Is the world running out of oil?

With the relentless rise in oil prices over the past three years, that question has been asked a lot, with surprisingly little agreement on the answer and a lot of muddle thinking in the analyses. That’s perhaps understandable, since the issue is a complex one. But when you’re trying to tackle a complex problem, it helps to start by asking the right question, and “Are we running out of oil?” is almost certainly the wrong question.

The better and more interesting question to ask is "Why isn't oil production growing faster in response to high oil prices?"

Two economists at the Dallas Fed, Stephen Brown and Richard Alm, provide a refreshingly clear and very convincing answer in the Bank’s most recent monthly Economic Letter:

Oil prices have marched upward in recent years, ending nearly two decades of relatively cheap energy. The weekly benchmark price for a barrel of West Texas Intermediate rose from $32.20 at the end of 2003 to $42.56 at the end of 2004 and to $59.49 at the end of 2005. In April 2006, oil reached an all-time high of more than $75 a barrel, measured in current dollars.

In explaining today's high oil prices, many analysts point to surging demand from China, India and other rapidly industrializing countries and cyclical growth in U.S. consumption. When added to existing demand from Europe, Asia and elsewhere, these increases have outstripped any gains in global production and reduced excess capacity to near zero. The analysts expect economic development to continue apace in China and India, with their appetites for oil growing as fast as or faster than their economies.

Are we running out of oil? The question always arises when oil prices spike. Some experts—including Matthew Simmons, author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy—argue that world oil production is at or near its peak and prices will just continue to rise, perhaps toward $200 a barrel or more. Industry veteran T. Boone Pickens also sees oil prices going nowhere but up.

The center of gravity among energy-industry experts isn't as alarmist. The U.S. Energy Information Administration, the International Energy Agency and Daniel Yergin's Cambridge Energy Research Associates all see sufficient oil resources to supply generations to come. Price pressures will moderate as new production reaches the market.

Today's proven reserves total 1.3 trillion barrels, but the U.S. Geological Survey estimates the world's remaining conventional resources at 2.6 trillion barrels. Canadian tar sands boost the estimate to 2.8 trillion barrels.

Keeping the global economy chugging—including the Chinas and Indias—requires about 85 million barrels a day. At current rates of use, 2.8 trillion barrels should last 90 years. Most likely, oil use will continue to rise, but conventional resources and tar sands should still be sufficient for 60 to 70 years. Other unconventional oil resources, such as shale oil, will greatly extend the time horizon at which we run out of oil.

Having oil is one thing. Delivering it to a growing market is another. World economies differ greatly in their capacity to organize enterprises, adopt new technologies, raise capital and supply what consumers want. When it comes to increasing oil production, economic systems matter quite a bit. More oil would flow onto world markets and prices would be lower if major oil resources were in countries where producers responded freely to market incentive. The extent of economic freedom in the countries with the world’s oil supplies will greatly affect how well that oil is delivered to consumers.

The complete essay is Running on Empty? How Economic Freedom Affects Oil Supplies (pdf).

My answer, BTW, to the title question is: No, we're not running out of oil, and for all practical purposes, we never will.