According to Oil & Gas Journal, the proven oil reserves of the top 12 oil produc

Question

According to Oil & Gas Journal, the proven oil reserves of the top 12 oil producers was 1137 billion barrels of oil in 2007. In that year, the U.S. Energy Information Administration reported that the daily oil production from these nations was 48.2 million barrels a day.

7. At this rate, how many years will the proven oil reserves of the top 12 oil producers last?
8. According to the Malthusian view, what will happen after the number of years you calculated in Question 7?
9. What are some important assumptions implicit in your calculations in Question 7?
10. Explain how the Malthusian view could be challenged if the assumptions you listed in Question 9 were not true.
11. How might market forces affect the amount of time the proven oil reserves will last, assuming that no new oil reserves are discovered and that the demand curve for oil remains unchanged.

Explanation / Answer

48.2 million barrels, since we want to know how many years the proven reserves will last, multiply 48.2 by 365 to find out the production per year (you could use 365.25 if you wanted to be a little more accurate, but with these large numbers 365 is a fair approximation). We get that 17,593 million barrels are produced a year, or 17.593 billion barrels per year. Divide the 1137 billion barrels by 17.593 to find that the proven oil reserves of the top 12 oil producers will last 64.63 years at the current rate. According to the Malthusian view, we will have run out of oil and as we do so the prices will skyrocket. Fierce shortages, and conflicts will emerge over the last few billion barrels, etc, etc. Implicit in these calculations is the assumption that 1) the current proven oil reserves are all that these top 12 producers have and 2) that the current rate will continue indefinitely. It is unlikely however, that the stock of oil reserves is limited to the reported level. Aside from the fact that many producers (especially in OPEC) routinely under-report the levels of their oil reserves (to create a false sense of scarcity, driving the prices up, or to make their actual reserves last longer than what others think), as the reported reserves deplete, and newly industrializing and expanding industrial countries increase the demand for oil, the price will go up and in response it will become profitable for oil producers to dig deeper, look harder and try new extraction techniques to find even more oil. If no new oil reserves are discovered, and the demand for oil remains unchanged (very tenuous assumptions, but we'll run with it for the sake of the question), as the reserves are gradually depleted, the price of oil will rise. Since there is no new supply, and the demand curve remains unchanged, the higher price will mean that lower quantity of oil is demanded (at this current price than at the previous price, the demand curve itself is unchanged). This means that as the reserves are depleted, the price will increase and the quantity demanded will decrease. Depending on the price elasticity of demand for oil, this decrease in demand may only be slight (meaning that the estimate of about 64 years attained earlier will be close to accurate) or it may be drastic (meaning that we have underestimated the amount of time, since as the price increases, the rate changes). The most likely case is that up to a point, the decrease in demand may be slight, but as the price climbs higher and higher, the demand becomes more and more elastic as fewer companies/countries are willing or able to shell out the high price per barrel)

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