There’s a remarkable confusion in the modern debate over energy sources. Informed by geological rather than economic considerations, energy sources and some raw materials are thought of either as “Renewables” or “Non-Renewables” — and the former is somehow much preferred to the later.
We’ve all heard versions of the following story: the use of non-renewable energy sources and digging up of non-renewable metals are what propelled the Industrial Revolution and underlined the build-up of our current rich societies and economies — but they are physically limited and finite, they will “run out,” and their use is “unsustainable” (the meaning of which is far from clear).
In a trivial sense this is of course true: the anti-capitalist environmentalists are superficially correct about no Planet B and the impossibility of infinite growth of material consumption. But it’s also, as Tim Worstall explains, “supremely unimportant.” In comparing the use of finite resources to food in the fridge, Worstall explodes the “No Breakfast Fallacy” — the conviction that once we’ve consumed today’s breakfast from the fridge, it is gone and there is consequently no more breakfast:
In that first instance we would agree with Worstall: eating breakfast does mean no breakfast in the fridge. We’d also agree that Worstall is mad because we understand that there is a vast industry dedicated solely to replenishing that breakfast before 7 am tomorrow.
Sure, like food in the fridge, “unsustainably” using up raw materials means that we run out of them. But also precisely like the food in the fridge, we replenish the raw materials we need, making “unsustainable” food consumption quite sustainable. How can this be?
Since “hardly anyone who is not an economist believes” this counter-intuitive notion, let’s examine it further.
How Non-Renewable Resources Don’t Run Out
In 1944 the world’s amount of proven oil reserves were 51bn barrels of oil. In 2018 the world’s proven oil reserves were almost 1,500bn (BP estimates 1,730bn ), i.e., about thirty times that of 1944 — and this despite humanity’s pretty voracious appetite for oil during the seven-odd decades in between. Anyone immersed in the naïve resource depletion theory has to incredulously ask himself — how can this be?
Simply put: we found more of it.
Markets with well-defined property rights use prices and profit motives to guide the allocation of resources — including, in this case, the investment resources that go into prospecting for oil or digging up metals in the ground. Markets use prices to convey information about the present and future availability of raw materials — with innovation allowing us to find, extract, and use them more efficiently and substitution regulating our want for them.
At any given time, there is some oil in storage, some proven (but not-yet-extracted) oil in the ground, some plausible pockets of oil and natural gas that geologists in various ventures are prospecting — and a big unknown chunk of oil reserves the amount and location of which nobody knows anything about. All of these actions (use, distribution, storage, extraction, prospecting) are governed and regulated by the market price of oil. If, as the resource depletion theory suggests, we would exhaust our known supplies of oil and raw materials, their market prices would rise — sending a palatable signal to all market actors. Three things then happen:
1) At higher market prices, previously uneconomical wells (or known pockets of oil that were previously too expensive to extract) now become available. Not physically available, mind you — they were always there — but economically available, which is what really matters. What’s known as the Shale Gas revolution is a splendid example of this.
2) At higher market prices, consumers curtail their use and start rationing oil — perhaps switching to smaller cars or improving energy efficiency of their houses.
3) Recycling materials become a profitable endeavor when market prices for the material rise. Copper already in use in power lines might be replaced by a relatively cheaper material while the copper itself is recycled to be re-sold into different production lines. This might not work as well for combustibles like oil where consumption changes the chemical composition of the material — although carbon capture initiatives suggest that it might not be impossible .
A recent Bloomberg article summarizes the point:
Economists teach us that resources don’t just run out. As something becomes scarcer, its price rises, triggering a search for new supplies or the discovery of substitutes.
While it is true that the Earth as such has a finite amount of oil or copper or iron ore, the fraction of which is actually discovered is unknown — and has to be unknown, at least until we’ve found the last drop available. But even if the entire world’s stock of oil or copper was neatly assembled into one large fixed pool as Harold Hotelling hypothesized in 1931, we still wouldn’t run out. The second point above, work as it does through the price mechanism, would still function and neatly ration our use while incentivizing the adoption of substitutes.
…But Renewables Do
The remarkable contrast to this point is the reverence often given to so-called renewables, i.e., energy sources that don’t run out. The ideal example is the sun, ceaselessly blasting the Earth with more energy than we’ll ever need. Other examples include tapping into naturally occurring processes, ranging from the never-ending tides of the ocean or blowing of the wind or volcanic activity to the growth of forests or reproduction of animals. Some of these are truly “renewable” in that their sources never run out (wind, thermal, ocean, sun), but they come with well-known problems of capture, scale, storage, and distribution.
Other renewables do run out; rivers that ran dry ruined the renewable hydro dams built upon them; forests, euphemistically referred to as ‘biomass’, are chopped down and “renewably” burned for fuel — but actually relying on it as a modern energy source means complete deforestation, and so no forests to chop down tomorrow; whaling for oil found its “renewable” ecological limit in the 1860s when easily accessible whales ran out (read: were killed). Even wind, a never-ending source of energy, may very well run into similar constraints. Ignoring technical problems of storage and distribution mentioned above, at capacity factors of 35%, we’d need almost 500 million standard 3MV turbines to just get wind energy to cover 10% of current world energy needs — that’s 1200 times more windmills than the world currently has. Non-renewable physical space might run out.
So, while we have a physically finite planet and a geologically limited amount of, say, rare earth metals (or whatever the latest fad of environmental hysteria may conjure up), the economic take-home point is that non-renewable resources actually don’t run out. In his hugely popular 1981 book The Ultimate Resource, Julian Simon forever changed the way a lot of people think about resources and raw materials. Simon pointed out that
Over the course of history, up to this very moment, copper and other minerals have been getting less scarce rather than more scarce, as the depletion theory implies … natural resources are not finite in any meaningful economic sense, mind-boggling though this assertion may be.
Simon’s assessment almost forty years ago still rings true today: raw materials have become more plentiful, not scarcer — contrary to what the depletion theorists would have you believe. While renewable energy sources do run out — often as a result of insufficient property rights — non-renewable resources don’t. The conclusion from a century-plus of raw materials’ extraction can thus be neatly summarized as: burn all you want — we’ll find more .
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