Thursday, July 18, 2013

Peak oil...

...is one of those things where I think critics really miss the point of what people are talking about.

I know supply curves slope up. I know prices signal to move on to other things. I'm also willing to grant that a lot of people who talk about peak oil don't know this (that's why it's good to teach economics!).

But this is not really what they're worried about. Even if the supply curve isn't perfectly elastic the worry is that it will get extremely inelastic and that you'll get lots of price signals about the skyrocketing marginal value of a barrel of oil and nothing will be on the horizon to replace it. All the prices will be sending information just fine, but that doesn't guarantee this will be a nice place to live.

I'm not all that much of a pessimist - natural gas seems to be a good option and environmentalists seem to be getting more reasonable on nuclear. But that's the concern.

You see this with discussions of full employment too.

Economists sometimes manage to get themselves into this position where as long as prices are flexible and markets are competitive they know there's a price vector that will work it all that and a microeconomic underpinning that'll get there... but they never seem to think much about whether that "there" is a good "there".

This is Keynes's question on full employment - is there a guarantee that general equilibrium will be a full employment equilibrium? No.

Is there a guarantee that the energy market equilibrium a couple decades from now will be an equilibrium where we all get to enjoy life the way we are enjoying life today? No.

Like I said, I'm an optimist but there's nothing in the functioning of markets that guarantees the good equilibrium result. What seems to be the best source of optimism is our tendency to innovate. That plus the market mechanism seems to offer good prospects for the future. But just citing the price mechanism doesn't really get at what people worry about when they worry about peak oil.

9 comments:

  1. Economists sometimes manage to get themselves into this position where as long as prices are flexible and markets are competitive they know there's a price vector that will work it all that and a microeconomic underpinning that'll get there... but they never seem to think much about whether that "there" is a good "there".

    This is quite true, Daniel. What is implicitly discussed in J.M. Keynes's 1936 book is the existence of multiple equilibria for the macro-economy. It also would be natural that there are multiple possible states for how effectively an industry or a market allocates the resources.

    Still, whether or not the peak oil advocates are justified in their beliefs despite their lack of a formal education in economics, I'd rather be safe than sorry by investing in alternatives sources of energy for the long-term.

    http://www.sciencedirect.com/science/article/pii/0360544281900955

    http://www.sciencedirect.com/science/article/pii/0360544284900598

    http://www.sciencedirect.com/science/article/pii/0360544287900211

    http://www.tandfonline.com/doi/abs/10.1080/00207239008710572

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    1. I would agree that multiple macro equilibria are possible. Lee Smolin discusses it in a video on this site, but I wasn't all that impressed with his perspectives overall. I would say that Russia and many other countries got trapped in an unfavorable equilibria. We likely did during the depression. I would argue that restricting possible moves makes it easier to get "trapped" in a local equilibrium. I agree with Daniel, that I'm optimistic due to our ability to innovate.

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  2. What do you think of the idea that worldwide oil production has already peaked? Like between '04 and '08. Thanks. :)

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  3. These are always questions of what will the future be and how will we get there. There is probably no way of telling without going through it, but speculation and argument are valuable in exploring alternatives and their likelihood. What are our best strategies for dealing with the storm and where they might lead are better than telling us the sea will be calm and flat again.

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  4. "Is there a guarantee that the energy market equilibrium a couple decades from now will be an equilibrium where we all get to enjoy life the way we are enjoying life today?"

    Here would be a good way to define "economism": Our ability to "enjoy life" depends upon how much shit we can consume. Honey Boo Boo Enjoys life more than Socrates, Obviously, since she gets to consume more!

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    1. 1. A fine definition of economist. Good thing I'm not guilty of it!
      2. I will not have you impugn the good name of Honey Boo Boo on this blog!

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    2. *a fine definition of economiSM

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    3. Honey Boo Boo sounds more like the poster child Keynesian recipe for dealing with the Paradox of Thrift to me.

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  5. There's also the problem of air travel if oil were prohibitively expensive. For weight reasons, the density of energy when stored in hydrocarbons is key to that. Nuclear energy in the sky is problematic as does hydrogen. The ideal solution would be a method of converting CO2 back into hydrocarbons using solar energy.

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