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The Fake Energy Crisis

Posted By Russ Roberts On October 17, 2005 @ 1:12 pm In Energy,Media | Comments Disabled

Twice in the last week I’ve seen mention of a new "crisis" in energy markets.  The crisis?  We may have reached the peak in oil production, meaning that in future years, the amount of oil available will dwindle.  This story is the lead story on today’s front page of USA Today [1].  The headline:

Debate Brews: Has Oil Production Peaked?

The story begins:

Almost since the dawn of the oil age, people have worried about the
taps running dry. So far, the worrywarts have been wrong. Oil men from
John D. Rockefeller to T. Boone Pickens always manage to find new
gushers.

But now, a vocal minority of experts says world oil production is at or
near its peak. Existing wells are tiring. New discoveries have
disappointed for a decade. And standard assessments of what remains in
the biggest reservoirs in the Middle East, they argue, are little more
than guesses.

The first expert is an investment banker:

"There isn’t a middle argument. It’s a finite resource. The only debate
should be over when we peak," says Matthew Simmons, a Houston
investment banker and author of a new book that questions Saudi
Arabia’s oil reserves.

In case you think this is no big deal, think again:

If the "peak oil" advocates are correct,
however, today’s transient shortages and high prices will soon become a
permanent way of life. Just as individual oil fields inevitably reach a
point at which it gets harder and more expensive to extract the oil
before output declines, global oil production is about to crest, they
say. Since 2000, the cost of finding and developing new sources of oil
has risen about 15% annually, according to the John S. Herold
consulting firm.

As global demand rises, American consumers will
find themselves in a bidding war with others around the world for
scarce oil supplies. That will send prices of gasoline, heating oil and
all petroleum-related products soaring.

"The least-bad scenario is a hard landing,
global recession worse than the 1930s," says Kenneth Deffeyes, a
Princeton University professor emeritus of geosciences. "The worst-case
borrows from the Four Horsemen of the Apocalypse: war, famine,
pestilence and death."

The Four Horsemen of the Apocalypse?  War, famine, pestilence and death?  They ought to put this quote in the next OED under "hyperbole."  And I thought this guy [2] was trying to really scare us (Ht: Alan Nemes) but it turns out he’s a moderate.

This fear that we’re running out of oil or some other key resource is a steady feature of the worrying class.  The worriers have a bad track record.  I understand that just because you’re paranoid it doesn’t mean people aren’t chasing you and just because the worriers have always been wrong doesn’t mean this won’t be the time they get it right.  But I still sleep well.

There’s nothing inherently worrisome about a peak in oil production.  Such imagery preys on a quick emotional response–before the peak, we’re going up.  After the peak, it’s all downhill.  But there’s nothing significant about a world where we produce and consume less oil next year than this year.  If that’s because remaining oil stocks are increasingly costly to bring up from the ground, that increases the incentive to economize on oil usage and find cheaper ways to get it out of the ground.  That mitigates the harm.

The worriers like to say that we’ve had cheap oil in the past and now we’re going to have expensive oil in the future.  They make it sound like it’s a geophysical relationship between production and prices.  As long as we’re finding more oil, oil is cheap.  When we’re past the peak, it’ll be expensive.  Cheap oil means the good life.  Expensive oil means misery.  But prices aren’t high or low.  They move around.  They are high or low relative to other prices.  If oil becomes increasingly scarce, we’ll do a thousand, (more like a billion) things to find other ways of doing what oil does.

If it happened tomorrow, if tomorrow, there were no gas in the pumps and this persisted forever, it would be a very unpleasant adjustment.  It isn’t going to happen tomorrow.  If it happens gradually over the next 30 or 50 or 100 years, it will have little or no impact on our overall well-being.

And wasn’t it supposed to be good not to rely on fossil fuels?  Why all this new worrying?  I think the worriers are trying to exploit the recent spike in gasoline prices to push public policy in directions that won’t happen otherwise.

Meanwhile, read Julian Simon [3]. Remember that human creativity is the ultimate resource.  Remember that the geophysicists don’t understand prices.  Sleep well, despite the worriers’ desire to keep you tossing and turning.  And if you hear the sound of hoofbeats in the still small spaces of the night, it’s probably just a horse.

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URLs in this post:

[1] USA Today: http://www.usatoday.com/money/industries/energy/2005-10-16-oil-1a-cover-usat_x.htm

[2] this guy: http://www.rollingstone.com/news/story/_/id/7203633?rnd=1128977870714&rnd=1129061456116&has-player=true&version=6.0.12.1040

[3] Julian Simon: http://www.amazon.com/exec/obidos/tg/detail/-/0691003815/qid=1129568700/sr=8-1/ref=pd_bbs_1/102-3805587-8967316?v=glance&s=books&n=507846/invisiblehear-20

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