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Economic theory and physical reality

The Peak Oil guys keep trying to tell the economists that there's a drop-off in oil production coming (the 'peak'), and the economists keep saying that the market will solve the problem when it arrives. Left unsaid is that sometimes market solutions involve "demand destruction" in the form of recession, depression, or worse.

Most of the energy optimists though think the market will wave its magic wand and incent the development of alternative technology. This is foolish - economics can't trump physics (especially energy density), but it's hard to sell this to economists. But I just had an idea, after hearing an old Spin Doctors song on my itunes shuffle.

What amount of money would I have to give you right now to develop a technology that would allow me to achieve Superman-like powers of flight, heat vision, super strength, etc? After all, if the power of the market can solve any problem, presumably there is a 'bid' I can make at which it will be able to solve THIS one, right?

(If the answer is "not an infinite amount of money, but considerably more than exists in the entire world economy" then you might as well treat it as an infinite amount of money for all intents and purposes. The same logic applies for oil - how much money will it take to get a portable energy storage mechanism which can achieve goals X, Y, and Z? Answer: money can't beat physics - there are some problems that no amount of money will 'solve' for given acceptable values of 'solution').

This entry was posted in the following categories: Politics (Outside Austin)


If there were an economist Sith lord, this would be the perfect time for him to say "I find your lack of faith...disturbing."

You're right about the economic consequences of peak oil - energy prices would, depending on how far supply falls afterwards, spike and drive us into a depression.

The problem is that this doesn't justify doing anything about it. Given political realities and economic necessities, early curbs to smooth out something that is by no means guaranteed and whose timing and magnitude cannot in any way be guessed with reasonable accuracy will do more harm than good. The market will not "save us" from peak oil. It will, however, limit the devastation.

I disagree - there are some trivial things to do which only encourage the market to take better account of externalities which could lead to a much softer landing. A gradual ramp up in taxes on carbon-based fuels, especially for transportation, would do wonders. Dedicate half the proceeds to paying down the national debt and the other half to capital costs for more rail construction (both intercity and intracity) and you've got a win-win-win situation.

I'll play the role of the Sith Lord - the recent run-up in fossil fuel prices looks exactly like the initiation of forward-looking expectation of restricted supply in response to peak oil should. People who sell this stuff see that, 10 years from now, they'll get X dollars for oil, so they won't sell unless the current price is discounted X minus storage costs, which may be zero, if 'storage' is in the ground.

In the past run-ups in these prices have had 'run-downs' in the price further out the futures curve - $40 oil had $20 oil out 10 months, say - this signals "this is temporary, hold on". Now the futures numbers are lower than current, but nowhere near as low as the spot prices were 18 months ago. This signals long-run expectations of higher prices, which will finally incent coal gasification, and all the other cheaper fuels. Texas is already seeing a big run-up in wind-based electric generation, and has been for a few years. Part of that is subsidies, but part of that is people looking at natural gas and saying "are we going to be competing with the transportation sector 10 years form now for supplies?" There is also new interest in new coal and even nuclear generation. This is what peak-oil's response will look like in the real world - more coal, more nukes, more gas cars, or plug-in cars to take advantage of that coal and nuke.

It has all gotten buried in the Katrina/Rita did-it theory, but Katrina/Rita aren't affecting September 2006 contracts for gas - something else is doing that.