The Growing Abundance of Fossil Fuels; R. Bradley, Jr.

O nly two decades ago nearly all acade mics, businessmen, oilmen, and policy makers agreed that the age of energy scarcity was upon us and that the depletion of fossil fuels was imminent. While some observers still cling to that view today, the intellectual tide has turned against doom and gloom on the energy front. Nearly all resource econo mists believe that fossil fuels will remain affordable in any reasonably foreseeable future. Indeed, these fuels have become more abundant even in the face of record consump tion. World oil reserves today are more than 15 times greater than they were when record keeping began in 1948; world gas reserves are almost four times greater than they were 30 years ago; world coal reserves have risen 75 percent in the last 20 years. Proven world reserves of oil, gas, and coal are officially estimated to be 45, 63, and 230 years of cur rent consumption, respectively. Probable resources of oil, gas, and coal are officially forecast to be 114, 200, and 1,884 years of present usage, respectively.

Moreover, an array of unconventional fossil-fuel sources promises that, when crude oil, natural gas, and coal become scarcer Robert Bradley, Jr., is president of the Institute for Energy Research in Houston, Texas, and an adjunct scholar ofthe Cato Institute. This is part ofa longer analysis, "The Increasing Sustainability of Conven tional Energy, " published by the Cato Institute and available at www.cato.orglpubslpaslpa341es.html. 40 (hence, more expensive) in the future, other fossil fuels may still be the best substitutes before synthetic substitutes come into play. Orimulsion The most promising unconventional fossil fuel todayis orimulsion,a tarlike substancethat can be burned to make electricityor refinedinto petroleum. Orimulsionbecame the "fourth ~os sil fuel" in the mid-1980s when technologIcal improvementsmade Venezuela'sreserves com mercially exploitable. Venezuela's reserve equivalent of 1.2 trillion barrels of oil exceeds the world's known reserves of crude oil, and other countries' more modest supplies of the natural bitumen add to the total.

With economic and environmental (post scrubbing) characteristics superior to those of fuel oil and coal when used for electric ity generation, orimulsion is an attractive conversion opportunity for facilities located near waterways with convenient access to Venezuelan shipping. While political opposi tion (in Florida, in particular) has slowed the introduction of orimulsion in the United States, it has already penetrated markets in Denmark and Lithuania and, to a lesser extent, Germany and Italy. India could soon join that list. Marketing issues aside, this here-and-now fuel source represents an abun dant backstop fuel at worst and a significant extension of the petroleum age at best.

Synthetics and More The significance of orimulsion for the electricity-generation market may be matched by technological breakthroughs commer cializing the conversion of natural gas to synthetic-oil products. For remote gas fields, gas-to-liquids processing can replace the more expensive alternative of liquefaction. In mature markets with air quality concerns, such as in California, natural gas could become a key feedstock from which to distill the cleanest reformulated gasoline and refor mulated diesel fuel yet. A half dozen competing technologies have been developed, several by oil majors that are committing substantial investments rela tive to government support. The widespread adaptation of gas-to-oil technologies could commercialize up to 40 percent of the world's natural gas fields that hitherto have been uneconomic. In addition to orimulsion and synthesized natural gas, tar sand, shale oil, and various replenishable crops also have great promise, however uneconomic they now are, given today's technology and best practices.

Michael Lynch of the Massachusetts Insti tute of Technology estimates that more than six trillion ·barrels of potentially recoverable conventional oil and another 15 trillion bar rels of unconventional oil (excluding coalliq uefaction) are identifiable today, an estimate that moves the day of reckoning for petroleum centuries into the future. The gas resource base is similarly loaded with potential substitutions. Advances in coal bed methane and tight-sands gas technology show immediate potential, and synthetic sub stitutes from oil crops have long-run promise. If crude oil and natural gas are retired from the economic playing field, fossil fuels boast a strong bench of clean and abundant alterna tives. Even the cautious Energy Information Administration of the U.S. Department of Energy concedes that "as technology brings the cost of producing an unconventional bar rel of oil closer to that of a conventional bar rel, it becomes reasonable to view oil as a viable energy source well into the twenty second century."1 41 Today's reserve and resource estimates should be considered a minimum, not a max imum. By the end of the forecast period, reserves could be the same or higher depend ing on technological developments, capital availability, public policies, and commodity price levels.

Technological advances continue to sub stantially improve finding rates and individual well productivity. Offshore drilling was once confined to fields several hundred feet below the ocean, for instance, but it now reaches depths of several thousand feet. Designs are being considered for drilling beyond 12,000 feet. Predictably, advances in production tech nology are driving down the cost of finding oil. In the early 1980s finding-costs for new crude oil reserves averaged between $11.50 and $12.50 per barrel in the United States and most areas of the world. In the mid-1990s they had fallen to around $7 per barrel despite 40 percent inflation in the interim. In the Unit ed States alone, finding-costs dropped 40 per cent between 1992 and 1996. That is perhaps the best indicator that oil is growing more abundant, not scarcer. Finally, the amount of energy needed to produce a unit of economic goods or services has been declining more or less steadily. New technologies and incremental gains in produc tion and consumption efficiency make the ser vices performed by energy cheaper even if the original resource has grown more (or less) expensive in its own right.

Understanding Abundance How is the increasing abundance of fossil fuels squared with the obviously finite nature of those resources? "To explain the price of oil, we must dis card all assumptions of a fixed stock and an inevitable long-run rise and rule out nothing a priori," says M. A. Adelman of MIT. "Whether scarcity has been or is increasing is a question of fact. Development cost and reserve values are both measures of long-run scarcity. So is reserve value, which is driven by future revenues."2 Natural-resource economists have been 42 THE FREEMAN/IDEAS ON LIBERTY. NOVEMBER 1999 unable to find a "depletion signal" in the data. A comprehensive search in 1984by two econ omists at Resources for the Future found "gaps among theory, methodology, and data" that prevented a clear delineation between depletion and the "noise" of technological change, regulatory change, and entrepreneur ial expectations.3 A more recent search for the depletion sig nal by Richard O'Neill and colleagues con cluded: "Care must be taken to avoid the seductiveness of conventional wisdom and wishful thinking. While the theory of exhaustible resources is seductive, the empirical evidence would be more like the bible story of the loaves and fishes. What matters is not exhaustible resource theories (true but practically dull) but getting supply to market (logistics) without disruption (geopolitics). While it is easy to see how political events may disrupt supply, it is hard to contrive an overall resource depletion effect on prices."4 The facts, however, are explainable. Says Adelman: "What we observe is the net result of two contrary forces: diminishing returns, as the industry moves from larger to smaller deposits and from better to poorer quality, versus increasing knowledge of science and technology generally, and of local govern ment structures. So far, knowledge has won."5 Human ingenuity and financial wherewith al, two key ingredients in the supply brew, are not finite but expansive. The most binding resource constraint on fossil fuels is the "petrotechnicals" needed to locate and extract the energy. Congruent with Julian Simon's theory that the most scarce resource is human capital, wages in the energy industry can be expected to increase over time, while real prices for energy can be expected to fall under market conditions. Under political conditions such as those that existed during the 1970s, however, the record of energy prices can be quite different.

There is no reason to believethat energy per se (as opposed to particular energy sources) will grow less abundant (more expensive) in our lifetimes or for future generations. "Ener gy," as Paul Ballonoff has concluded, "is sim ply another technological product whose eco nomics are subject to the ordinary market effects of supply and demand."6 Thus, a negative externality cannot be assigned to today's fossil-fuel consumption to account for intergenerational "depletion." A better case can be made that a positive inter generational externality is created, since today's base of knowledge and application subsidizes tomorrow's resource base and consumption. The implication for business decision making and public-policy analysis is that "depletable" is not an operative concept for the world oil market, as it might be for an individual well, field, or geographical section. Like the economists' concept of "perfect competition," the concept of a nonrenewable resource is a heuristic, pedagogical device an ideal type-not a principle that entrepre neurs can turn into profits and government officials can parlay into enlightened interven tion. The time horizon is too short, and tech nological and economic change is too uncer tain, discontinuous, and open-ended. D 1. Energy Information Administration, "International Energy Outlook 1998," pp. 3, 38.

2. M. A. Adelman, The Genie Out a/the Bottle: World Oil Since 1970 (Cambridge, Mass.: MIT Press, 1995), p. 22. 3. Douglas Bohi and Michael Toman, Analyzing Nonrenewable Resource Supply (Washington, D.C.: Resources for the Future, 1984), p. 139. 4. Richard O'Neill et aI., "Shibboleths, Loaves and Fishes: Some Updated Musings on Future Oil and Natural Gas Markets," U.s. Fed eral Energy Regulatory Commission, Office of Economic Policy, discussion paper, December 31, 1996, p. 22. 5. M. A. Adelman, "Trends in the Price and Supply of Oil," in The State ofHumanity, ed. Julian Simon (Cambridge, Mass.: Black well Publishers, 1995), p. 292. 6. Paul Ballonoff, Energy: Ending the Never-Ending Crisis (Wash ington, D.C.: Cato Institute, 1997), p. 21.