by Jerome a Paris
Sun Oct 21st, 2007 at 04:31:18 PM EST
I posted a link to a libertarian site about peak oil in opus (47) of this series, to note their ad hominems against a fellow Oil Drum contributor, and take that as a sign of increased desperation.
But that thread over at the Mises website has grown to several hundred comments, and someone was kind enough to point me to it and to send me their own contribution to that thread, which I find worth discussing.
Posted by: Bastiat at September 27, 2007 7:07 PM
A- Peak oil is real and may be sooner than later
While there is a lot of denial of climate change in the thread I linked to, there is almost none of peak oil per se amongst those that see themselves belonging to the Austrian school. Most of them readily admit that it is a finite resource and that its use is likely to decline.
Where they disagree with the "peakers" is in the relevance of that event. To them, it's just a background fact that is no more relevant than any other, and which will be best dealt with by free individuals and not by government meddling.
Any attempt to "prepare" for peak oil in any way is seen as a socialist attempt to tell people what they should do instead of letting them react as they see fit to reality.
B- Under a pure free market, peak oil is a non-event. It is a non-event because each individual can still choose when HIS oil will peak. HE can decide if having 2 extra cylinders on his next car is valuable enough to HIM to work several overtime hours per week in order to pay for it. As long as HE values food more than travel, he will let the farmer overbid him for the diesel needed by the farm tractor. And if people were really obsessed with oil (they are not) then eventually all 7 billion people will be in the oil industry and a lot of oil will be found. Peak oil timing is not determined so much by geology as by expectations of the future demand for oil versus alternatives, including voluntary powerdown.
There's a number of more or less explicit assumptions there that are worth deconstructing:
- one is that the reality of peak oil is something that will hit at some point, that we don't control (or, as these guys prefer free markets, shouldn't control, and let happen as the individual preferences of people bring them to use oil at the price it is at any time). Then the question is only one of adaptation to the event, in which case, as in any other, individual choices should prevail. The argument that we might want to control when (or how) peak oil hits is seen as an unacceptable socialist or elitist attempt to tell people how they should behave, and thus freedom- and value) destroying. Society doesn't exist, and shouldn't exist; there are no collective preferences, and no goods that have importance beyond the value that individuals give it. And that's true, for these guys, for oil too. Its specific qualities as an extra-dense and convenient energy carrier and its dominant role in our current economy are simply not relevant factors for them - or anyway, they consider that individual ingenuity will provide as required;
- the last sentence, about 'powerdown', is, in that particular context, revealing. The underlying concept is that of demand destruction (i.e. someone choosing not to consume the good rather than paying the asking price), and it is presented as an individual choice that each of us will have. But the reality of the "free markets" is that supply and demand must balance out - the price beign the mechanism to do that, by encouraging new producers to come in, and some consumers to get out. In a supply-constrained world, this will happen via demand destruction, i.e. people choosing not to - or unable to afford to - buy oil anymore. And the price for oil will go high enough that the appropriate volume of demand is eliminated. "Powerdown" means enough people going without oil. In an ideal world, that means people choosing to telecommute, or carpool, or manage to switch to another, slightly less convenient, form of energy. In the real world, that means, ultimately, people doing without energy.
I usually write this about food: "famine is an efficient market solution." People dying destroys demand and allows the market for food to clear - you just need a price high enough that the right number of people cannot afford to eat at all. It's the same with oil: it will eventually be priced enough that people are pushed out of the oil economy. and it will be their choice to do so, so those that still remain in the economy at that point are blameless - hey, they're willing to pay the price for that oil, whereas the others aren't.
For some reason, that particular assumption of the libertarians (and it is a fundamental one) is rarely acknowledged properly. I wonder why...
- another assumption to note at this point is that those pure markets presuppose a perfect enforcement of rules and contracts. People that have no choice than to ruin themselves or do without a vital commodity are expected to accept that situation meekly (it's their free choice, remember). People that can no longer afford food will let themselves die off peacefully - or the law will be enforced mercilessly on them, thanks to (government-run?) police and justic systems? At what point does the disorganisation from demand destruction spill over into the real world?
C- The oil market is far from free. In particular, there are some entry barriers to drilling and especially, hoarding underground oil, in several countries if not every one of them.
D- To convince an Austrian economist Peak Oil is an issue, you NECESSARILY have to show that the current oil price is LOWER than it would be in a pure free market. You can argue that OPEC countries have unstable regimes and therefore an incentive to dump oil on the market faster than a capitalist owner would. However, the overwhelming evidence is that the price is HIGHER than it would be in a pure free market.
Of course, all these grand theories can never be tested because reality always intrudes, and prevent the perfect markets condition from ever being fulfilled, for some reason. This is a most convenient excuse never to have to explain why your theories never ever seem to work. Hypotheses were not all fulfilled. Which begs the question (beyond that of the relevance of a theory that can never be applied) as to why, for instance, consumers should agree to play by market rules if suppliers don't - or more generally, why some should be bound by market discipline in the face of obvious manipulation. Ah, but individual choice is always better, whatever the circumstances.
E- If Peak Oil is indeed an issue, the most intelligent way to coordinate the planning of a solution by 7 billion potential inventors is still the free-market solution. Some will succeed, and the others will imitate them. Governments have a much smaller number of brains, and just can't do that.
cf my last sentence above. Humans are all investors. How cute is that?
F- Under a free market, the absolute worst case scenario is when no new energy source can be shown to have a net return on investment. Then, you can expect an exponentially decreasing depletion of the remaining stocks, at a rate roughly equal to originary interest, which is a matter of individual preference (you will have to read von Mises to get that one). People would simply find it a bit expensive to feed children, and would choose to have less. Economic growth would still occur because it is a subjective concept. If I telecommute by choice, I am not a "Peak Oil refugee", but actually switching from a less desirable to a more desirable living arrangement, therefore increasing my standard of living.
Kudos again to that person for at least acknowledging the point that peakoilers often make: we may simply run out of accessible energy, because the EROEI (energy return on energy invested) is trending down. Oil has the advantage of a huge EROEI - it's nicely concentrated, and easily captured, energy. Running out of it means running out of cheap energy, forcing us to go back to less convenient forms of energy (like human labor). But the fact that we "choose" to deal with such new circumstances via individual free choice makes population decrease ok - it's a choice, and thus it can still look like "economic growth", because prices for what's become incredibly rare will increase enough to make GDP look good.
And as the price of oil (or other energy forms) at this point will have been brought about by individual choices, it is by definition an efficient situation, and thus one's choices in that context should be the same. Life is wonderful.
Many comments in that thread by the self-proclaimed libertarians and/or 'Austrian economists' were in that same vein - individual choices will always be better, any claim ot the contrary is totalitarian socialism, with a strong whiff of climate change negationism (not by all, though). Human ingenuity is infinite, and thus substitutes will be found to oil from other sources - and governments or self-proclaimed elites are certainly not the best placed to say what these are.
Maybe I should title my series "Countdown to a symbolic non-event"... which, as things go (new record highs pretty much each day in the past 2 weeks, the $90 line reached on Friday, the euro and gold going up along, suggesting deep structural weakness of the dollar in addition to oil strength) could take place pretty soon...
Earlier Countdown diaries:
Countdown to $100 oil (48) - 85, 86, 87, 88, ...
Countdown to $100 oil (47) - Malthus, Mein Kampf and ostriches
Countdown to $100 oil (46) - what's a dollar worth?
Countdown to $100 oil (45) - time to bet again (eurotrib)
Countdown to $100 oil (45) - time to bet again (DailyKos)
Countdown to $100 oil (44) - oil industry admits it cannot save us
Countdown to $100 oil (43) - IEA boss denies and confirms peak oil in same breath
Countdown to $100 oil (42) - IEA predicts shortages within 5 years
Countdown to $100 oil (41) - oil more expensive than it appears
Countdown to $100 oil (40) - Undulating plateau
Countdown to $100 oil (39) - BigOil running out of oil
Countdown to $100 oil (38) - Who gets Champagne edition
Countdown to $100 oil (37) - OPEC says peak oil (and $100 oil) is near
Countdown to $100 oil (36) - Free game! win champagne! no risk! (eurotrib)
Countdown to $100 oil (36) - Free game! win champagne! no risk! (DailyKos)
Countdown to $100 oil (35) - peak oil: the last skeptics capitulate (CERA)
Countdown to $100 oil (34) - Oil major CEO calls for demand reduction
Countdown to $100 oil (33) - Below zero
Countdown to $100 oil (32) - peak oil is, like, so over. Not!
Countdown to $100 oil (31) - $15 oil? The cornucopians are fighting back
Countdown to $100 oil (30) - senior politico fears looming oil wars
Countdown to $100 oil (29) - Alaska joins axis of evil (unreliable oil suppliers)
Countdown to $100 oil (28) - New records suggest more to come
Countdown to $100 oil (27) - 'Mission Accomplished' - High oil prices are here to stay
Countdown to $100 oil (26) - Time to bet again (eurotrib)
Countdown to $100 oil (26) - Time to bet again (dKos)
Countdown to $100 oil (25) - Iran vows that oil prices will not go down
Countdown to $100 oil (24) - What markets are telling us about future energy prices
Countdown to $100 oil (23) - Running out of natural gas in North America
Countdown to 100$ oil (22) - gas shortages in the UK - 240$/boe
Countdown to $100 oil (21A) - The 4 biggest oil fields in the world are in decline *
Countdown to 100$ oil (21bis) - long term vs short term worries (dKos)
Countdown to 100$ oil (21) - 8-page extravaganza in the Independent: 'we're doomed'
Countdown to 100$ oil (20) - Meteor Blades is Da Man in 2005
Countdown to 100$ oil (19) - Your bets for 2006 (Eurotrib)
Countdown to 100$ oil (19) - Your bets for 2006 (DailyKos)
Countdown to 100$ oil (18) - OPEC happy with oil above 50$
Countdown to 100$ oil (17) - Does it matter politically? A naked appeal for your support
Countdown to 100$ oil (16) - We'll know on Monday
Countdown to 100$ oil (15) - the impact on your electricity bill
Countdown to 100$ oil (14) - Greenspan acknoweldges peak oil
Countdown to 100$ oil (13) - Katrina strikes / refinery crisis
Countdown to 100$ oil (12) - Al-Qaeda, oil and Asian financial centers
Countdown to 100$ oil (11) - it's Greenspan's fault!
Countdown to 100$ oil (10) - Simmons says 300$ soon - and more
Countdown to 100$ oil (9) - I am taking bets (eurotrib)
Countdown to 100$ oil (9) - I am taking bets (dKos)
Countdown to 100$ oil (8) - just raw data
Countdown to 100$ oil (7) - a smart solution: the bike
Countdown to 100$ oil (6) - and the loser is ... Africa
Countdown to 100$ oil (5) - OPEC inexorably raises floor price
Countdown to 100$ oil (4) - WSJ wingnuts vs China
Countdown to 100$ oil (3) - industry is beginning to suffer
Countdown to 100$ oil (2) - the views of the elites on peak oil
Countdown to 100$ oil (1) (eurotrib)
Countdown to 100$ oil (1) (dKos)
* added to the series after the fact