<p>First, of all it is really difficult to answer these sort of far fetched questions. Over time humanity is having more oil reserves (see graph below from Energy Institute), and there is no reason to suspect this trend will stop in next several decades and at that point probably most of the energy production will transfer from fossils to renewables. This is because we are finding new oil deposits and new ways of getting oil (e.g. shale/fracking) at a rate that means that amount of oil available for extraction still increases over time so rather than running out of oil we are continuously having more of it. Since <a href="https://www.jstor.org/stable/24923117?casa_token=okjlRvZjOIcAAAAA:4Xd89CDybLEDa1c_u7EhRcioNLerrHguJuPI76NttBZk2fDII2jhIJGEha5SmX4wdxetGUlESZNKWnXMgCN47HX3-THid7BWv32kS7gvF0UeYtNJepr5" rel="nofollow noreferrer">Hubbert (1971)</a> first formulated the scientific version of 'peak oil' idea people were claiming 'peak oil' is just around the corner every 10 or so years (e.g. see <a href="https://alarmism.watch/assets/sources/1bc9e6ab6af9dc74de145f1680ff1250.pdf" rel="nofollow noreferrer">Deming 2003</a>) or <a href="https://www.sciencedirect.com/science/article/abs/pii/S0301421509008519" rel="nofollow noreferrer">Aleklet et al 2010</a>). Most recently Shell in its <a href="https://www.shell.com/energy-and-innovation/the-energy-future/scenarios/new-lenses-on-the-future/earlier-scenarios.html" rel="nofollow noreferrer">2008 report</a> predicted peak oil and gas in 2020 which did not happen either.</p>
<p>Of course, that cannot go on indefinitely but it is a trend that lasted over 100 years and there is no indication it will not continue on for several more decades or even more. Even if we will ever get to the point where we hit true physical 'peak oil' at some unspecified future we will have few decades before we actually run out and increased price will give people incentive to conserve the remaining oil. Hence most likely we will run of the use before Earth itself ever runs out of oil. As a consequence many more modern studies say there will simply never be 'peak oil' in a sense that we would run out of oil but there will be peak for demand for oil in some future (see <a href="https://www.scirp.org/(S(lz5mqp453edsnp55rrgjct55))/reference/referencespapers.aspx?referenceid=1885906" rel="nofollow noreferrer">Maugeri 2012</a> or the newer Shell reports) and after that it will be simply phased out of use in most settings. To be fair some new papers still claim there will be peak oil (in sense we start run out of it) some time after 2035 (see EIA 2013), but I would not count on that prediction either since these peak oil predictions are always made assuming no virtually no technological change in our ability to extract and detect oil which is clearly unrealistic as history shows.</p>
<p><a href="https://i.sstatic.net/wlsfs.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/wlsfs.png" alt="enter image description here" /></a></p>
<p>This being said if you want to entertain such hypothetical the extent of damage to the economy would depend mainly on:</p>
<ul>
<li>Share of energy and output more broadly produced using oil.</li>
<li>Availability of substitutes.</li>
<li>When the oil runs out (now damage would be several orders of magnitude bigger than 50 years from now).</li>
</ul>
<p>Currently word-wide 31.21% energy is produced from oil and the share of energy production from oil  (see graph from <a href="https://ourworldindata.org/grapher/oil-share-energy?tab=chart&amp;country=%7EOWID_WRL" rel="nofollow noreferrer">Our World in Data</a> below)</p>
<p><a href="https://i.sstatic.net/kO6dZ.jpg" rel="nofollow noreferrer"><img src="https://i.sstatic.net/kO6dZ.jpg" alt="enter image description here" /></a></p>
<p>However, oil is not only important for energy production, economy is actually bit more reliant on the oil. Currently the oil intensity of the world output is about 40% and this value was declining by about 0.8% per year for the last 50 years (see table below).</p>
<p><a href="https://i.sstatic.net/1xtAz.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/1xtAz.png" alt="enter image description here" /></a></p>
<p>This implies if all oil would disappear today, and if we assume there are no substitutes for oil it would lead to global loss of GDP of about 40%. However, the newest cry wolf predictions put peak oil at some time after 2035, if we assume oil lasts only 10 years after peak (quite pessimistic) we would run out in 2045. Assuming the trend in decreasing oil intensity will continue at slower pace of 0.5% per year the oil intensity would be about 27% in 2045, so that would be about 27% loss of output at most pessimistic scenario I can think of (still assuming no substitutes).</p>
<p>Next, we have to consider if there are substitutes to oil. There are probably not substitutes for every function oil has in production but there are definitely substitutes when it comes to energy production (renewables, nuclear energy, natural gas, coal etc).    Hence the 27% decline is not realistic. It is nearly impossible to estimate how easy it will be to substitute those other options for oil in 2045, but even if we assume low elasticity of substitution, the decline in output would be smaller. Elasticity of substitution also grows over time as people have some time to adjust. As a guesstimate I would say thanks to substitutes you could reduce the output loss even in worst case scenario by 2/5 at least, which would put it to around 16,2%.</p>
<p>This being said this is mostly speculation, there are no good ways how to make 25 year ahead accurate forecasts even when one uses rigorous models, the above was highly speculatory guesstimate based on some back of the envelope calculations so take them with grain of salt. Also that was based on quite gloomy assumptions about the <em>when</em> question. Most likely scenario is that there simply wont be any significant  drop in output as the true peak oil is too much ahead in the future for oil to still matter too much for the economy.</p>

CC BY-SA 4.0
2022-06-01T23:38:47.110Z
2022-06-01T23:38:47.110Z
1muflon1
<p>Oil is a significant component of world's economy. Various wars have been allegedly fought over oil. But, it is a limited natural resource. Our standards of living have gone up, thanks to industrialization, but it might come to a halt, when we run out of oil.</p>
<p>How will the world's economy work, when we run out of oil. Will the standard of living go down again.</p>

<macroeconomics><microeconomics>
How will world economy run when we run out of oil reserves?
Sahil
# How will world economy run when we run out of oil reserves?

(Asked by: username_0 on 2022-06-01)

Oil is a significant component of world's economy. Various wars have been allegedly fought over oil. But, it is a limited natural resource. Our standards of living have gone up, thanks to industrialization, but it might come to a halt, when we run out of oil.

How will the world's economy work, when we run out of oil. Will the standard of living go down again.

**Tags:** macroeconomics, microeconomics

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## 1 answers

### Answer by username_1 on 2022-06-01. Score: 3

First, of all it is really difficult to answer these sort of far fetched questions. Over time humanity is having more oil reserves (see graph below from Energy Institute), and there is no reason to suspect this trend will stop in next several decades and at that point probably most of the energy production will transfer from fossils to renewables. This is because we are finding new oil deposits and new ways of getting oil (e.g. shale/fracking) at a rate that means that amount of oil available for extraction still increases over time so rather than running out of oil we are continuously having more of it. Since [Hubbert (1971)](https://www.jstor.org/stable/24923117?casa_token=okjlRvZjOIcAAAAA:4Xd89CDybLEDa1c_u7EhRcioNLerrHguJuPI76NttBZk2fDII2jhIJGEha5SmX4wdxetGUlESZNKWnXMgCN47HX3-THid7BWv32kS7gvF0UeYtNJepr5) first formulated the scientific version of 'peak oil' idea people were claiming 'peak oil' is just around the corner every 10 or so years (e.g. see [Deming 2003](https://alarmism.watch/assets/sources/1bc9e6ab6af9dc74de145f1680ff1250.pdf)) or [Aleklet et al 2010](https://www.sciencedirect.com/science/article/abs/pii/S0301421509008519)). Most recently Shell in its [2008 report](https://www.shell.com/energy-and-innovation/the-energy-future/scenarios/new-lenses-on-the-future/earlier-scenarios.html) predicted peak oil and gas in 2020 which did not happen either.

Of course, that cannot go on indefinitely but it is a trend that lasted over 100 years and there is no indication it will not continue on for several more decades or even more. Even if we will ever get to the point where we hit true physical 'peak oil' at some unspecified future we will have few decades before we actually run out and increased price will give people incentive to conserve the remaining oil. Hence most likely we will run of the use before Earth itself ever runs out of oil. As a consequence many more modern studies say there will simply never be 'peak oil' in a sense that we would run out of oil but there will be peak for demand for oil in some future (see [Maugeri 2012](https://www.scirp.org/(S(lz5mqp453edsnp55rrgjct55))/reference/referencespapers.aspx?referenceid=1885906) or the newer Shell reports) and after that it will be simply phased out of use in most settings. To be fair some new papers still claim there will be peak oil (in sense we start run out of it) some time after 2035 (see EIA 2013), but I would not count on that prediction either since these peak oil predictions are always made assuming no virtually no technological change in our ability to extract and detect oil which is clearly unrealistic as history shows.

[![enter image description here](https://i.sstatic.net/wlsfs.png)](https://i.sstatic.net/wlsfs.png)

This being said if you want to entertain such hypothetical the extent of damage to the economy would depend mainly on:

* Share of energy and output more broadly produced using oil.
* Availability of substitutes.
* When the oil runs out (now damage would be several orders of magnitude bigger than 50 years from now).

Currently word-wide 31.21% energy is produced from oil and the share of energy production from oil (see graph from [Our World in Data](https://ourworldindata.org/grapher/oil-share-energy?tab=chart&country=%7EOWID_WRL) below)

[![enter image description here](https://i.sstatic.net/kO6dZ.jpg)](https://i.sstatic.net/kO6dZ.jpg)

However, oil is not only important for energy production, economy is actually bit more reliant on the oil. Currently the oil intensity of the world output is about 40% and this value was declining by about 0.8% per year for the last 50 years (see table below).

[![enter image description here](https://i.sstatic.net/1xtAz.png)](https://i.sstatic.net/1xtAz.png)

This implies if all oil would disappear today, and if we assume there are no substitutes for oil it would lead to global loss of GDP of about 40%. However, the newest cry wolf predictions put peak oil at some time after 2035, if we assume oil lasts only 10 years after peak (quite pessimistic) we would run out in 2045. Assuming the trend in decreasing oil intensity will continue at slower pace of 0.5% per year the oil intensity would be about 27% in 2045, so that would be about 27% loss of output at most pessimistic scenario I can think of (still assuming no substitutes).

Next, we have to consider if there are substitutes to oil. There are probably not substitutes for every function oil has in production but there are definitely substitutes when it comes to energy production (renewables, nuclear energy, natural gas, coal etc). Hence the 27% decline is not realistic. It is nearly impossible to estimate how easy it will be to substitute those other options for oil in 2045, but even if we assume low elasticity of substitution, the decline in output would be smaller. Elasticity of substitution also grows over time as people have some time to adjust. As a guesstimate I would say thanks to substitutes you could reduce the output loss even in worst case scenario by 2/5 at least, which would put it to around 16,2%.

This being said this is mostly speculation, there are no good ways how to make 25 year ahead accurate forecasts even when one uses rigorous models, the above was highly speculatory guesstimate based on some back of the envelope calculations so take them with grain of salt. Also that was based on quite gloomy assumptions about the *when* question. Most likely scenario is that there simply wont be any significant drop in output as the true peak oil is too much ahead in the future for oil to still matter too much for the economy.


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