Bill Frezza.

Fellow in Technology & Entrepreneurship, The Competitive Enterprise Institute

Belief In Peak Oil Logically Implies Failure Of Alternative Energy

One of the most persistent beliefs among proponents of alternative energy is that we are in danger of running out of fossil fuels. This economic theory, known as "Peak Oil," was first articulated by geophysicist M. King Hubbert in 1956. It states that for any geographic region--indeed, for the world as a whole--the extraction of fossil fuels follows a bell-shaped curve that eventually hits a maximum and then must inevitably decline. It seems like a commonsensical, compelling theory--except for a few small problems. It ignores the role economics plays in shaping supply and demand, it completely discounts the power of human ingenuity to come up with novel ways to solve problems, and it has been repeatedly refuted by the facts.

Every prediction over the last half century--and there have been many--that global oil production has or will soon hit a peak has been proven wrong. In fact, Peak Oil advocates have been so thoroughly debunked that they seem to now inhabit an alternate reality--one where fracking and horizontal drilling were never developed. Today, U.S. oil production is soaring, and the International Energy Agency predicts that the U.S. is on track to become the world's largest crude oil producer by 2017.

Yet the Peak Oil theory lives on, like a zombie that refuses to die. The Wikipedia entry on the subject still states "Hubbert's Peak was achieved in the continental US in the early 1970s. Since then, it has been in a gradual decline." A new report published by the Post Carbon Institute, A New Era Of Energy Abundance? reprises Hubbert's arguments and dismisses the current boom as a bubble destined to fizzle out. No word from the report's author, David Hughes, on whether he is willing to reprise Paul Ehrlich's famous wager with Julian Simon that the price of a basket of scarce minerals would rise due to resource exhaustion and overconsumption. (I can't wait to see the look on his face when teachers from the bankrupt state of California begin marching to allow drilling in the Monterey Shale so their underfunded pensions can get paid.)

The purpose of this column is not to review the laundry list of reasons why neo-Malthusian theories like Peak Oil consistently fail to predict reality--many others have done so in impressive fashion, especially Julian Simon in his classic opus, The Ultimate Resource. Rather, it is to point out that if somehow fossil fuels were to start to "run out," that would necessarily imply that solar, wind, biofuel, algae, and any other politically favored alternative energy source that got a seat at the subsidy table could not possibly have captured a lion's share of the market. For had any of them done so, the reduced consumption of fossil fuels would keep fossil fuels from running out!

This is not a complicated concept, but grasping it requires forever abandoning the static analysis that so distorts the debate over energy and natural resources. Every school kid understands the basic law of supply and demand and the role that changing prices play in balancing the two. And yet Peak Oil promoters and alternative energy zealots seem to believe that increased oil prices will not bring about increased exploration, innovation, and discovery (never mind that they brought us the current fracking boom) and that decreased consumption due to a massive switch to alternative energy will not lower fossil fuel prices, making it ever harder for alternative energy sources to gain market share.

Through its seemingly automatic adjustments--not directed by any commissar or central planner--the oft-maligned invisible hand has an uncanny way of upsetting economic experts' carefully devised predictions of what the market will look like a few years hence, along with politicians' cleverly designed government policies to distort it. And while these distortions can certainly influence markets at the margin, the energy industry is way too large for bankrupt governments to support economically unsustainable energy schemes for long. Just look at the solar investment bubble's spectacular collapse in Germany and Spain.

So next time you hear a Peak Oil alarmist prophesying doom, calm him down by pointing out that if natural energy resources were to ever run dry, we would already be living in an alternative solar-windmill-algae cheap energy nirvana.

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