By Sierra Parker Hoffer & William F. Shughart II
March 2, 2016 at 5:00 am ET
Expansion in American oil production is the reason so many motorists are happy. Crude oil, which hasn’t been this cheap since the early 2000s, now costs less than the barrel it’s shipped in. That is good news for the average American, who saved roughly $540 at the pump last year and will likely save as much, if not more, this year. The global market is awash in oil and the glut shows no signs of going away.
Amidst the celebration, what happened to the doomsday peak oil prediction and the claim that we’d soon be running out?
In the 1950s, those accepting the peak oil story sparked concerns that industrial civilization was quickly approaching its end. Twenty years later, those theories seemed to be coming true as crude oil production began to decline and prices started to spike. Many observers assumed that global supplies had reached an apex and that production would only continue to fall.
Energy security became a core national concern, not only because prices were likely to rise but also because America relied heavily on imports from unfriendly and unstable nations in the Middle East and South America. Then, an embargo by the Saudi-dominated Organization of Petroleum Exporting Countries (OPEC) sent crude oil prices through the roof and regulatory caps on retail gasoline prices caused long lines at the pump.
Fast forward 40 years: oil and gas production are approaching all-time highs. Energy supplies are secure, with the U.S. now producing two million more barrels per day than Saudi Arabia. No longer are we at the mercy of OPEC.
How did we get here? The answer is entrepreneurship. Major advances in technology adopted by American energy companies have unlocked vast new resources–shale oil and natural gas found miles underneath earth’s surface recovered by hydraulic fracturing. The shale revolution and its increasingly sophisticated use of that new technology is a prime example of how market-driven innovation works for the benefit of consumers.
Roughly five years ago, the market was beset by crude oil prices that hovered around $100 per barrel. Pricey oil was an opportunity risk-takers and problem solvers could not pass up as they unleashed a surge of investment into research and development. The work they did, armed with heavy-duty computing power and big data, turned old assumptions about peak oil on their head. Major innovations are finding ways to coax more energy from underground deposits, which, in turn, is adding to proven supplies and strengthening our nation’s energy security.
Despite being arguably the most important energy story of the 21st century, the oil and gas shale revolution remains overlooked and underappreciated. Not only did it put peak oil hysteria to bed and help jump start our economy in the wake of the Great Recession, but it also fundamentally changed the global balance of power in the oil market.
The main lesson here is that unfettered markets can rule out the worst-case scenarios feared by those ignorant of basic economic principles. Predictions of doomsday may grab headlines, but as long as alert entrepreneurs remain free to respond to changes in market prices, apocalypse will be averted.
Sierra Parker Hoffer is a graduate student in economics at Utah State University. William F. Shughart II, Research Director of the Independent Institute, is J. Fish Smith Professor in Public Choice at Utah State University’s Huntsman School of Business and a senior fellow of Strata, a policy research center in Logan, Utah.