Are We Running Out of Resources?

Speakers
Steven Horwitz,

Release Date
February 28, 2011

Topic

Free Markets and Capitalism
Description

Prof. Steve Horwitz addresses the common belief that the world is running out of natural resources. Instead, there are economic reasons why we will never run out of many resources. In a free market system, prices signal scarcity. So as a resource becomes more scarce, it becomes more expensive, which incentivizes people to use less of it and develop new alternatives, or to find new reserves of that resource that were previously unknown or unprofitable. We have seen throughout history that the human mind’s ability to innovate, coupled with a free market economic system, is an unlimited resource that can overcome the limitations we perceive with natural resources.

Are We Running Out of Resources?
Another contemporary economic myth is that we’re running out of resources. This fear that we’ll use up the Earth’s natural resources has been with us pretty much since the Industrial Revolution. Since the beginning of Industrialization, people have feared that as firms used up the Earth’s resources that we would eventually run out of them. And this fear continues today. However, this is largely a myth. In fact, we’re not running out of resources. What we’re doing over time is learning to use resources more efficiently and finding substitutes for resources as they do begin to deplete.
For example, consider the story of copper. In the early 1960s, telephone use in the United States was expanding enormously. At the time, the only way to carry the data for telephones was over copper wire. And so, as telephone use began to expand to new parts of the United States, the demand for copper began to rise. As the demand for copper began to rise, so did the price. The result of this is people began to worry we wouldn’t have enough copper to wire the entire country for telephone use. But as we know, we managed to get around this problem.
How did we get around it? Two things happened. First, as the price of copper went up, copper producers found new sources of copper that were previously too expensive to explore. More important, we saw the development of substitutes like fiber optic cable, which is made out of sand. Now we carry our voice and data through fiber optic cable rather than copper, conserving on the use of copper and providing us with more of the services that copper was delivering.
Another example is oil. Ever since crude oil was first refined in the 19th century, people have been concerned that we would eventually run out of oil. This became even more of a concern in the 20th century with the development of the automobile and the increasing demand for oil that came from that. But despite the concern that we might be running out, the reality is that proven reserves keep growing year after year, even as people are concerned that we’re running out.
If we look more closely at the data, what we find is that in 1882, estimates were that only 95 million barrels of oil remained. Given that we were consuming oil at 25 million barrels per year, that wasn’t going to last very long. But by 1919 oil was still with us, and Scientific American reported only 20 years of oil left. Fast forward to 1950, over 30 years later, oil’s still with us and then the American Petroleum Institute estimated 100 billion barrels of oil left. Notice that’s 10 times the oil that was left in 1882. By 1956, people were predicting peak oil in the United States by 1970. But by 1980, remaining proven oil reserves were at 648 billion barrels. By 1993, 13 years later, that had grown to 999 billion barrels. By the year 2000, it was over a trillion. And most recently in 2008, the best estimates are 1.2 trillion barrels of oil remaining.
When we put all this together what we discover is that we’re not really running out of oil. As oil prices rise, what oil producers do is to begin to look for new sources of oil. The reason why those proven reserves keep rising is because as the price goes up it becomes profitable to search for oil in places that was previously too expensive. So as a result, we end up finding oil that we didn’t know existed before the price began to rise.
You can think about prices in the following way. Prices are an incentive wrapped in knowledge. And so when the price of oil or copper rises, it does two things. It provides the knowledge to producers that signals to them it’s time to find substitutes or it’s time to find more efficient ways of using the good. But not just the knowledge, it also provides them with an incentive to do so. At the higher price again, new sources of resources become more profitable. As consumers balk at buying the good, substitutes become more profitable as well.
So if we’re really concerned about running out of resources, the answer is not to restrict our use of those resources, but to give the price system and competition in the market economy the maximum play possible to create competitive prices and provide producers with the knowledge and the incentive they need to economize and to find substitutes as resources begin to get more scarce.