Oil is a non-renewable finite resource, yet we’ll never run out. How is this possible? The answers are not obvious and some folks are unduly concerned. Let’s explore the logic of oil exploration, production, and consumption.

First, there is a critical difference between resources and reserves. Resources are the total physical stock of a natural commodity (e.g., oil, coal, or gold). Reserves are the portion that can be economically developed with current technology. Technological advances allow us to constantly move commodities from the resource category into the reserve pool. New exploration and drilling and recovery technologies dropped the worldwide finding and development cost per barrel of oil dramatically: from $21 in 1979-81 to $6 in 1997-99.

This helps explain how oil reserves can expand even as consumption increases. For example, California’s Kern River field was discovered in 1899. By 1942, its reserves were estimated at 54 million barrels. But over the next 44 years it produced 736 million barrels. In 1986, another estimated 970 million barrels remained. And the field is still producing.

In 1979, the CIA concluded that global oil “output must fall within a decade” and that the world “does not have years in which to make a smooth transition to alternative energy sources.” A generation later, oil output is more than 10 percent higher than it was in 1979. Over the past thirty-five years, the world consumed 800 billion barrels of oil while global reserves grew by 1,500 billion barrels.

“Resources are, reserves become.” When institutions foster innovation scarcity never wins against creativity. The historical evidence supporting this is so clear and compelling I wonder why anyone believes otherwise.

But I realize some folks do think we are headed toward disaster. Check out, for example, Life After the Oil Crash. “Civilization as we know it is coming to an end soon.... [W]orldwide demand for oil will outpace worldwide production...by a significant margin. As a result, the price will skyrocket, oil-dependant economies will crumble, and resource wars will explode”... and we’ll slide into a “post-industrial stone age.”

This is remarkably silly. Whatever the actual course of our energy future, there is no reason -- historical, economic, or technical -- to believe the eventual transition will threaten civilization. Humans seem hardwired to develop new technologies that either expand resources, lead to the discovery of substitutes, or both. Why believe this process has an expiration date? However, we do expect scarcity when nations develop perverse institutions. Consider the Kulaks under Stalin or North Korea today.

North of Cutbank, MT, lie the Athabasca oil sands of Alberta. They make up a trillion-plus-barrel field with reserves estimated at 300 billion barrels. The US Department of Energy estimates that Saudi Arabia holds around 264 billion barrels. Extracting these resources is expensive. To fully develop them, energy companies need some confidence that oil prices will remain high. Energy investors recall that as recently as 1999 oil was $9 a barrel.

There is another concept critical to better understanding our transition out of oil. Here it is: The amount of oil we demand, whether for use as gasoline, fertilizer, or in plastics, depends on price.

Not every petroleum use is equally valuable. The cheaper the price of gas, the more we’ll squander on trivial pursuits (e.g., fueling a boat to pull water-skiers). As prices rise, we naturally prioritize our consumption. This is the market process at work.

Higher prices force us to shift our consumption to satisfy more valued activities. Higher prices ration out lower valued uses. At some point ($4, $6, $8 a gallon?) we decide (perhaps) fueling our SUV is too costly. Hence, we’ll select cars that get greater (likely not maximum) gas mileage, drive less, carpool more, and fish instead of water-ski.

Failure to understand that people are sensitive and respond to prices is to fundamentally misunderstand human behavior. Arguing for public policy based on this misunderstanding is dangerous and irresponsible.

Concern over the finite nature of nonrenewable resources is a recurring theme. But whenever people have been able to reap the rewards of their imaginations, across time and across cultures, brains have proved an excellent substitute for BTUs.