Drilling for oil

As recent as last summer an article in The Independent, citing assessment from the lead economist at the International Energy Agency (IEA) warned that “The world is heading for a catastrophic energy crunch that could cripple a global economic recovery because most of the major oil fields in the world have passed their peak production.” The 2008 report urged that we are at a crossroads and we need to transition rapidly to a low carbon fuel economy. It’s certainly not a new argument; it was a consensus in the 1970s that we were running out of oil too. Since oil is a finite resource, as a matter of physics, we will eventually run out of oil says George Mason professor Don Boudreaux. But,

Conventional wisdom, however, often is handicapped by a poor grasp of economics. And among the important lessons of economics is that the supply of resources is less a matter of physics than of, well, economics. First, no mineral, no plant, no geographical location, no anything becomes a resource unless and until human creativity and ingenuity figure out how to put that thing to use in a manner that satisfies human wants. Petroleum was no resource to our ancestors who had yet to grasp the fact that it can be refined and burned in ways that improve the quality of life. In fact, I suspect that whenever that gooey, noxious black stuff appeared in freshwater creeks in pre-Columbian Pennsylvania, natives of that region regarded it as a nuisance.

So economically, the Earth’s supply of nonrenewable energy resources was, back then, much smaller than it is today. Human creativity and effort turned a nuisance into a resource. Human creativity and effort also are at work finding not only substitutes for oil, but also new supplies of oil. Each success on this front increases the supply of oil. The reason is that oil deposits that remain unknown are economically nonexistent. The same is true of oil deposits that are known to exist but are currently too costly to tap. Oil in the Earth’s crust that is out of reach with existing technology is no more of a resource today than is oil on Pluto. But if and when human creativity discovers cost-effective techniques for extracting that oil, it then — and only then — becomes a resource. In effect, more of the resource “oil” is created.”

It was new technologies that led us to the discovery of new oil fields beneath the ground. Three decades ago, proven oil reserves were 645 billion barrels; five years ago it was 1.28 trillion and in 2009 it was 1.34 trillion. New, innovative technologies, as well government policies put in place to support them, will help recover that oil and discover more. Unconventional sources could soon become conventional. And if they’re not economically viable, then they’ll stay in the ground and we’ll transition to different sources of energy – perhaps sources of energy we haven’t heard or thought of yet.

Competition bodes well for the American consumers, but the notion that we need the government to force a transition away from oil overnight because we’re sucking the well dry is an absurd one. Congress should implement policies do not discriminate or bias investments in order to allow the most efficient and promising innovations to flourish. The latest, that has promise but also has a lot of help from the government is the Bloom Box, “a silent, refrigerator-sized, fuel-cell power generator that will one day provide energy to your house from your own backyard.”

Generating electricity at eight to ten cents a kilowatt hour (under the national average of eleven cents), the Bloom Box received a significant amount of press in conventional papers and the blogosphere. Hailed as a major breakthrough (more so than the major breakthroughs you forget about a week later), how does the Bloom Box fare without generous state and federal subsidies?

“The unsubsidized cost would be 13-14 cents/kWh, with about 9 cents/kWh from the capital costs of the Bloom box and 5 cents/kWh from natural gas costs, according to Luz Research. If natural gas prices rise or fall 50% (gas prices are often volatile), overall price would fluctuate from 11.5-12.5 cents/kWh to 20.5-21.5 cents/kWh. That unsubsidized price is still too high to compete in most markets with retail electricity without subsidy. However, this is the first generation, and if Bloom can bring prices down (and/or natural gas prices are stable/low), there could be a significant market for this fuel cell.”

“Could” is the operative word here. And if there is a market for the Bloom Box, or any other ground-breaking supplier of energy, the market will let it be known. But if it continues to rely on government handouts, like other renewable energy sources, it will be frozen in a perpetual state of mediocrity with no incentive to reduce costs.