Talk of "peak oil" and "running out of oil" concerns only cheap, high quality oil. Cheap oil may peak by 2010, that's a big reason the price has now gone up to the price of expensive oil. We have already suffered much of the economic impact of running out of cheap oil—and survivied.

The world has not collapsed—billions of people are not dying. High oil prices hurt, but even at $100/barrel, the world economy would not collapse. But the current level of $70 per barrel is enough to bring lots of new resources into the market. At that price you can turn coal into gasoline.

1. At higher prices, lots of oil can be made from tar sand, oil shale, coal, etc.

2. Even without this, the market would prevent a sudden smashup.

First, the easy one; there's lots of fossil for gasoline. The Germans ran mostly on gasoline made from coal during WWII. We are better at converting coal to oil today. There is enough coal to last a couple of hundred years. Long before people give up cars, or starve to death, we will make gasoline from coal.

Why hasn't this happened? Because the price of oil has not stayed high for long enough, and because there is still enough cheap oil. Investment in alternative sources of gasoline started back in the late 1970's when the price spiked for a while.  But it soon came down and stayed down for 25 years and killed those projects. Investors will not invest again until they are quite sure the price will stay up. But once we run out of cheap oil it will definitely stay up, and investors will build plants to convert coal to oil.

Even now tar sands production in Alberta is going gang busters.  It's a bit cheaper than converting coal to oil and oil prices have been high enough long enough for that to take off. Alberta has enough recoverable oil from tar sands to equal Saudi Arabia in volume of oil. It just costs more and makes a much bigger mess.

How high will the price get? Demand for gasoline responds to price, but not very quickly. If there is a sudden shortage of supply, people get desperate, are willing to pay a lot, and the price spikes. Consequently the price will bounce around from say 60% too high to 20% too low. But since gasoline can be made from coal for the equivalent of about $40 per barrel, it is unlikely that we will see prices averaging $100/barrel (in 2000 dollars) for many years to come, perhaps not for over a century.

Even if there were no expensive source of gasoline, we would not run out. How is this possible? Say there were just enough oil to sustain the present level of oil consumption for 50 years, and once that was used up, there would be no more oil and no way to make any from coal, or distill it from tar sands. Wouldn't we just use it all up and run out, and the economy would collapse?

Nope. People are not that dumb. The oil traders think about how fast we are running out all the time, and how to profit from it. They are greedy. The geologists are not quite so greedy, which is a good thing, but they need to learn something from the traders.

Say the world was going to run out of oil in 2050. By 2049, the geologists would have this figured out. What would the traders do? They would buy all the oil they could and hold onto it until 2051. Because with the world totally out of oil except for their stash, it would be worth a fortune--probably $50,000 per barrel. People would pay just to see it, and the super rich would pay a fortune to show off driving their fancy cars when the world is out of oil.

This is all a bit silly, but it shows the basic reason we can't run out. The closer we get to running out, the more the traders will hoard oil and wait for the price to go higher. Their hoarding prevents us from running out. But their hoarding causes shortages ahead of time. These shortages won't stop all oil use, just slow it down and drive the price up.

Oil literally costs too much for the world to use it up. Now here's the tricky part: how fast will the price go up? Will it go up slowly till it gets to $100 and then shoot up to $1000 the next year? No, because the traders would see this coming and buy lots of oil and drive the price up before it did that. The theory of price is very circular, but that doesn't mean there is no answer. It means you have to be good at math to find the answer.

The answer was found in the 1930s by Hottelling. Unfortunately, the math is calculus, but not first or second year calculus, it's third year--so I'm not going to explain it to you. But the answer is simple. All those greedy traders, who will forever watch for peak oil so they can buy the oil before the other traders do, will prevent any huge and sudden increase. There will be sudden ups and downs, but the average will increase forever at only about the rate of interest, only about 10% per year, and we will never completely run out.

As the price goes up, two things happen. We use less gasoline and we produce more from tar and coal. Once coal becomes economical as a source of gasoline, it will hold the price of oil down to that level. The result will be that we will run out of cheap oil because its price will not go up as it would if it were the only source of gasoline. Then we will be left with only coal, tar sands and other expensive sources.

Unfortunately, both have a higher carbon content and both take more energy to produce. So we will keep using more and more energy as the population of the world grows and gets richer and CO2 will increase even faster than with good cheap oil.