic about, is limited. That’s not because the sun is, in any reasonable sense, limited, but because all the expensive resources used to convert the sun’s rays into something useful are limited. In his recent book, The Moral Case for Fossil Fuels, which Bryan Caplan has reviewed here and which I’m reviewing for another publication, Alex Epstein makes that case beautifully.
But I want to make another point: natural gas, coal, and oil are unlikely to run out any time soon, where soon means any time in the next 60 years.
Last century, William Stanley Jevons, the famous economist who was in part responsible for the marginal revolution, reasoned that because the easy-to-get coal was already gotten, what was left was coal that was harder and harder to reach. Therefore, he argued, we would reach a point where coal would be much scarcer and much more expensive.
As I wrote in my bio of Jevons, here was his error:
Jevons failed to appreciate the fact that as the price of an energy source rises, entrepreneurs have a strong incentive to invent, develop, and produce alternate sources. In particular, he did not anticipate oil or natural gas. Also, he did not take account of the incentive, as the price of coal rose, to use it more efficiently or to develop technology that brought down the cost of discovering and mining (see natural resources).
And from the “Natural Resources” article cited in the Jevons bio, by the late Sue Anne Batey Blackman and William J. Baumol:
Innovation has increased the productivity of natural resources (e.g., increasing the gasoline mileage of cars). Innovation also increases the recycling of resources and reduces waste in their extraction and processing. And innovation affects the prospective output of natural resources (e.g., the coal still underneath the ground). If a scientific breakthrough in a given year increases the prospective output of the unused stocks of a resource by an amount greater than the reduction (via resources actually used up) in that year, then, in terms of human economic welfare, the stock of that resource will be larger at the end of the year than at the beginning. Of course, the remaining physical amount of the resource must continually decline, but it need never be exhausted completely, and its effective quantity can rise for the indefinite future. The exhaustion of a particular resource, though not impossible, is also not inevitable.
With respect to oil, here’s how I put it in a Sidebar to the Natural Resources article in the first edition of The Concise Encyclopedia of Economics:
Are We Running Out of Oil?
No resource has inspired so great a fear of running out as oil has. This fear is not new. And every time in the last hundred years that an expert predicted we would run out, that prediction has been wrong–and not just wrong, but wrong by a huge margin. In 1891, for example, the U.S. Geological Survey stated that there was little chance that oil would be found in Kansas or Texas. Since then, 14 billion barrels of oil have been produced from just those two states. In 1914 an official of the U.S. Bureau of Mines claimed that the total future U.S. production would be 5.7 billion barrels. In fact, production has already been six times that figure. In 1920 the director of the Geological Survey said that peak annual crude production had almost been reached. By 1948 annual U.S. production was four times its 1920 level. Finally, in one of the most astoundingly wrong predictions, the Interior Department stated in 1939 that U.S. oil supplies would run out in thirteen years. Of course, over sixty years later, the United States is still producing oil.
Source: Baumol, Blackman, and Wolff, p. 214.
Or as I have put it in various talks I’ve given over the years:
Every single time someone has predicted that they we will run out of oil, that person has been wrong. What reason is there to think that prediction today will be right?