Peak Oil, Energy Conservation and Other Nonsense

Via Metafilter, I see that even Hollywood is now jumping on the "Peak Oil" hysteria bandwagon. I could launch into a long tirade about why "peak oil" doom-and-gloom fantasists are talking a load of nonsense, but I'll confine myself to linking to this essay as well as this one: if "Peak Oil" types are so sure they know what they're talking about, why aren't they out there putting every last dime they have into hoarding oil? People who buy into this whole "peak oil" nonsense have no understanding of how oil reserves are booked or the significance of the "known" in "known oil reserves", nor do they have any faith whatsoever in human ingenuity. They are, in short, nothing but the Paul Ehrlichs, John K. Galbraiths and Lester Thurows of our time, false prophets who will go on being lionized by their ignorant admirers in perpetuity despite none of their prophecies ever coming to pass.

As for the contention that the finiteness of oil reserves or the current high oil prices mean that there's some sort of pressing need for an "energy policy", let me ask you this: if two banks were offering certificates of deposit, but one promised to pay 10% for the first 2 years and 12% for the next two, while the other offered 11% for 4 years straight, which would you choose? Or how about if, say, IBM offered two 20-year bonds, one paying 6% for the first 10 years and 8% for the last 10, but the other paying 7% for the entire period? I don't know any sensible person who'd take the former option as against the latter in either scenario, and yet this is analogous to the situation in which fans of "energy conservation policies" demand we all place ourselves, i.e., that we forego higher growth today for the promise of higher growth at some point in the distant future. Even if such a promise had any substance, it still wouldn't make sense from an economic viewpoint under all but the most implausible circumstances, e.g. the decline in energy-intensity of all industrial processes over the last 30 years somehow reversing itself, or energy's share of GDP suddenly zooming up, in contradiction to what actually happened even in the "Oil Shock" era.

In short, the desire for an "energy conservation policy" isn't motivated by economic rationality but by instinctive statism and an overconfidence in the superiority of planning over market forces which hasn't been tempered in the least by an iota of knowledge of the many failures of planning over the last century. There is an argument to be made for some sort of pollution tax on gasoline and coal consumption, but this has nothing whatsoever to do with the supposed "necessity" of government-imposed energy conservation, with "liberating" the United States from its dependence on "foreign oil" (a forlorn hope for such a fungible product in a world of unified markets), or the supposed threat posed by "Peak Oil."

Comments

[Andrew Reeves]

Most believers in Peak Oil aren't talking about a geological event, they're talking about an Apocalypse Sent to Punish the Wicked. The wicked in this case being the capitalist world. Trying to actually talk to such people is like trying to explain to a fundamentalist Xian of the Jack van Impe stripe that the U.N. might not be an all powerful Satanic organization.

OTOH, while there are plenty of options for transportation energy once the oil runs out (even if Fischer-Tropsch gasoline from coal doesn't feel very futuristic), the transition is going to be painful. It would not be a bad idea at all to at least have the state give enough of a nudge so that there is an alternative infrastructure in place before the transition is absolutely necessary.

[Abiola Lapite]

Well, I for one am willing to go on record as saying that oil will *never* run out: not only are vast stores of the stuff still extant in places like the tar sands of Canada, but at current oil prices nuclear energy is already economically self-sustaining, without the need for subsidies, and the knowledge that oil prices are likely to remain high for the extended future will both prompt more plants to be built (barring anti-nuclear obstructionism) and new research into better extraction methods. The average American car has a lifespan of 5 to at best 7 years, so even the incremental cost of a massive changeover from SUVs to more energy-efficient vehicles wouldn't be onerous.

The long and short of it is that I don't in fact believe that the government has any role whatsoever to play in energy policy. If profit-hungry investors can't get this issue right (and the experience of the last 100 years tells us they will), why should we expect any better from a bunch of stuffed shirts sitting on Capitol Hill? Remember the wonderful 1970s, when Nixon and Carter did such a marvellous job sorting out energy issues?

PS: You might want to read the folliowing.

http://www.resourceinvestor.com/pebble.asp?relid=12322

As I've said, this hysteria about the imminent depletion of oil has been out there for going on a century now, and it's going to be proven wrong today for the same reasons it's always been in the past. Subsidizing imaginary substitutes to oil and gas like ethanol is nothing but a waste of taxpayer money, while mandating ever higher fuel-efficiency standards is just a way to impoverish the populace for no good reason: forfeiting higher living standards today for the sake of events that might or (far more likely) might not occur decades in the future is pure madness.

[DW]

What about the long history of government investment in new technologies? That has generally been regarded as successful. But isn't it rather difficult to sort out the successes and failures of either the market on its own or of the involvment of government since it all gets tangled up?

And a somewhat different issue. If direct pollution taxes are a good idea but politically unachievable, might not govenment investment in new less polluting energy technologies be a second best?

[Andrew]

As I understand it, peak oil is a farther-off and more abstract event than the loss of spare pumping capacity - the idea being that as demand increases, eventually it runs up against capacity so that there is no buffer between what's currently being produced and what could be produced if need be. This makes severe oil shocks more likely even with tiny disruptions in supply, and it's this price instability which is damaging.

Re the CD analogy - surely it's a question of which interest rates correspond to reality? I mean, if it was a choice of bond A which offered 5% for 2 years v. bond B which offered 7% for 1 year then 2% for the next year, surely you'd take bond A. It seems to me that the idea behind peak oil is that this is the choice we're facing, not a 5% for 2 years v. 4% then 6% choice. They might be wrong about the facts, but the idea of lower growth rates today to gain higher growth rates tomorrow is not intrinsically ridiculous, it just depends on what those growth rates are.

[Abiola Lapite]

"What about the long history of government investment in new technologies? That has generally been regarded as successful."

Oh really? Care to name a few? What's become of all that past government investment in ethanol, solar energy and hybrid vehicles then?

"But isn't it rather difficult to sort out the successes and failures of either the market on its own or of the involvment of government since it all gets tangled up?"

Not in the least. Nixon and Carter fucked up the energy markets in ways any half-competent economist would have predicted, and Reagan's removal of their braindead policies rejuvenated the sector.

"If direct pollution taxes are a good idea but politically unachievable, might not govenment investment in new less polluting energy technologies be a second best?"

No. If you're trying to get people to pay the cost for something, you don't go and subsidize something else, you charge them for the thing they aren't paying for. It should not be any government's job to try to pick winners and losers by doling out taxpayer money to subsidize research private individuals and organizations are already actively engaged in.

[Abiola Lapite]

" the idea of lower growth rates today to gain higher growth rates tomorrow is not intrinsically ridiculous"

No, it IS in fact intrinsically ridiculous, as the only way the return on energy conservation could possibly justify the privations we're asked to undergo today would be if some absurdly farfetched scenario like the ones I mentioned played out, e.g., that the world somehow manages to forget the lessons of the past *and* ignore rising oil prices by dumping newer, more efficient industrial processes for older and less efficient ones. The point I'm trying to make is that "Peak Oil" hysteria is based on lunatic assumptions about the future structure of the world economy.

[Jim]

"Subsidizing imaginary substitutes to oil and gas like ethanol is nothing but a waste of taxpayer money.."

Oh, it's much more than that; it is a fat subsidy for farm state Senators and Congressmen, like the ethanol requirement that forces California drivers to buy a more polluting fuel than their own state laws would allow.

Another example of a government policy that accomplished nothing was the tax breaks that rewarded investors for installing windmill electric generators across California, with no requirement that they actually produce power, so now there are endless miles of dead windmills. It is very difficult to make laws that people can't get around.

[Abiola Lapite]

Andrew,

I'll also add that the further out we have to go to get the extra growth we're being asked to sacrifice for today, the larger (and therefore more unlikely) that growth boost will have to be, while the shorter the horizon required to see the supposed benefits, the more flagrantly the assumptions run into conflict with a world in which the futures markets fail to confirm the grim prophecies of the peak-oilers. Look at the December 2011 oil futures quotations from NYMEX and tell me that they look to be prophesying doom and gloom to you:

http://futures.tradingcharts.com/marketquotes/index.php3?market=CL
http://futures.tradingcharts.com/chart/CO/C1

What is it that the "Peak Oil" advocates know that the entirety of the world's oil traders don't, and why aren't they trading themselves if they're so sure of what they know?

[DW]

Computers, electronics more generally, aerospace, and in the energy field--nuclear.

In the future more oil will be coming from unstable places and less from dependable places like Norway. Also, new sources will be more environmentally destructive (i.e., tar sands).

If nothing else, it is worth having consumers realize that there is considerable risk in the energy future. A widespread attitude that the market will painlessly solve all the problems before they even arrive isn't any more realistic than fear that we will soon be back in the Dark Ages. There are complex problems here, it is worth having a debate even if it is--as usual--an often off the mark debate.

[Abiola Lapite]

"If nothing else, it is worth having consumers realize that there is considerable risk in the energy future."

The price system will do more there than all the debate in the world will ever accomplish; as I noted in the previous discussion, the high oil prices in September did in fact end up driving consumption downwards.

[carib]

Theres a difference between the economic argument wrt to the availability of oil and the military perspective, which is that most of the known reserves are in regions of the world that are politically unstable. IMO, nobody sensible would guarantee that Saudi Arabia, Nigeria, Russia or Venezuela will remain as reliable long term suppliers of oil to the US. Any government which isn't thinking of alternatives to just relying on those countries to continue supplying oil is a government that is out to lunch.

[dsquared]

wow that's the most misleading summary of "The New Industrial State" I've ever seen.

Pop quiz, hotshot; what was Galbraith' view on antitrust policy?

[Abiola Lapite]

"nobody sensible would guarantee that Saudi Arabia, Nigeria, Russia or Venezuela will remain as reliable long term suppliers of oil to the US."

They have to supply it to *somebody*, and in the end that is all that matters, as oil is fungible; even if importers in the United States never bought a drop of oil from any of the countries you list, Americans would *still* face the full brunt of any spikes in oil prices - this is a straightforward consequence of the "law of one price."

To get to the point, the "military perspective" adds nothing except an excuse for paranoia-inspired imperialistic adventures of the sort which led to the great wars of the first half of the 20th century. There is absolutely no need to be concerned about the stability or lack thereof of oil producers, just as long as they're willing to pump the stuff out of the ground to sell it to *someone*, no matter who.

[Abiola Lapite]

"Pop quiz, hotshot; what was Galbraith' view on antitrust policy?"

Still trolling, I see. Don't expect me to respond to you as frankly, you don't deserve it: I've flipped the "Bozo Bit" for Dsquared.

[DW]

"just as long as they're willing to pump the stuff..."

Ahh, that's the nub. Of course it is silly to worry about a boycott on just sales to the US. But I wonder about little things like civil wars where nobody in the country is pumping even if they wish they could.

It is sudden worldwide shortages that are the problem. Such shortages would eventually go away, but they could cause big damage first.

[Jim]

"To get to the point, the "military perspective" adds nothing except an excuse for paranoia-inspired imperialistic adventures of the sort which led to the great wars of the first half of the 20th century. "

And they are a very blunt weapon anyway. Some kind of patrolling of sea lanes is one thing; going in with a corps or two to "sort things out" is something entirely different, and pretty hard to hide and pretty hard to accomplish before someone who wants to take to world back to the seventh century anyway just pops a few charges in the right places and halts production altogether. Never happen.

[dsquared]

[Shorter Dsquared: "I'm right and you're wrong because, well, just because - so there! You can't have read the books you claim to because you don't agree with me (what's that you say about my not providing any actual evidence or facts? that stuff's for little people!) And you got mad at my being condescending to you so you're obviously wrong!"]

[As I said, bozo bit flipped. Lump Jagdish Bhagwati along with me as another person ignorant of the remarkable insights from Galbraith which are obvious only to brilliant souls like yourself.

http://www.nytimes.com/books/first/b/bhagwati-stream.html?pagewanted=all&position=

You're full of shit, condescending as all hell, and as dishonest as they come. - A.L.]

[Julian Elson]

In theory, you sound about right, but actual oil prices have been unpredictable and volatile. Oil should be rising slowly, at about the interest rate, adjusted for changes in technology which allow access to new stocks and such. In truth, though, its price has been volatile and difficult to predict. If the migration to widespread use of oil substitutes requires substantial long-term investment (in things like Fischer-Tropsch coal liquefication, biodiesel, natural gas-powered cars, solar, wind, nuclear, etc), then investors might easily be confused by whether $60 a barrel oil is a blip, soon to be followed by a return to $30 a barrel oil, or it's a permenantly higher plateau reflecting the long-term scarcity of oil. Given that uncertainty, it's quite possible that they won't start investing until five years after they "should" have (or, alternatively, will start investing too soon).

None of this suggests, of course, that politicians have some special knowledge of oil markets that investors lack. It's entirely possible, of course, that both Washington and Wall Street will totally muck up the transition (which is, pretty much, what I expect: I don't expect peak oil to be a Mad Max-style collapse of civilization, but I think we'll suffer a decade or so of our economy being out of sync with our resources, with resulting higher NAIRU, bear markets, etc. Call it a hunch, and feel free to laugh copiously at me in 30 years when I turn out to be wrong.).

[DW]

Being laughed at wouldn't be so painful.

[Abiola Lapite]

"I think we'll suffer a decade or so of our economy being out of sync with our resources, with resulting higher NAIRU, bear markets, etc."

Even if it turns out to be so, the benefits of higher growth now are likely to heavily outweigh any possible lessening of pain to be had from "energy conservation": better to grow at 4% per annum for 25 years and then suffer 5 years of 3% growth than to "enjoy" 30 continuous years of 3.5% increases - and here I'm being generous, as there's no good reason why American "conservation" measures shouldn't just mean cheaper oil and therefore even greater consumption by countries like China and India.

[dsquared]

[Thou shalt not lie. - A.L.]

[Simstim]

Hey, it's the "markets will save us" reply is it? The problem is, the market doesn't have the information to make proper decisions, in particular, no-one actually knows at the moment how much oil there is out there, either already-found or prospective.

[Jim]

Nor does anybody else have that information, including the philosopher kings in the government, so why not let the people with the biggest stake in this, millions and millions of us little people, make millions and millions of little decisions, that may end up averaging into something like a real solution, the way lots of little mutations in lots of lineages amount to an adaptive adaptation for the whole species?

[dsquared]

Perhaps some passers-by on the web will be interested to know that Galbraith was one of the few Western economists to spot that Gorbachev's perestroika was unsustainable and call for a further move to a fully capitalist system in his 1988 book "Capitalism, Communism and Coexistence", jointly authored with Stanislav Menshikov. Also that "planning" in "Reason" magazine's wholly dishonest summary of "The New Industrial State" is presented by them in a context in which they imply that Galbraith was talking about state planning, when it is actually quite clear that he was referring to corporate planning; for example, Microsoft's management of consumers' upgrade paths.

To be honest, I'm surprised that Reason were making a big deal out of "predictions that turned out wrong" in the first place, since their raison d'etre is to help sell the book "Road to Serfdom", the central prediction of which was that the postwar European welfare state would inevitably lead to totalitarian government.

[Jim]

"postwar European welfare state would inevitably lead to totalitarian government."

The inevitablity part is the only weak link in that prediction. It's not as if Reason is some lone voice crying in the wilderness. The EU ought to just break clean and put Louis XIV's portrait on the flag, or maybe bag the stars and replace them with a big sun.