We're running outta oil...so what?

There is a series of videos out on youtube when you search: The most important video you will ever see.

It's about Peak Oil theory and the power of compounding.  Being a math major, the math isn't in debate.  In fact, it's used all the time to calculate doubling-time in investment theory.  I'm not even going to debate that Peak Oil is real.  It seems sound enough since all resources are finite.  However, what I am going to talk about is the bigger picture and beyond Peak Oil.

First of all, we will never consume all the oil on the planet.  It won't happen.  How can I make this claim?  Well imagine being stuck in a barn filled with peanuts.  As you start getting hungry, you start to discover you can crack open the peanuts and start consuming them.  As you eat them, you start discarding the shells in the barn since you're stuck inside it.  Initially, finding unopened peanuts is easy.  You can pretty much go anywhere you want and find an unopened peanut.  However, at some point, you start running into opened shells in search for peanuts.  Eventually, there will be so many opened shells and not enough peanuts that finding peanuts become a fruitless exercise, even though you know there are unopened peanuts somewhere in the barn.

The Peak Oil theory basically describes a method in which to estimate how much oil you have left based on how much you've consumed...i.e.where you are in the peanut consumption process.  So while we are indeed running out of oil, there will be a point where finding the remaining oil becomes way too expensive.  Combine this process along with the population growth and demand for energy increases.  This has only one effect on prices - they will rise.

Prices in the free market are simply signals to find alternatives.  Soon, oil will become more expensive than alternatives that are expensive today.  Alternatives like solar, wind and geo-thermal.  Nothing brings out the entrepreneur in each of us than extremely high, unmet demand.

Back when telephones were invented and the network effects were kicking in, the only way to build the infrastructure was to run copper lines.  Believe it or not, people started thinking we were going to run out of copper because every household in the country, and ultimately in the world, would want a telephone.  Add to that the dependency companies had on this marvelous invention to dramatically increase sales, a shortage would threaten the very economic livelihood of millions.

But it turns out the world didn't end.  Today, we have alternatives to copper telephone wiring.  We've replaced it with fiber optics and wireless technologies.  Not only did we did we satisfy millions of more users today than back then, but the quality is much greater.

Most of us under 40 will likely see this change in energy in our lifetimes.  As consumption continues at its 7% annualized growth rate, we will consume as much oil in the next 10 years as we have so far in our entire history.  Yes, prices will rise but that will just spur innovations in every direction until another viable solution is found.  Yes, some people will lose their jobs and will have to find new ones.  Just like the old-fashioned telephone switchers and operators got replaced by computer controlled switches, an oil rigger today will have to find another job as well as the CEO of Exxon-Mobile.

Transitions aren't always easy but are necessary.  I'll close with a favorite blurb from one of my favorite songs, Tom Sawyer:

"He knows changes aren't permanent.  But change is."