Oil: Will We Ever Run Out?

As oil becomes scarcer, and as the Laws of Demand tell us, the price of oil will continue to rise. To combat this, on the demand side, we can try to find substitutes to use instead of oil. While on the supply side, we can either try to find more reserve or come up with more substitutes. We would only run out of it if there was no demand left for the fossil fuel.

oil will we ever run out

Economic Theory Disproving Peak Oil

 Horizontal Sum of Demand

We need to take the horizontal sum of demand for petroleum. In the diagram, Da represents this generation’s demand for petroleum and Db represents the next generation’s demand for petroleum.Horizontal sum of Demand for oil

Using arbitrary numbers, this graph implies that future generations’ demand for the fossil fuel has already been accounted for. In the above graph, at $5 Da (today’s generation) will consume 20 units. While Db (tomorrow’s generation) will consume 10 units. Their total demand is 30 units.

Present value of future demand

Then we take the present value of the next time period’s demand for the fossil fuel and discount it to today.Present Value of future demand for oil

Sum of Present Value

We then take the sum of the present value of demand for petroleum over multiple periods of time.sum of the present value of demand for oil over multiple periods of time.

P1 represents the future price of oil that D1 will pay. The vertical line represents the limited supply of petroleum, hence this graph implies that it is inexhaustible, i.e. that we can never run out.

After combining the two concepts, we can see that future demand for oil has already been met in today’s price and that we would never really run out. And if people did think we could run out of it, then they would save it and sell it after “oil ran out”. And everyone would do that to the point that we would never actually run out.

Economic Theory Disproving Peak Oil

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