Our universe consists of space, time, matter and energy. Fundamental in this universe is the natural law that matter and energy (and charge) are conserved quantities. Within these laws this is an exception when there is an exchange between the two in nuclear reactions where energy and mass can interchange in an exact relationship. Our domain lies in between the subatomic domain and the stars of nebula in a domain in which nuclear exchanges are un-natural and where matter is conserved and where energy is conserved independently.

It is therefore alarming that economists cannot accept these basic facts of our universe. Our economic life is dominated by the application of energy to production and has resulted in a cornucopia of stuff we can consume. Economists believe that we have an insatiable desire for this stuff and will always prefer more to less. This economic person that economists fantasize about does not exist and they have trouble accepting scientific observations that refute this. Marketing people know otherwise and use all manner of means to persuade us to buy things we do not really want.

Economists theorise about their factors of production, land, capital, labour, and expertise. They do not see that energy should be recognised as a separate and vital factor of production. The energy that has created our modern industrial society has grown dramatically in importance with large sources of energy being made available. First there was coal that could be burnt in furnaces that would generate steam that could drive engines to supply industry. Then petroleum was discovered and was found to be so much better as source of energy. It too could be used in the same way as coal, but the invention of the internal combustion engine and the jet engine extended the application of energy. Liquid fuels distilled from petroleum are the ideal means of energising transport. Liquid fuels are easy to store, transport and control. Jet transport could not exist without liquids fuels.

Unfortunately, petroleum was created over a hundred million years from organic wastes. This was created in a fixed quantity. The law of conservation of matter applies to the ancient deposits of oil. Since we found how wonderful it was, we have continued to use it at ever increasing rates. It now appears that we have used up about half of it and consume it an ever increasing rate. The Club of Rome's book "Mankind at the Turning Point" showed up the consequences of this. The end of industrial growth would come and it would collapse the economic system and the population of the world would also collapse. This evaluation was made 30 years ago and met with dismay from economists because it undermined their zeal for growth. They dismissed the problem, distorted the issue and misunderstood it. They could not understand the consequences of the law of conservation of matter as applied to petroleum.

Professor M. Adelmann in his book "The Economics of Petroleum Supply." said :
"minerals are inexhaustible and will never be depleted. A stream of investment creates additions to proved reserves, a very large in-ground inventory, constantly renewed as it is extracted. How much was in the ground at the start and how much was left at the end are unknown and irrelevant."

Not only is he denying the fact that petroleum was fixed in quantity, but he is not considering economist's law of diminishing returns that will limit the discovery of extractible reserves. He also said:
"Oil is a renewable resource, with no intrinsic value over and above its marginal cost... There is no original stock or store of wealth to be doled out on any special criterion... Capital markets are equipped to handle [oil depletion]."

Economists have great faith in the concept of substitutes. A resource that increases in price (due to shortages) will enable a substitute at a higher price come into the market as a replacement. This is the fallacy of endless substitution. Oil is the substitute for coal, but not the other way round. There are many failed civilizations that lacked a substitute for some essential that had supply downturns.

Another excuse for economists denial of the limits to petroleum is their faith in technology. Technology is constantly making improvements and will always provide alternatives in economist's view. They expect exponential technology improvements, not the law of diminishing returns applying to technology advances.

In New Zealand, Professor Bryan Philpott, Professor of Economics at Victoria University expounded on these excuses in a paper given in October 1973. It was entitled The Club of Rome and Zero Economic Growth. Economists have this fantasy that growth is so wonderful that any idea of zero growth is pure heresy. Philpott diverted the issue to an attack on "Zero growth" and concerned himself with investment, wage increases, distribution of income, etc. He did say that if there is a constraint on energy, NZ should raise the price of the energy supplies in scarcest supply (ie applying the Hotelling Rule which says depleting resources should be increased in price at the same rate as the return on capital). He complained that the Club of Rome's computer model had "too little allowance for substitution of plentiful resources like coal for scarce resources like oil; for the substitution of labour for capital; for the ability of the economic system to economise on resource use if these become more expensive; for the development of new technologies for agriculture and for dealing with pollution; and overall just too little allowance for general human and social adaptability."

Julian Simon was an economist well known for his disputing the Limits to Growth view of the running down of resources. His book; The Ultimate Resource 2. expounded his un-scientific view. He had a chapter labelled "When Will We Run Out of OIL? Never!" that contained a section labelled "The Nonfiniteness of Oil." He was well aware of the importance of oil as a source of energy which he called the Master Resource. He brought in economist's "rear vision" approach to oil. Because booms in oil extraction resulted in declining prices and the postponement of test drilling, he assumed that his meant that was an indication that the amount of oil was becoming less scarce and implied that the amount of oil in the ground was increasing. He stated that "For the very long run, there is nothing meaningfully "finite" about our world that inevitably will cause energy, or even oil in particular, to grow more scarce and costly." His faith in rear vision is shown in his statement that "Forecasts based on technical analyses are less persuasive than historical extrapolations of cost trends." He says " But our energy supply also is nonfinite, including oil as an important example. That was not a misprint." With another author, Norman Meyers, Simon wrote and published a book "Scarcity & Abundance". They said:
"Regarding oil, the price rise since the 1970s does not stem from an increase in the cost of world supply. The production cost per barrel in the Persian Gulf still is perhaps 50 cents per barrel. Concerning energy in general, there is no reason to believe that the supply of energy is finite, or that the price of energy will not continue its long-term decrease forever. I realize that it sounds weird to say that the supply of energy is not finite or limited, but I'll be delighted to give you a whole routine on this in the question period if you ask."

"The days of the oil shortages are over," said economist William Wilson of Comerica Bank in Detroit, adding that's welcome news for truck owners. "Trucks are here to stay because Americans like them."

Economist Robert Solow (who obtained a pseudo Nobel Prize)[ More on the 'Noble Prize' - click here.]
in a 1974 lecture to the American Economic Association said :
"... the world can, in effect, get along without natural resources ... at some finite cost, production can be freed of dependence on exhaustible resources altogether..."

Economists Laureate Paul Samuelson and William Nordhaus (also recipients of the pseudo Nobel Prize) said:
"Should we be taking steps to limit the use of these most precious stocks of society's capital so that they will still be available for our grandchildren? … Economists ask, Would future generations benefit more from larger stocks of natural capital such as oil, gas, and coal or from more produced capital such as additional scientists, better laboratories, and libraries linked together by information superhighways? … in the long run, oil and gas are not essential."

Milton Friedman is well known as a prominent economist of the "Chicago" School that concentrated on monetary policy. Friedman (another "Nobel" Prize winner) still believed that available energy is a function of money price. Here is part of an interview with him (worth quoting at length because of his colossal stupidity):

Ravaioli: But there are many other environmental problems ...
Nobel Laureate Friedman: Of course. Take oil, for example. Everyone says it's a limited resource: physically it may be, but economically we don't know. Economically there is more oil today than there was a hundred years ago. When it was still under the ground and no one knew it was there, it wasn't economically available. When resources are really limited prices go up, but the price of oil has gone down and down. Suppose oil became scarce: the price would go up, and people would start using other energy sources. In a proper price system the market can take care of the problem.
Ravaioli: But we know that it takes millions of years to create an oil well, and we can't reproduce it. Relying on oil means living on our capital and not on the interest, which would be the sensible course. Don't you agree?
Nobel Laureate Friedman: If we were living on the capital, the market price would go up. The price of truly limited resources will rise over time. The price of oil has not been rising, so we're not living on the capital. When that is no longer true, the price system will give a signal and the price of oil will go up. As always happens with a truly limited resource.
Ravaioli: Of course the discovery of new oil wells has given the illusion of unlimited oil …
Nobel Laureate Friedman: Why an illusion?
Ravaioli: Because we know it's a limited resource.
Nobel Laureate Friedman: Excuse me, it's not limited from an economic point of view. You have to separate the economic from the physical point of view. Many of the mistakes people make come from this. Like the stupid projections of the Club of Rome: they used a purely physical approach, without taking prices into account. There are many different sources of energy, some of which are too expensive to be exploited now. But if oil becomes scarce they will be exploited. But the market, which is fortunately capable of registering and using widely scattered knowledge and information from people all over the world, will take account of those changes.

(Note! None of the Club of Rome's predictions have failed. I suspect Friedman didn't bother to do his own research and simply relied on Libertarian disinformation.)

More recently, we have an Associate Professor of Political Science, Dane Bjorn Lomborg disputing the oil-depletion warnings in his book "The Skeptical Environmentalist". He caused quite a stir with many deniers pleased that there was no problem any more.. He used a "rear view" analysis of "known reserves" to claim that reserves are not finite but constantly growing. He thought that oil would come not only from the sources we already know, but also from many sources of which we do not yet know. He does not seem to realise that the economists "law" of diminishing returns applies to investigation and drilling work and discovery will decline until all the fixed quantity is discovered and there is absolutely no more to be found. He also believes in improved recovery methods will avoid an imminent peak. Again, the methods have diminishing returns applying. Improved extraction cannot go beyond the fixed quantity available and will increase the cost of petroleum extracted. There is no sense in improving extraction below an EROEI (energy return on energy invested) of 1.0. Lomborg uses the substitution fallacy as his third argument. Notwithstanding that oil is the substitute for coal because coal has less energy capacity and is inconvenient to exploit compared with oil, coal economics depends on cheap oil products to extract and transport, and the reversion to coal use will increase climate change beyond what can be allowed. While economist's ignorance of the laws of conservation and matter have not produced much criticism, Lomborg's nonsense has generated a large backlash with many scientists publishing rebuttals and continue with detailed dismantling of his arguments.

The fact remains that the fossil oil that we depend on so much is FIXED in quantity, and even if we can extract most of it, it will run out. When you take into account the continuing demand increase and the decline in discovery, the decline in extraction, and the decline in the creation of the infrastructure (tankers, pipeline, & refineries), supply will soon fail to meet demand enforcing an economically damaging escalation of fuel prices.