Peak What?

The Sunday Magazine in the New York Times has climbed aboard the “peak oil” donkey cart. And been whacked right off by Steven Levitt the Freakonimist.

The onset of triple-digit prices might seem a blessing for the Saudis — they would receive greater amounts of money for their increasingly scarce oil. But one popular misunderstanding about the Saudis — and about OPEC in general — is that high prices, no matter how high, are to their benefit.
Although oil costing more than $60 a barrel hasn’t caused a global recession, that could still happen: it can take a while for high prices to have their ruinous impact. And the higher above $60 that prices rise, the more likely a recession will become. High oil prices are inflationary; they raise the cost of virtually everything — from gasoline to jet fuel to plastics and fertilizers — and that means people buy less and travel less, which means a drop-off in economic activity. So after a brief windfall for producers, oil prices would slide as recession sets in and once-voracious economies slow down, using less oil. Prices have collapsed before, and not so long ago: in 1998, oil fell to $10 a barrel after an untimely increase in OPEC production and a reduction in demand from Asia, which was suffering through a financial crash.

Oops, there goes the whole peak oil argument. When the price rises, demand falls, and oil prices slide. What happened to the “end of the world as we know it?” Now we are back to $10 a barrel oil. Without realizing it, the author just invoked basic economics to invalidate the entire premise of the article!
freakonomics

I happen to think that higher oil prices are a good thing simply because they will tend to reduce the viability of suburbs which, and here is my only point of agreement with James Kunstler, I believe are an abomination. However, as I have written before, they are also self correcting.

Sustained per barrel oil prices of over $60.00 - which I agree with Levitt are not likely in the medium term - will have the effect of providing huge incentives to consumers to demand smaller, more efficient cars and to use those cars less. They will also provide incentives for a whole range of “bright, green” technology. Which you can read about at World Changing.

There is no question at all that it is in the West’s interests to cease its dependency on cheap oil from the Middle East. And there is little doubt that to kick the chep oil habit, a price shock is a very useful thing. In a perfect world oil prices will go over $60.00 and stay there long enough for a whole string of energy technologies to come online. At which point the price can crater and the Saudis and their ilk can return to camels, goats and Allah. They will not be missed.

Written by jay on August 22nd, 2005 with 7 comments.
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Get your own gravatar by visiting gravatar.com Sean
#1. August 22nd, 2005, at 9:08 PM.

Jay, you know what the difference is between being poor in the city and being poor in the country? City folks eat from the Food Bank while country folks eat well from their garden (we’re currently building a chicken coop and we’ll have sheep next year, too).

Living in the suburbs with a garden plot seems rather more intelligent to me than living in a box in a walkup and having to stand in a soup line when the inevitable economic downturn occurs.

I do agree with you that the Saudis won’t be missed. I will be happy to send a shipment of pork rinds their way so that the poor dears won’t starve.

Get your own gravatar by visiting gravatar.com Gareth Igloliorte
#2. August 22nd, 2005, at 10:22 PM.

I’ve never understood your aversion to suburbia Jay.

People like peace and quiet. People like space. The suburbs provide both at a decent cost, the city doesn’t.

Higher gas will cause more people to buy smaller cars I agree, I don’t think it will cause them to move into the city though. The economics aren’t there just on the cost of housing alone.

Awhile ago I posted a long discussion regarding oil on your old site (the new one rocks by the way) and I won’t repeat it here, but its safe to say that even with advancements in energy, we are going to be a (cheap) hydrocarbon economy for a good while yet.

Get your own gravatar by visiting gravatar.com Andrew burton
#3. August 23rd, 2005, at 12:32 AM.

Now if only the green idiots (as opposed to the smart greens) will start to wise up to the benefits of nuclear power.
Had lunch last week with a friend who is a major player in the energy industry, he is laughing all the way to the bank with the current rise in energy costs. His assesment? The fact that this country (the US) is not running on nuclear power is criminal. And it’s making his fortune even bigger.

Get your own gravatar by visiting gravatar.com Matt McIntosh
#4. August 23rd, 2005, at 12:53 AM.

There is no question at all that it is in the West’s interests to cease its dependency on cheap oil from the Middle East.”

Jay, you just failed Oil Econ 101. For practical purposes there is no such thing as “Middle Eastern Oil”. Oil is fungible, i.e. one barrel is substitutable for any other. Saudi oil is somewhat cheaper to extract, but that means that if the west reduced its oil consumption, the impact would be felt more by other oil producers than it would by the Saudis. So no, don’t go looking for reduction of western oild demand as a panacea.

Get your own gravatar by visiting gravatar.com jay
#5. August 23rd, 2005, at 1:19 AM.

Andrew, there is some very interesting work going on outside America on very safe, very efficient, reactors. Pebble bed technology is set to come on line in China to the tune of 30 gigawatts of power. But you pretty much have when you refer to the idiot greens; however, even there the greenies are spliting.

Which is worse? Global warming or a minimal possibility of a nuclear accident and a de minimus fuel disposal risk. While it is fun to see greenie brains having their own private China Syndrome confronted with these contradictions in green theology, the more intelligent can see the difference between irreversible global catastrophy and localized accidents. (The rest of us are sceptical about the possibility of eithe.)

Gareth, my aversion to suburbia lies in the fact that there is, to quote Gertrude Stein on Oakland, “no there there”. While peace and quiet are glorious, a culture, a civilization needs the human creativitiy sparked by real cities and towns. A suburb is neither a city or a town.

My objection to suburbia is economic and ecological - and yes, though I have no time for the green idiots I care quite deeply about ecology. The creation of a suburb almost always entails large scale, subsidized, road construction. It eats up everything from salmon streams to farmers’ fields. It creates an entirely car dependent world beacuse it is planned rather than allowed to follow the needs of its inhabitants.

While there are a few rather beautiful suburban areas - almost all of them pre-WWII and almost all designed as small village/towns rather than the housing around a strip mall, outside the functionally gated communities of the “New Urbanism” virtually none have been built since the War.

Sean, I wrote a piece on Kunster’s new book, The Long Emergency where I suggested that folks like Kunstner have a certain frisson at the happy thought of a suburban soccer mom raising turnips in her front yard…And its even more exciting if she’s doing it at gunpoint. And you do have a point. But the ‘burbs and the people who live in them would not revert to farmland and farmers; instead they would simply be in the way of people who could actually grow a crop.

Get your own gravatar by visiting gravatar.com jay
#6. August 23rd, 2005, at 1:30 AM.

Matt, I am well aware of the fungibility of oil - though natural gas because of infra-structure is a different case - but a reduction in overall demand in the West will tend to leave the Saudis et al in the sand. Price is largely determined by marginal demand and any reduction at the margin will tend to drop price, fast.

Only in the West, and really only in America, is there much room for demand reduction at the margin. The truth is that soccer mums (when not hoeing vegetables) do not need to drive their kids to twelve different team sports and lessons every week. The kids can, gasp, ride their bikes. As gas prices rise that is exactly what will happen along with the use of assorted technologies to replace IC engines.

Get your own gravatar by visiting gravatar.com Matt McIntosh
#7. August 23rd, 2005, at 3:05 AM.

I’m all in favour of reducing oil consumption when it makes economic sense to do so, and you’re right that fully developed nations are the only ones that are capable of making this adjustment at the moment. I’m just not sanguine that anything we could reasonably do would be enough to bankrupt the Saudis anytime within the next couple of decades. As I said, they’d actually be the last ones to feel the effect since their oil is cheaper to extract than it is in most other countries, so lowering our own demand may not lower Saudi oil exports very much, if at all (especially with China and India’s demand for oil still increasing).

The Saudis were financing madrassas when oil was $10 a barrel, and they’ll keep financing them when it goes back down*. If you seriously want to stop them from funding terrorism, start doing targetted assassinations on terrorism financiers. That’s maximum bang for your buck.

*And it will go down. The thing to remember is that the oil market is inelastic, so it has a lag time measured in years because of how long it takes to revamp the infrastructure and bring new sources online, and for other industries to adjust. I’ll go on record as predicting a continued slow rise followed by a significant drop in oil prices starting about two years from now.

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