It is unfortunate that the debate over when and whether world oil production will peak has taken on the character of a grudge match. Underlying the debate is a grudge against those who believe the marketplace cannot solve all of our problems, especially problems which stem from resource depletion.
On one side are a group of retired petroleum geologists and academics including Colin Campbell, Jean LaHerrere and Kenneth Deffeyes who have provided extensive research on world peak oil production and its timing. On the other side are prominent energy consultants such as Michael Lynch and Daniel Yergin (Cambridge Energy Research Associates) who claim that energy supplies are ample and that any energy transition is far away and will be smooth.
Campbell, LaHerrere and Deffeyes have little to gain from their prognostications. Their concern about oil depletion has been a decades long one, and they are all retired now. Lynch and Yergin are active consultants who make their livelihood projecting energy supply and prices. To be fair, some who are sounding the alarm about peak oil are consultants and investment bankers and managers. The most prominent among them is Matthew Simmons who insists that it would actually be better for his business if he didn't ruffle so many feathers with his outspoken warnings. Both sides then have every incentive to get their forecasts right.
Is it really just a case of bulls and bears espousing their opinions about the direction of the petroleum markets? Or does the disagreement stem from something more basic? I think the answer can be found, in part, in Yergin's paean to free-market ideology, "Commanding Heights." The book traces the transition away from government control of the world's economies to the laissez-faire ideology of today. There is no doubt where Yergin stands. Peak oil critics such as Yergin and Lynch believe the marketplace can solve all the world's ills. What they do not explain is why, with their preferred free-market ideology now ascendant practically everywhere, the marketplace is only making global warming, soil erosion, deforestation, and water depletion worse. They glide around all questions of ecological damage and focus on economic growth alone. They are cornucopians who cannot fathom the possibility of limits to growth.
When such cornucopians are asked how the marketplace would handle a hypothetical peak in world oil production in the next five years, they respond that there will be no peak. Do they have perfect knowledge of the future? Lynch's crystal ball has been off recently. In April 2004, he predicted $25 a barrel oil by the summer of 2004. In 2001 Yergin's organization predicted growing supplies of natural gas for the United States through 2005. The reality has been very different as Yergin admitted to Congress last year.
So why do these cornucopians behave as if they have been the recipients of infallible whisperings from the goddess of marketplace? Because they have no answer to an imminent oil peak, save perhaps that the marketplace would be "self-correcting" by "destroying demand." That's a polite way of saying a lot of people would have to do without, and for many that could mean doing without the very necessities of life: food, water, and heat. In short, Lynch and Yergin seem to be saying that because the marketplace would not produce a salutary outcome, such an outcome must be impossible.
A pragmatic person might admit that no one has perfect knowledge of oil supplies or of the future. He or she might try to construct scenarios from very favorable to very unfavorable to discern the risks. And, then such a person might suggest ways to mitigate those risks. Such a person (actually three people) has done just that for the U. S. Department of Energy.
The Department of Energy study is the result of an open, pragmatic mind, and its message is not all that sanguine: Even if the peak is 20 years away, we would have to start a crash program now to make up for the loss of liquid fuels after the peak. Given what's at stake, is it really wise to rely on whispers from the goddess of the marketplace into the ears of the chosen ones?
UPDATE: An anonymous commenter brings our attention to Richard Heinberg's explanation of an oil depletion protocol designed to reduce oil consumption and encourage energy savings. Such a protocol would use both non-market and market mechanisms in a pragmatic approach to heading off the substantial disruptions that are sure to follow an oil peak.
Godess is a good way to phrase it because too many have faith based belief in the choices made by the market. They deny the undeniable failures of markets, like in tragedy of the commons situations. Look at what the markets have done to our oceans: http://www.sciencedaily.com/releases/2003/05/030515075848.htm
ReplyDeleteThank you for this posting, Kurt, and for the links to several other important documents. You've provided a very good 'short course' in peak oil and its implications. Coupled with R. Heinberg's new newsletter (on a proposed international protocol for handling depletion), it makes for encouraging reading!
ReplyDeleteI also concur. Given that after the peak, we'll still have plenty of oil, I have come to believe that raising awareness is very important - it raises the chances that the globe might share.
ReplyDeleteMarkets, by themselves, do not share, they sequester resources for those who have capital.
People using the "free market" argument can go pound sand.
ReplyDeleteThere is NOT a 'free market' for oil. Oil is backed by wacky tax laws, a money structure that is fiat, and force of arms.
Hardly a free market. It is a market built on sand.
Peak oil has caused me to study economics, which I never had much of an interest in. So it has expanded my horizons.
ReplyDeleteThat being said, I have learned to hate economists. I think they are deluded, as deluded as advocates of table tapping, leeches, and freudian psychoanalysis, from the not-too-distant past.
This quote by skeptic steven bratman sums up the problem well:
"If the hard sciences are problematic, one wonders whether there is any rational reason to favor any conclusions drawn by the soft sciences. Consider economics. An economy is a complex system with multiple interlocking variables and a great range of natural variation, much like a human body. Because it isn't possible to change just one variable in an economy, nor to try an experiment twice by starting an identical society under new rules, economic analysis is really the equivalent of observational evidence (economic records) combined with plausible reasoning (an economic model). In medicine we have seen that observational evidence combined with plausible reasoning can lead to conclusions that are the exact opposite of truth." [!]
The possibility that the product produced might be impossible to produce one day because of shortages is never an assumption of the free market. On the other hand, we should not mess with the market to the extent that it produces high prices. Higher prices may never give us sufficient alternative sources, but, in the absence of rationing or mandatory conservation measures, it is crucial to send the signal to the consumer that they need to change their ways. As far as the producer of oil goes, the signal of higher prices will only be effective if the producer believes that resources are to be found or that additional drilling will be covered by the permanently high prices. If the producer fears he will be burned by future lower prices, he may just keep the cash, raise salaries, dividents, buy back stock, etc.
ReplyDeleteSo you see, the market works perfectly, except when it doesn't.