Politics & Policy

$40 Oil and the Twilight of ‘Scarcity Ideology’

(Wenbin Yu/Dreamstime)

Scarcity ideology pervades modern environmentalism. Indeed, the environmental movement has long relied on the idea that we are running out of, well, everything.

We are running out of food — that claim goes back to 1798, when Thomas Malthus argued that starvation for many people was inevitable because farmers wouldn’t be able to keep up with population growth. In 1968, Paul Ehrlich published The Population Bomb, in which he grimly declared that “the battle to feed all of humanity is over. In the 1970s hundreds of millions of people will starve to death in spite of any crash programs embarked upon now.” Ehrlich’s book was commissioned and published by the Sierra Club. Two million copies were sold. Never mind that today we are feeding twice as many people as we were when Erhlich made his dire prediction and that we are doing so on about the same amount of farmland.

We’ve also heard claims about impending shortages of everything from water to rare earth elements. But no commodity has been the source of more scarcity claims than oil.

And that has led Roger Stern, an energy economist at the University of Tulsa, to coin the term “scarcity ideology.” Stern recently published a must-read essay, “Oil Scarcity Ideology in US Foreign Policy, 1908–1997,” that shows just how deeply the concept of scarcity has polluted American energy policy and foreign policy. Stern’s paper, along with a new book, The Price of Oil, by Roberto Aguilera, a research fellow at Curtin University in Australia, and Marian Radetzki, an economics professor at Luleå University of Technology in Sweden, put the lie to the entire concept of peak oil and petroleum shortages.

Before I delve into those publications, recall that last week, just five days before scads of Greens gathered to celebrate Earth Day, some of the world’s biggest oil-producing countries met in Doha, Qatar, in the hopes of reducing oil production to relieve a worldwide surplus that has sent prices down by about 60 percent over the past two years or so. But no deal was reached. In fact, right after the meeting, both Russia and Saudi Arabia threatened to further increase their output, prompting Venezuelan oil minister Eulogio Del Pino to say that without a multi-nation deal to cut production, “we could see a steep fall in oil prices in the next few weeks.” The Venezuelan predicted that prices, now at about $44 per barrel, could go below $30, owing to oversupply.

None of this should be a surprise. There’s never been a global shortage of oil. In fact, hard as it may be to believe, the recurring problem in the oil market has been not scarcity but surplus.

There’s never been a global shortage of oil. In fact, hard as it may be to believe, the recurring problem in the oil market has been not scarcity but surplus.

The most important interventions — and attempts at interventions — in the oil market (the failed meeting in Doha is the latest example) have aimed at limiting oil production to help stabilize prices. In 1930, Dad Joiner, by drilling a rank wildcat well in Rusk County, discovered the super-giant East Texas Field. Within months, the world was flooded with oil and prices crashed, going from $1.30 per barrel to 13 cents. After a few years of political and legal wrangling, the Railroad Commission of Texas was given the authority to limit production in Texas oil fields. It did so by setting “allowables” — that is, the amount of oil that producers were able to produce and sell in a given month. By limiting production from one of the world’s most prolific oil provinces, the Railroad Commission helped stabilize prices. In 1973, OPEC effectively succeeded the Railroad Commission, and it did so by directly copying the Commission’s model of allowables.

But on Thanksgiving Day 2014, OPEC’s model officially went kaput. The wannabe cartel recognized that it couldn’t control the flood of shale oil coming out of the United States. (Between 2009 and 2015, U.S. oil production soared by about 4 million barrels per day. That’s roughly equal to the combined oil output of four members of OPEC: Ecuador, Indonesia, Libya, and Qatar.) Seeing this surge in production, Saudi Arabia, which has long dominated OPEC, responded by opening its taps, hoping that a price crash would force shale producers in the U.S. to reduce their drilling and therefore reduce supply.

Despite this continuing problem of oil oversupply, policymakers and environmental activists stubbornly cling to the notion that oil is scarce. They have done so for decades. A few examples:

‐In 1914, a federal agency, the Bureau of Mines, predicted that world oil supplies would be depleted within ten years.

‐In 1939, the Interior Department predicted that global oil supplies would be fully depleted in 13 years.

‐In 1946, the U.S. State Department predicted that America would be facing an oil shortage in 20 years.

‐In 1951, the Interior Department revised its earlier prediction and said that the oil on the planet would be depleted within another 13 years.

‐In 1972, the Club of Rome predicted that the world would be out of oil by 1992 and out of natural gas by 1993.

‐In 1977, in a televised speech, President Jimmy Carter warned that “unless profound changes are made to lower oil consumption, we now believe that early in the 1980s the world will be demanding more oil than it can produce.”

Scarcity ideology was convenient for many interest groups. As Stern notes:

By providing an alarming worldview, scarcity ideology both created and met demand for apocalyptic ideas. Scarcity ideology producers thrived in this trade. Within government, scarcity ideology could be bartered for influence and budgets; within academia for recognition, grants and advancement.

The result of scarcity ideology has been a decades-long orgy of rent-seeking. For instance, Mark Jacobson, an engineering professor at Stanford University, has authored a document in which he claims that the U.S. economy can be run on nothing more than solar and wind energy. In 2014, during a debate at the University of Iowa, he declared that the U.S. had to switch to renewables because we were running out of hydrocarbons.

The most obvious and noxious example of scarcity ideology is the corn-ethanol scam, one of the longest-running robberies of American taxpayers in this country’s history. As I showed in a report for the Manhattan Institute last year, thanks to the Renewable Fuel Standard, which requires retailers to mix motorfuel moonshine into our gasoline, American drivers are now paying about $10 billion more per year than they would be if they were buying conventional gasoline alone. And that robbery has been made possible because Big Corn has sustained a decades-long campaign about the supposed evils of foreign oil.

Here’s Stern again:

Peak oil forecasts . . . ,all of which proved wrong, repeatedly led policymakers to assume that rival powers sought to seize dwindling supplies or that disaffected exporter-states would decline to sell. Perennial expectation of impending scarcity elevated the perceived importance of foreign oil, especially from the Middle East.

That’s a key line: “that disaffected exporter-states would decline to sell.” The meeting at Doha earlier this month proved, yet again, that the exporter states don’t have a choice. They have to sell their oil into the global market. If they don’t, they have no revenue. Without revenue, the rulers of the petrostates cannot stay in power for very long. Or, for that matter, even keep their people supplied with diapers. An acquaintance told me recently that his mother-in-law often waited in line for four hours before being able to buy nappies in Caracas. Such is the progress that the Bolivarian Revolution and Nicolás Maduro are having in Venezuela.

So what does all this mean for future Earth Days? In the view of Aguilera and Radetzki, whose book was published last October, the past is merely prologue. They predict that, thanks to horizontal drilling and hydraulic fracturing, the technologies that fostered the shale revolution, oil will remain abundant for decades to come. In addition to providing an excellent review of the history of the global oil market, Aguilera and Radetzki point out that other countries can emulate what the United States has done with its shale deposits. (Shale is the most abundant form of sedimentary rock on the planet.) But oil producers don’t have to target shale. Instead, they can now use horizontal drilling and hydraulic fracturing to increase production from conventional oil reservoirs in Brazil, Argentina, Canada, Mexico, and many other non-OPEC countries.

The punchline here is obvious: The more energy we find, the more energy we find.

Those two technologies, they predict, “will have an overwhelming impact on global oil supply.” So much so that, the two authors expect global oil production could rise by nearly 20 million barrels per day by 2035. They further expect that moderate oil prices — they predict $40 oil in 2035 — will mean that “efforts to develop renewables for the purpose of climate stabilization will become more costly [and] require greater subsidies.” That’s a debatable claim. The cost of solar panels, for instance, has been falling for decades, regardless of price gyrations in the oil market. Aguilera and Radetzki are undoubtedly right, however, when it comes to the mandates and subsidies provided to biofuels, which, in fact, have a negative impact on the climate. The same is true for the fat subsidy ($7,500 per vehicle) given to buyers of Teslas and other electric vehicles. (Read my recent article on this welfare program for the Benz and Beemer crowd.)

Of course, Aguilera and Radetzki could be proven wrong about oil prices. But what a marvelous outlook they provide. They expect that oil-importing countries will have the advantage in the years ahead, and they predict that lower oil prices will, “on balance, provide a great advantage to the global economy.”

Furthermore, they point out that the need for continuing military interventions in the Middle East has been dramatically reduced. Indeed, they write that foreign military forays in the region have not been productive in energy-policy terms. Instead, they say, those interventions have “contributed to destabilized output and exports.”

The punchline here is obvious: The more energy we find, the more energy we find. That means we can make energy cheaper and, in doing so, provide every type of power we desire, from motive power and cooking to lighting and computing. Despite decades of handwringing about energy shortages, the U.S. and the rest of the world are now looking at a world of hydrocarbon-energy abundance that will last for decades. The challenge now, given that both Hillary Clinton and Bernie Sanders have declared plans to drastically limit, or even ban, hydraulic fracturing, is to ensure that this vibrant new era of energy abundance isn’t turned into an era of energy scarcity by government fiat.


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