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I remember one of my undergrad economics professors going on a rant about how we will never run out of oil or tungsten or whatever because the marginal cost wil

I remember one of my undergrad economics professors going on a rant about how we will never run out of oil or tungsten or whatever because the marginal cost will increase gradually until we find alternative materials. It sounded very intelligent and convincing to me at 18, and sounds downright idiotic to me now.

oppositelock 4y ago
This is different than fish, as tungsten is recyclable and doesn't rot. Read up on the Simon/Ehrlich wager. Nobody knows the future, but your professor was demonstrating a solid economic principle.
- nerdponx 4y ago
  I know that oil and tungsten are materially different from fish. Marginal costs of digging things out of the ground does in fact tend to increase gradually with scarcity, as do incentives to devote resources to basic research into recycling, consumption reduction, and alternatives. But teaching undergrads about tungsten and not fish is just propaganda. Edit: To be clear, the point is not that my professor was idiotically wrong about oil and tungsten specifically. The "idiotic" part is to assume and furthermore imply to young students (who don't know any better) that the general principle holds equally well in all domains. Maybe "arrogant" would be a better word than "idiotic".
  - narrator 4y ago
    Oil and gas are different than metals though because some deposits spurt out of the ground, while others require heroic drilling, pumping and refining efforts that take more energy to realize. This is the concept of energy returned on energy invested (EROEI). When it takes more energy to get the oil out of the ground than is in the oil, it might be better to use the energy for something else and leave the oil in the ground.
mr_toad 4y ago
Tuna can’t survive as a species with just a handful of tiny deposits scattered around the planet. And if we found alternatives to Tuna, it doesn’t mean that other species like sharks and Orca can.
dredmorbius 4y ago
s someone who degreed in economics, and has been studying the economic resource situation formally and informally for nearly five decades, what I've come to realise is that economics has a very shaky grasp on the actual, and sensible, pricing of extractive resources. Economically, mining is exploitation of any resource on a basis which fails to account for the full ecological formation costs of that resource. In the case of petroleum, we can look at one ecological cost: time. Petroleum formed over a period of hundreds of millions of years. It's been extracted by humans for a couple of hundred years. Even on napkin math, the time cost is being discounted by on the order of one million fold. If the resource were so vast that it could not be meaningfully exhausted, this wouldn't be an issue. But we've hit peak conventional oil within numerous major producer countries, and quite probably the world, which corresponds to roughly half the total exploitable resource having been exhausted. The economic theory most often mentioned for pricing of nonrenewable resources is Hotelling's Rule, formulated in 1932. I've read that paper numerous times, and the fact that strikes me most about it is that although it cites earlier economic works and numerous references of the author himself, it cites absolutely no scientific, geological, or petrochemical references. It's utterly devoid of any real-world grounding. And we have pricing data to invalidate it, one of the most comprehensive being crude oil prices dating to 1870 or so. That's published as part of BP's Annual Statistical Review of Energy, showing both nominal and inflation-adjusted prices. What's clear is that price does not follow the trend predicted by Hotelling, but rather reflects, at various times, unrestrained extraction (when the price collapses), various catellisations and embargos (when it peaks), and several periods of long-term managed output, during which it remains quite nearly constant. The longest and most stable such period was from the early 1930s to the early 1970s, following the establishment of regulated extraction in the United States (at the time the world's peak, and surplus-capacity, provider of oil). Immediately prior to this period, following major discoveries and unregulated extraction in East Texas, the price fell from a target $1/bbl to $0.13/bbl, and finally as low as $0.02/bbl. The rational for pricing wasn't Hotelling's model, but the bare minimum price required to meet marginal costs of extraction. More recently, in the 2000s and 2010s, what's emerged has been the flip side of demand destruction, where prices of oil can rise to the point that economic activity can't support them, and demand collapses, with it ultimately price (as more expensive marginal wells are withdrawn from production). Price has see-sawed between highs as the global economy surged, and lows, as it collapsed. Sometimes exogenously as with the 2020 global COVID pandemic, which saw US spot futures prices fall negative briefly at contracts expired and delivery had to be made --- there was no available storage and traders paid to have their oil offloaded. The upshot is that extractive commodity prices don't behave as one might expect during periods of exhaustion. Rather than rising monotonically, they'll jump around on thin trading, surges in supply and demand, and external influences.
drewm1980 4y ago
Indeed, your professor was starting under the assumption that our civilization will not collapse. If you want to know what happens when the resources your civilization is built on run out, you're probably better off asking a historian than an economist.

oppositelock 4y ago

This is different than fish, as tungsten is recyclable and doesn't rot. Read up on the Simon/Ehrlich wager. Nobody knows the future, but your professor was demonstrating a solid economic principle.

nerdponx 4y ago
I know that oil and tungsten are materially different from fish. Marginal costs of digging things out of the ground does in fact tend to increase gradually with scarcity, as do incentives to devote resources to basic research into recycling, consumption reduction, and alternatives. But teaching undergrads about tungsten and not fish is just propaganda. Edit: To be clear, the point is not that my professor was idiotically wrong about oil and tungsten specifically. The "idiotic" part is to assume and furthermore imply to young students (who don't know any better) that the general principle holds equally well in all domains. Maybe "arrogant" would be a better word than "idiotic".
- narrator 4y ago
  Oil and gas are different than metals though because some deposits spurt out of the ground, while others require heroic drilling, pumping and refining efforts that take more energy to realize. This is the concept of energy returned on energy invested (EROEI). When it takes more energy to get the oil out of the ground than is in the oil, it might be better to use the energy for something else and leave the oil in the ground.

mr_toad 4y ago

Tuna can’t survive as a species with just a handful of tiny deposits scattered around the planet. And if we found alternatives to Tuna, it doesn’t mean that other species like sharks and Orca can.

dredmorbius 4y ago

s someone who degreed in economics, and has been studying the economic resource situation formally and informally for nearly five decades, what I've come to realise is that economics has a very shaky grasp on the actual, and sensible, pricing of extractive resources. Economically, mining is exploitation of any resource on a basis which fails to account for the full ecological formation costs of that resource. In the case of petroleum, we can look at one ecological cost: time. Petroleum formed over a period of hundreds of millions of years. It's been extracted by humans for a couple of hundred years. Even on napkin math, the time cost is being discounted by on the order of one million fold. If the resource were so vast that it could not be meaningfully exhausted, this wouldn't be an issue. But we've hit peak conventional oil within numerous major producer countries, and quite probably the world, which corresponds to roughly half the total exploitable resource having been exhausted. The economic theory most often mentioned for pricing of nonrenewable resources is Hotelling's Rule, formulated in 1932. I've read that paper numerous times, and the fact that strikes me most about it is that although it cites earlier economic works and numerous references of the author himself, it cites absolutely no scientific, geological, or petrochemical references. It's utterly devoid of any real-world grounding. And we have pricing data to invalidate it, one of the most comprehensive being crude oil prices dating to 1870 or so. That's published as part of BP's Annual Statistical Review of Energy, showing both nominal and inflation-adjusted prices. What's clear is that price does not follow the trend predicted by Hotelling, but rather reflects, at various times, unrestrained extraction (when the price collapses), various catellisations and embargos (when it peaks), and several periods of long-term managed output, during which it remains quite nearly constant. The longest and most stable such period was from the early 1930s to the early 1970s, following the establishment of regulated extraction in the United States (at the time the world's peak, and surplus-capacity, provider of oil). Immediately prior to this period, following major discoveries and unregulated extraction in East Texas, the price fell from a target $1/bbl to $0.13/bbl, and finally as low as $0.02/bbl. The rational for pricing wasn't Hotelling's model, but the bare minimum price required to meet marginal costs of extraction. More recently, in the 2000s and 2010s, what's emerged has been the flip side of demand destruction, where prices of oil can rise to the point that economic activity can't support them, and demand collapses, with it ultimately price (as more expensive marginal wells are withdrawn from production). Price has see-sawed between highs as the global economy surged, and lows, as it collapsed. Sometimes exogenously as with the 2020 global COVID pandemic, which saw US spot futures prices fall negative briefly at contracts expired and delivery had to be made --- there was no available storage and traders paid to have their oil offloaded. The upshot is that extractive commodity prices don't behave as one might expect during periods of exhaustion. Rather than rising monotonically, they'll jump around on thin trading, surges in supply and demand, and external influences.

drewm1980 4y ago

Indeed, your professor was starting under the assumption that our civilization will not collapse. If you want to know what happens when the resources your civilization is built on run out, you're probably better off asking a historian than an economist.