“Peak Oil”:Welcome to the Media’s New Version of Shark Attacks

The cover story 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 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, here, and here. And thanks to Alex from marginalrevolution for pointing me to Hamilton’s posts.)

head lem

OK I'll be your Huckleberry.

In 1971, President Nixon declared a "War on Cancer".

"The Market" has had 35 years to respond.
In fact, very rich people who are dying of cancer are willing to pay whatever price they can afford for "the cure". The Shah of Iran came to NYC with his cancer and his untold wealth. It did not help him. Peter Jennings of ABC news (lung cancer 2005) was probably wealthy. The "market" did not help him.

And amazingly, Nixon declared his war on cancer AFTER we had been to the Moon in 1969. Why heck, if WE can go to the Moon, we can do anything. The Market always provides. Right? Right? Technology always finds a way. Technology will save us. Right? The market will save us. "They" who tinker in science will save us even though they fret that they might be able to this time. It's always happened before and therefore by unquestionably "sound" logic it must happen again. Right?

Peak Oil is one of a number of Global-Scope Catastrophes that are rolling up onto Humanity's beach. The Tsunami of Sumatra was nothing compared to what is heading our way. We know about it, and yet the ever-insightful "market" does nothing. Just as it did when the dot.com bust was rolling in and people knew (Barrons). Just as it did when the first oil shock hit (Hubbert's 1973 USA peak). When are you religious fanatics of "economics" and Adam Smith's invisible waving hand going to wake up and admit you worship a false deity?

There is only a finite amount of easily-extractable oil underground. We are at the point where our high-tech straws are sucking it out as fast as they can. The faster they suck, the quicker we reach peak and go over.



The economics principles I don't disagree with, its the degree of the reponse. You say:

"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."

But our use of energy is far more fundamental to both our population growth as a planet, and our standard of living as a country.

What the economics can't compensate for are the physics and fundamentals of the laws of thermodynamics. Our standard of living requires a certain energy input. Renewables can't provide energy at the rate we are accustom to, so we use the "battery" of oil that we are draining. When that battery runs out, the economics will adapt, but along with it is a more painful adaption we will have to make in the way we live.

As just one example of how fossil fuels go beyond just gas trips for errands, read this article:





Using cancer as an example doesn't help your argument here -- it's a shining example of common misunderstanding. There is no such disease as cancer -- "Cancer is actually the end result of what are probably hundreds (thousands?) of different diseases. We have confused ourselves by giving them the same category name - it's like the old-style classification of infections as various 'fevers.'"

I would argue that "peak oil" is an issue which suffers from common understanding in a similar way -- the complex details of the real situation become obscured by attention-grabbing, headline-friendly rhetoric. The Economist had an excellent survey discussing peak oil in the April 28th issue; I won't reproduce their arguments against this kind of alarmist talk here, simply because there are too many of them.


Eric Galloway

The sad thing is that the New York Times is so 'old media' that most readers of the paper will never know about these critiques.

Here an idea: Make this the subject of your next column in the New York Times. Of course, the Timesies are feeling a little sensitive to criticism these days (Judy Miller, Jayson Blair, etc.) so any explicit references to the Peter Maass piece might be ill-advised.


Yes the market will respond. As Hamilton points out, the framing of this question in terms of peaks or sudden cliffs where prices shoot up instaneously is naive. However, nothing in the market-economics arguments addresses:

- the size of the dislocation (small increases in oil prices can multiply their effects as it raises costs throughout the economy)

- the time to respond. This is the big one. A rational response to a rise in oil prices involves consuming less transportation. Everyone who lives spread out in the suburbs will be hurting and, perhaps, be economically motivated to live in a denser development pattern where they can rely on human-power or public transit. However, getting to that state requires an enormous shift in investment, public and private. It's not going to happen quickly and it's going to cause pain.

- Speaking of pain, downturns, recessions, and depressions can all be part of a market response. While a long-view economist can interpret it all as a welcome and necessary correction, that doesn't lessen the pain for individuals involved.

I'd like to see you and James Kunstler, who has a new doomsaying book out, have a good optimist/pessimist debate. Us ordinary citizens don't know who to believe, but a good battle is always entertaining.


Jamie Brockington

Dr. Levitt:

You make an excellent that is often overlooked in the mainstream media and among the general populace. Taking into account another basic economic principle, that people make rational decisions, it is illogical to assume that people will pay say, $5 per gallon of gas if an alternative can offer half of that. It is also reasonable to assume that people would drive less if driving costs more. The idea that rising gas prices could be the "end of life as we know it" is just completely absurd.

Toyota and Honda obviously understand it. They're beginning to create more hybrid vehicles.

to head lem:

Contrary to your assertion, the market is responding to cancer. While there is no efficative cure for the disease, there is a copious amount of money and research towards developing one. That IS the invisible hand at work. Were there no economic response to such a devastating illness, there would be Cancer Societies, no funds devoted towards curing cancer, and less attention paid towards it. Just because a few wealthy, cancer-afflicted aristocrats could not use their money to cure themselves, doesn't negate the economic, incentive-based reaction towards cancer.




The flaw in your logic is the speed with which society will adapt. I don't feel it will be a slow shift away from oil, but rather a sudden drop in supply will come first - unrest in Nigeria or Venezuela and suddenly supply drastically exceeds demand. Look at the panic buying which ensued during the UK petrol protest in 2000 - it literally brought the country to a halt:


The US is particularly dependent on petrol for transport. Look at Walmart's worry over oil prices. Look at Surprise, AZ - a community with no public transport, a group of suburbs which are virtually unsustainable without cheap fuel:


We all agree that hybrids and changes of habits must happen. Unfortunately, I bet that a sudden drop in supply will cause total chaos before any real lasting change in habits begins to occur.

I am also highly sceptical of any replacement technology for oil - how long will it take to build the nuclear plants required? Any idea how many plants would be needed? You can't build a nuclear plant overnight.

Oil is to society as alcohol is to an alcoholic ... sadly, I feel we're going to have to wake up in our own vomit before we start any process of a real substantial move away from oil.



"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."

The price of oil has gone up precipitously in the last few years, mainly because excess capacity has disappeared. We are still consuming more every year. If and when we get to the point where supply actually decreases, the price of a good with an inelastic demand curve will go through the roof, at least temporarily.

I agree that as long as cooler heads prevail, this does not mean the end of civilization, but modern civilization is built on the idea of growth. Our current system where the rich get richer will only work when there is growth in the system. This will become extremely difficult once energy becomes constrained. Is it hard to believe that when the economy goes into an extended funk and the people at the bottom are getting squeezed the most, that people will want a scapegoat, esp one thats supposedly sitting on all the oil?



The real problem with your analysis of the situation as one which can be resolved by simple economics is that you're right.

You're right - prices will go up until enough demand is destroyed for them to stabilize. There'll be a lot of up/down in the meantime.

But what does this mean? In our country, this means you won't be able to live in the suburbs anymore in most cities (no public transportation; and no feasible way to deliver it to most suburban neighborhoods). So what does that do to our country?

Concrete laid down now to build the latest exurbs has a long life. And conversely, rebuilding today's suburbs to be dense urban neighborhoods in which mass transit can actually work is expensive even with CHEAP oil.

One thing economists forget is that demand destruction in the abstract is a perfect solution to a supply/demand imbalance. But when the suburbanites are trying to get to work or school at $6/gallon gasoline, and there still isn't a bus in their neighborhood, and they still can't carpool since their town has offices spread all throughout the suburbs rather than in one central location, what are you gonna do?


Prof. Goose

This post has been removed by the author.


Economists seem weird to me. Yes, I've seen and commented in some of those other blogs. Valid points are made, but an undercurrent of economic weirdness returns. They seem to think they have "the answer" because no matter what happens, supply and demand will meet. It doesn't matter if they meet in a return to $10 gas (SUVs for everyone!) or at $100 (goodbye Fedex) ... it's still a market success.

A comment above says:

Taking into account another basic economic principle, that people make rational decisions, it is illogical to assume that people will pay say, $5 per gallon of gas if an alternative can offer half of that. It is also reasonable to assume that people would drive less if driving costs more. The idea that rising gas prices could be the "end of life as we know it" is just completely absurd.

I submit to you that driving less, even having to think about how far you drive, is a change in life as we know it.

Be careful that your prediction of optimism doesn't come to match someone else's prediction of pessimism!



sorry, $10 oil not "$10 gas."

Prof. Goose

Cheap oil is necessary and sufficient for economic growth. Period.

Cheap oil is what could have facilitated the development of alternative sources of energy, had it been used wisely.

You see, without economic growth, lives change. Period.

Economics is a discipline that is very normatively pleasing when economic growth exists. Growth facilitates rational choices and we all feel warm and fuzzly about the market.

However, at its core, economics, when there is not economic growth, turns into a rationalist, Hobbesian State of Nature that decays rapidly. Why?

Actors have to make tougher choices, that while still rational, do not stem from a growing pie, but a shrinking one.

Then throw in the psychology of people with no hope of growth or betterment...and what do you have?

NB, I do not subscribe to the real doomers like Kunstler, because I think humans can innovate and change if we understand the situation and are driven to do so...and we can do so in time to come in for a soft landing.

We just have to get our heads out of our asses and start. Now.

So, I hope you all learn as much as you can about peak oil. Simmons, Deffeyes, etc., etc.

And if you're so inclined, come on over to The Oil Drum, where it is our mission to talk about this and many other related subjects.



As knowledge of the impending energy crisis begins to spread, hording will take precedent over conservation-- pushing the price higher and higher, even in the face of falling demand.

Eric Galloway

I see Peter Maass (the author of the NY Times Mag piece) is writing a book about oil. I'd advise him to write quickly--just in case the price of oil collapses down to $10 a barrel again (as in 1998)--if he wants to produce a freako'-style bestseller. Next year we might be back to worrying about the threat from Japan (or perhaps killer bees, or possibly even kudzu).


A few thoughts from up here in "Oilberta", Canada.

- I have a friend who burns raw vegetable oil in his mercedes diesel at 77 cents (CDN) per litre.

- People in my town are responding by snapping up Smart Cars. They are everywhere in the Great White North.

- It might not be the price of oil in terms of dollars, but the price of dollars in terms of oil. The US dollar has taken a substantial hit as of late.

- Price of oil is based on expectations. Investment houses who buy futures contracts do so on expectations. They almost have an incentive to propagate a theory of limited future supply.


“We know about it, and yet the ever-insightful "market" does nothing.”

How can you make such a claim? It now costs $1,000 dollars to change any car into a Natural Gas or propane car. Oil can now be cheaply extracted from Sand Tar and Coal. -did you know America could supplement it's oil supply with it's coal supply? Electric cars are now completely viable, still not as good as oil driven cars, but 300 miles on an overnight charge ain't bad. Combustion Hydrogen cars can be made for 50k, fuel cell for about 100k. Should we go on? There are hundreds of examples, and hundreds of alternatives that could go into effect, and be improved upon within months, if your catastrophe ever comes about.

“There is only a finite amount of easily-extractable oil underground”

You need to research this a bit more, you do realize that the definition of easily extractable oil has changed every single year of your life? Tar sand which a few years ago was considered costly, can now be done for relatively cheap. Deep oil which was once impossible to drill, can now be done for $12 a barrel. American Oil companies have not once accurately predicted oil prices beyond 5 years. Always stating a higher cost than they expected, always underestimating the increase in technology. Tappable Oil reserves have increased every year I have been alive. If that ever changes, you will soon see oil substitutes increase every year.

“Renewables can't provide energy at the rate we are accustom to, so we use the "battery" of oil that we are draining.”

France gets 80% of it's energy from Nukes, we get 20%. Even if your statement is true, we have a long way to go.

The article you link is basically bunk. About 90% of oil use in America goes to transportation. That other 10% can be made up easily just through use of alternatives. It doesn't even explain the green revolution properly. Look it up at Wiki if you care.

I don't know if you know anyone in the car business, but bring this all up with them. Every car company has a plan to switch from Gas to other alternatives. The price of which would only be about 16 billion dollars. The cars would not be as good as gas cars at first -miles per tank of about 200-300 miles- but that would improve very quickly.

“Look at Surprise, AZ - a community with no public transport, a group of suburbs which are virtually unsustainable without cheap fuel:”

A really bad example, seeing that just last year Phoenix's oil supply was cut off by a pipeline rupture. Gas went to 20 dollars a gallon. And though their was much complaining, people just car pooled for the week while the pipeline was being fixed. Heck at the very worst, it takes about a day to switch your car over to natural gas or propane. Phoenix having one of the best natural gas infrastructures in the world would be able to remedy this quickly.

That's not to say it would be havoc for a good month or two, but people who think it would be a catastrophic way to life as we know it, just don't seem to understand the history.

The prices of commodities have always gone down, new technology has always arise, better means of extraction have always been invented. This has and will always be the case. Why should oil be any different? I'm 27 years old now. I have been hearing this same debate for my entire life now. At every step of my life my teachers have told me we will run out of oil in 10 years. I used to think, that if they kept saying it, someday it would be true. Now I realize it will never be true. Man learns to adapt. For there are only two great truth in the world.

The world is always getting better, and everyone always believes it's getting worse.



Dr. Levitt

I urge you not to make hasty comments about this subject without more deep analysis. Oil is not just a commodity, it is THE commodity that makes everything in our modern world possible, in particular food production and most forms of transportation. Barring some major innovation, there is no technology or energy source that can replace oil and it's many uses. It's like water and air. 6 Billion people need oil. 100 million maybe...

If you read the Maass article closer you will find that really the oil market right now suffers from gross price distortion (probably way too low) because of a dearth of basic data on reserves and a well by well analysis of production rates. This is why people like Matt Simmons have been crying out for more data. Until we have more data I don't think anyone should be complacent about oil prices moving slowly in any direction.

The problem is that we have invested Trillions of Dollars into an economic structure predicated on consistently low oil prices. We have trusted politically motivated leaders and economic interests that oil is plentiful and can meet an ever rising level of demand. If we had better data then the market could have continuously bid up the price as it became increasingly apparent that oil supplies were becoming scarce.

Instead we are left with a situation in which all of this will become apparent when there are real shortages which will cause a huge spike in prices and the Saudis simply cannot increase production to alleviate the shortage. Then the market will react with brutal efficiency throwing the economy into an economic depression. Will oil restabilize at a lower price? Perhaps. It depends on whether you think inflation will be the main effect or an economic collapse causing rapid deflation of asset and massive unemployment. Remember that everything is relative. If there is rapid deflation and massive unemployment, then $10/barrel may be unaffordable. Please research this subject more closely and come back to us with a more thorough analysis of the subject. It's only the fate of our economy and civilization that hang in the balance.



One very quick point.

Why is it do you think that in Canada our oil and natural gas reserves are managed by the Ministry of Natural Resources, Environment Canada, run mostly by enviornment science grads but in the US oil and how to obtain it is a matter of National Defence?

I find Americans to be very reactionary. If oil and the procurement of it become to expensive and difficult I feel that it actually may be a very good thing for LOCAL economy.....why buy a tomato from Chile when you can buy one from the farmer down the road, and that sort of thinking.


All this discussion with no mention of Julian Simon's bet with Paul Ehrlich? Simon's proposition is that comodities get cheaper over time due to human creativity. Real gas prices are not much more than they were in the '50's, while real income is much higher.