Why have oil and gasoline prices soared for most of the last few years — and why, despite a recent dip in prices, do many analysts expect them to rise for years to come? It comes down to supply and demand.
On the demand side, more people are buying more oil than ever, and they’re willing to pay higher prices for it — whether that oil is powering a diesel backup electric generator in China, a young couple’s first automobile in India or a tractor in Brazil. But on the supply side, producers haven’t kept pace, despite the lure of high profits.
Why not? A popular explanation is that we are “running out of oil.” For example, Al Gore claims oil prices are increasing because oil is a “quickly depleting” resource that cannot “feed a rapidly growing demand all around the world.” Can’t it?
The supply of oil on the market at any given time is the amount that can be produced profitably at a given price. This, in turn, depends on three things: the earth’s raw materials, the state of industrial technology and the freedom of the oil industry to extract oil.
Over time, technology has dramatically increased the oil industry’s ability to find, extract and refine oil from the earth. Whereas once the only useful oil was shallow oil in Pennsylvania, in recent decades human ingenuity in exploration, production and refining has reached into the Arctic, remote deserts and the ocean floor miles down, extracting not only conventional, liquid oil deposits but also thicker heavy oil, still-thicker tar sands and solid shale rock.
Furthermore, modern extraction techniques make far larger percentages of any given oil reservoir accessible — from historical levels of 10% to today’s levels of upwards of 60%. And on top of that, commercially viable technologies can now turn both natural gas and coal into oil.
Thus, despite the fact that civilization has consumed one trillion barrels of oil to date, the amount of oil available to us has never been greater. Forecaster Michael Lynch says, “The consensus among geologists is that there are some 10 trillion barrels out there,” adding: “A century ago, only 10 percent of it was considered recoverable, but improvements in technology should allow us to recover some 35 percent — another 2.5 trillion barrels — in an economically viable way. And this doesn’t even include such potential sources as tar sands …” This exciting potential is on display in North Dakota’s Bakken shale oil fields, a former backwater that now produces a quarter-million barrels a day while helping slash the state’s unemployment rate to 3.8%.
That’s the good news. The bad news is that every single one of the technologies that could lead us to petroleum prosperity is being slowed or stunted by government, in America and around the globe.
All the technology and potent raw materials in the world are worthless if oil producers are not free to develop and profit from oil. The oil industry arose in a world where property rights were respected and development valued. Unfortunately, today’s government has the power to thwart nearly any industrial project — a power that is largely directed by environmentalists.