"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.)

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  1. head lem says:

    OK I’ll be your Huckleberry.

    In 1971, President Nixon declared a “War on Cancer”.
    http://training.seer.cancer.gov/module_cancer_disease/unit5_war_on_cancer.html

    “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.

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  2. Preston says:

    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:

    http://www.fromthewilderness.com/free/ww3/100303_eating_oil.html

    -Ptone

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  3. Davis says:

    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.

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  4. 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.

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  5. mtraven says:

    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.

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  6. 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.

    -JB

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  7. Anonymous says:

    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:

    http://en.wikipedia.org/wiki/UK_fuel_protest

    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:

    http://maps.google.com/maps?oi=map&q=Surprise,+AZ

    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.

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  8. JW says:

    “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?

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