The Effect of Substitutes

I have the utmost in respect for the great site, The Oil Drum, which is dedicated to the “peak oil” hypothesis so it’s a little embarrassing for me to point out an error in a post over there. In a recent post there the rise and fall in the production of whale oil in the 19th century was proposed as a model for what’s likely to happen to petroleum. The following graphic was shown:

19th century whale oil production

Click on the image for a larger version.,

I think they’re right but probably not in the way they may think. The use of whale oil emphatically did not decline because of resource depletion but because of substitution. The substitute was kerosene.

Kerosene was first described by the Arab al-Razi, a resident of Baghdad. The Arabs were great distillers, sort of a delicious irony. Following an improvement in the method for producing kerosone, In 1850 the first commercial company to market kerosene was established. In 1856 a method of producing kerosene from seep oil, essentially a waste product was developed and kerosene became the primary fuel for lighting in Europe and the United States with amazing rapidity.

Whale oil lampThis is a subject I happen to know a little about. As I’ve mentioned before I collect pressed glass from the period in question (1840-1870). At right is a whale oil lamp from my collection and one picks up information about things as an aid to identifying and dating various objects. After 1856, as kerosene became commercially available (and cheap) practically everywhere, whale oil lamps disappeared from production virtually overnight, just as candlesticks had before them when oil lighting came into vogue. The kerosene lamps that succeeded them are dramatically different in design.

Note the points of inflection in the graphs above. They correspond with extraordinary precision to the adoption of substitutes, kerosene for whale oil and steel for whale bone in corsets (the primary commercial reasons behind whaling). Steel became cheaper after the Bessemer process was developed, c. 1855.

So, yes, production of a commodity can rise to dizzying heights and drop meteorically but resource depletion isn’t the only explanation for the drop in production. Substitution can cause a drop in demand for riskier and intrinsically more expensive commodities. And, importantly, as the price of a commodity rises the incentives for finding substitutes rise, too.

What does that portend for oil producers? Nothing particularly catastrophic, I suspect. Oil has lots of uses. If production slows and as prices rise it will increasingly be relegated away from mass consumption and towards specialty and luxury goods. I remember attending a speech given by Jordan’s King Hussein forty years ago. In his speech he said that oil was too valuable to burn. I think that’ll be about right.

1 comment… add one
  • PD Shaw Link

    What a coincidence. I read this entry yesterday morning and then later that day read this line in a book I’m reading: “The forty years beginning in 1815 represented the golden age for the American whaling industry; its fleet peaked at mid-century, just before the new petroleum industry began to replace whale oil.” Daniel Walker Howe, What Hath God Wrought: The Transformation of America, 1815 – 1848.

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