Misunderstanding Peak Oil

There’s a common and very annoying misunderstanding about peak oil. One that leads all sorts of people to worry about it a great deal more than they ought to:

The government was warned by its own civil servants two years ago that there could be “significant negative economic consequences” to the UK posed by near-term “peak oil” energy shortages.

Ministers were told it was impossible to know exactly when production might fail to meet supply but when it did there could be global consequences, including “civil unrest.”

It’s there in that second paragraph. Specifically “when production might fail to meet supply”….actually, looking at that in detail they’ve managed to get that completely the wrong way around anyway, well done to The Guardian!

They mean “when production will fail to meet demand”.

Not realising that this is an impossibility. For one of the more basic things about economics is that there is no such thing as “supply” or “demand”. There is only “supply at a price” and “demand at a price”.

So, if supply does fall then price will rise. That price change will reduce demand and thus supply and demand will balance.

Yes, certainly, if oil prices move from $100 a barrel to $200 a barrel then there will be an awful lot of people still demanding $100 a barrel oil. But so what? The price is now $200 which is where supply and demand balance.

After all, there are an awful lot of people (like anyone still stuck with a Hummer) who would like $10 oil. But we don’t say that supply and demand don’t balance because some would like to have $10 oil. We just say that it’s $100 now because that’s the price where supply and demand balance.

This isn’t to say that oil suddenly bouncing up to $300 or $500 wouldn’t be something of a trauma. But it just cannot be true (in the absence of politicians doing something stupid like enacting price controls) that supply not meet demand. For it is prices which change to make sure that they do.

Forbes