The problem is not that fossil fuels are costing more money, but that they are costing more energy.
As the section of the economy devoted to extracting fossil fuels consumes more of the yield of fossil fuels, there is less left for consumption, to run the rest of the economy. Now it's quite true that much of our current economy is low-value, but the fact remains the the economy of the future is going to be structurally different and will have less surplus over subsistence. As renewable energy becomes more important and fossil fuels less available and more expensive, stationary uses of energy will have an advantage over transportation, which in turn will have implications for economic scale, including the scope of international trade. This economist seems never to have heard of "net energy", but he will. It's a typical fantasy of neoclassical economists that economics trumps physics. Don't believe it. Douglas Woodard St. Catharines, Ontario, Canada On Sun, 21 Aug 2005, robert luis rabello wrote: > > > My sister, the stockbroker, sent this message to me. I thought I'd > post it here for comment. > > > <http://www.freakonomics.com/blog.php> > > > Sunday, August 21, 2005 > > > "Peak Oil:" Welcome to the media's new version of shark attacks > > The cover story > <http://www.nytimes.com/2005/08/21/magazine/21OIL.html>of the New York > Times Sunday Magazine written by Peter Maass is about "Peak Oil." The > idea behind "peak oil" is that the world has been on a path of > increasing oil production for many years, and now we are about to peak > and go into a situation where there are dwindling reserves, leading to > triple-digit prices for a barrel of oil, an unparalleled worldwide > depression, and as one web page > <http://www.lifeaftertheoilcrash.net/>puts it, "Civilization as we know > it is coming to an end soon." > > One might think that doomsday proponents would be chastened by the long > history of people of their ilk being wrong: Nostradamus, Malthus, Paul > Ehrlich, etc. Clearly they are not. > > What most of these doomsday scenarios have gotten wrong is the > fundamental idea of economics: people respond to incentives. If the > price of a good goes up, people demand less of it, the companies that > make it figure out how to make more of it, and everyone tries to figure > out how to produce substitutes for it. Add to that the march of > technological innovation (like the green revolution, birth control, > etc.). The end result: markets figure out how to deal with problems of > supply and demand. > > Which is exactly the situation with oil right now. I don't know much > about world oil reserves. I'm not even necessarily arguing with their > facts about how much the output from existing oil fields is going to > decline, or that world demand for oil is increasing. But these changes > in supply and demand are slow and gradual -- a few percent each year. > Markets have a way with dealing with situations like this: prices rise a > little bit. That is not a catastrophe, it is a message that some things > that used to be worth doing at low oil prices are no longer worth doing. > Some people will switch from SUVs to hybrids, for instance. Maybe we'll > be willing to build some nuclear power plants, or it will become worth > it to put solar panels on more houses. > > The NY Times article totally flubs the economics time and again. Here is > one example from the article: The author writes: > > The consequences of an actual shortfall of supply would be immense. If > consumption begins to exceed production by even a small amount, the > price of a barrel of oil could soar to triple-digit levels. This, in > turn, could bring on a global recession, a result of exorbitant prices > for transport fuels and for products that rely on petrochemicals -- > which is to say, almost every product on the market. The impact on the > American way of life would be profound: cars cannot be propelled by > roof-borne windmills. The suburban and exurban lifestyles, hinged to > two-car families and constant trips to work, school and Wal-Mart, might > become unaffordable or, if gas rationing is imposed, impossible. > Carpools would be the least imposing of many inconveniences; the cost of > home heating would soar -- assuming, of course, that climate-controlled > habitats do not become just a fond memory. > > If oil prices rise, consumers of oil will be (a little) worse off. But, > we are talking about needing to cut demand by a few percent a year. That > doesn't mean putting windmills on cars, it means cutting out a few low > value trips. It doesn't mean abandoning North Dakota, it means keeping > the thermostat a degree or two cooler in the winter. > > A little later, the author writes > > 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! > > > Just for good measure, he goes on to write: > > High prices can have another unfortunate effect for producers. When > crude costs $10 a barrel or even $30 a barrel, alternative fuels are > prohibitively expensive. For example, Canada has vast amounts of tar > sands that can be rendered into heavy oil, but the cost of doing so is > quite high. Yet those tar sands and other alternatives, like bioethanol, > hydrogen fuel cells and liquid fuel from natural gas or coal, become > economically viable as the going rate for a barrel rises past, say, $40 > or more, especially if consuming governments choose to offer their own > incentives or subsidies. So even if high prices don't cause a recession, > the Saudis risk losing market share to rivals into whose > nonfundamentalist hands Americans would much prefer to channel their > energy dollars. > > As he notes, high prices lead people to develop substitutes. Which is > exactly why we don't need to panic over peak oil in the first place. > > So why do I compare peak oil to shark attacks? It is because shark > attacks mostly stay about constant, but fear of them goes up sharply > when the media decides to report on them. The same thing, I bet, will > now happen with peak oil. I expect tons of copycat journalism stoking > the fears of consumers about oil induced catastrophe, even though > nothing fundamental has changed in the oil outlook in the last decade. > > (For those of you interested in more economic perspectives on peak oil, > check out these three posts by Jim Hamilton of econbrowser: here > <http://www.econbrowser.com/archives/2005/07/how_to_talk_to.html>, here > <http://www.econbrowser.com/archives/2005/08/limitations_of.html>, and > here <http://www.econbrowser.com/archives/2005/08/peak_oil_for_sk.html>. > And thanks to Alex from marginalrevolution > <http://www.marginalrevolution.com/> for pointing me to Hamilton's posts.) > > > > robert luis rabello > "The Edge of Justice" > Adventure for Your Mind > http://www.newadventure.ca > > Ranger Supercharger Project Page > http://www.members.shaw.ca/rabello/ > > > > _______________________________________________ > Biofuel mailing list > [EMAIL PROTECTED] > http://sustainablelists.org/mailman/listinfo/biofuel_sustainablelists.org > > Biofuel at Journey to Forever: > http://journeytoforever.org/biofuel.html > > Search the combined Biofuel and Biofuels-biz list archives (50,000 messages): > http://www.mail-archive.com/[EMAIL PROTECTED]/ > > _______________________________________________ Biofuel mailing list [EMAIL PROTECTED] http://sustainablelists.org/mailman/listinfo/biofuel_sustainablelists.org Biofuel at Journey to Forever: http://journeytoforever.org/biofuel.html Search the combined Biofuel and Biofuels-biz list archives (50,000 messages): http://www.mail-archive.com/[EMAIL PROTECTED]/
