August 26, 2005

I’m Tired of the Oil-Price and Oil-Supply Obsessions

Filed under: Economy,Environment,MSM Biz/Other Bias,Taxes & Government — Tom @ 10:17 am

BizzyBlog has officially hit the wall when it comes discussions of “record high” oil prices and “peak oil.” A quick definition of “peak oil” is this: “the belief we’re going to run out of oil all of a sudden and the world as we know it will end.”

Oil prices and “peak oil” dominate much of business news coverage. Along with the “housing bubble” (to be dealt with in another post in the future), they seem to be the only business and economics topics that break out from the financial pages to the front pages of American newspapers and the lead stories in TV newscasts. Especially as there is plenty of good economic news, even really good news, that deserves more attention, it’s getting very tiresome.

The breathlessness of the reporting about the oil price and supply situation has become nearly comical. My e-mail box is plundered daily, sometimes multiple times a day, and even occasionally once every 15 minutes, by “Breaking Business News” from CNN telling me that oil is up, down, or steady, that supplies are higher or lower, blah-blah. Guys, I subscribed to your e-mail service to get late-breaking news about the entire economy, not an oil-price ticker tape.

The oil obsession meter went into the red last weekend with The New York Times Sunday Magazine piece called (oh no!) “The Breaking Point.”

It naturally repeats the falsehood that the barrel price of oil and the gas price at the pump are at “record” levels, when on an inflation-adjusted basis they aren’t, and would have to go up in the neighborhood of 20% to get to record levels. A rare reference to that truth can be found in the eighth paragraph of this Associated Press report.

But the piece’s main purpose is to convince us that the supply of cheap oil is diminishing, that oil prices are likely to shoot to stratospheric levels in a relatively short time period, and that (of course) governments must “do something.”

The article reflects a fundamental lack of faith in the ability of the markets to adjust on their own. Just one example cited earlier by BizzyBlog: the “we’re running out of landfill space” preoccupation of the 1980s turned out, thanks to human ingenuity, to be a myth. Operators got more garbage into less space, and are continuing to do so. Crisis solved.

As to oil, economics blogger Freakonomics notes that the sky-is-falling crowd has repeatedly erred, but refuses to learn (bolds are mine in this and other excerpts):

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.

The incomparable Thomas “Four Hands” Sowell agrees (esteemed economist Walter Williams, no publishing slouch himself, gives Sowell this appellation because of prolific writing output). Sowell says it’s simply a matter of having the will to produce:

Today production is being held back …. by political hysteria whenever anyone suggests actually producing more oil ourselves. Organized nature cults go ballistic at the thought that we might drill for oil in some remote part of Alaska that 99 percent of Americans will never see, including 99 percent of the nature cultists.

People used to ask whether there is any sound if a tree falls in an empty forest. Today, there are deafening political sounds over oil-drilling in an empty wilderness.

Nor can we drill for oil offshore, or in many places on land, again for political reasons. Nor can we build enough refineries or even build hydroelectric dams as alternative sources of power.

Many of the same people who cry “No blood for oil!” also want higher gas mileage standards for cars. But higher mileage standards have meant lighter and more flimsy cars, leading to more injuries and deaths in accidents — in other words, trading blood for oil.

Apparently the only things we can do are the things in vogue among nature cultists and the politicians that cater to them, such as windmills and electric cars. That is why we would be better off if the government did nothing and let people adjust their own energy consumption individually in their own ways as the prices of gasoline and fuel oil rise.

Freakonomics goes further and calls the the oil price obsession “the media’s new version of shark attacks”:

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.

Unfortunately, The Freak is probably right.

Of course, sudden shocks, such as supply cutoffs by hostile countries and the like, could cause big price swings, and I won’t discount the potential negative consequences of a major supply disruption. But that’s not what the doom-and-gloom people are worried about. They think we’re sleepwalking towards disaster regardless of world events. They’re wrong, they’re incredibly annoying, and I’m not going to get sucked into it. While of course you should do everything you can to conserve energy and keep your spending on it under control, don’t be duped by the Chicken Little crowd.
___________________

August 26, 9PM: Outside the Beltway Jammer.

August 27, Noon: Wizbang Carnival participant.

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8 Comments

  1. Why give an ounce of credibility to the Freakonomics opinion? The NYT piece appeared on Sunday and Levitt had something up in a few hours, even though he has no apparent experience on the subject, excepting his own opinions. (He never wrote a thing about the subject until that day) I have looked around and this piece seems to have gained special standing among the skeptics out there.

    Why have such high opinion for these people with “prolific” output and knee-jerk reactions?

    Oh well, thanks for the Sowell link.

    Comment by Webster Hubble Telescope — August 27, 2005 @ 9:16 pm

  2. Thx, #1. Points:

    - Though I wasn’t there to watch, The Freak probably did his thing in the wee hours of Sunday morning and reviewed it later Sunday morning before letting it go. He could even have begun late Sat. Evening. The NYT Sunday Mag is released on Saturday. In fact, the 8/28 mag is available now, and was as of 9:55 or earlier:
    http://nytimes.com/pages/magazine/index.html

    So…it would appear that he could have had 12-14 hours of intellectual deliberation, including time to sleep on it. That would appear to suffice in the circumstances.

    - But as to substance, the points he makes are points that are made in Econ 101, which as a Univ. of Chicago Econ professor he has at least some familiarity with, like probably 20 years or so. In fact, he probably knows the subject so well he could have done the post in his sleep.

    - You’re not going to like this, but those of us who trust in markets have faith that human ingenuity will enable us to adapt to non-catastrophic circumstances. The depletion of the world’s in the ground oil supply is a developing problem and not catastrophic. Tens of thousands, if not hundreds of thousands of people at energy companies are dealing with this stuff every day, and I trust them as rational people not to use up the last drop and say “oops, it’s all gone.” And BTW, even then it’s not really all gone, because there are other ways to get and make oil. I haven’t seen any reason to distrust the industry or to think it will collectively miscalculate on such a grand scale. If or when I do I’ll say so.

    - So the point of my post is that I’m damn tired of seeing ONLY the news about oil supply and prices and ONLY the news about the possible housing bubble break out of the business pages into front-page news and feature articles like the NYT mag piece, especially when the news about “peak oil” appears largely contrived (I’m still working on the housing bubble). With the good and underplayed news ID’d at two of my other linked posts, I think I have a point that builds on what The Freak says. The “shark attacks” crowd out other economic news, and IMO it’s deliberate in the sense that the MSM is conditioned to believe that a Republican economy can’t possibly be doing well without something else getting screwed up in the process.

    - Sowell, by the way, is the one I gave credit to for prolific output (Williams too, but to a lesser degree). I could have added that I consider them two of the smartest guys in America, irrespective of profession, but the post is already pretty long.

    Comment by TBlumer — August 27, 2005 @ 10:16 pm

  3. “A quick definition of “peak oil” is this: “the belief we’re going to run out of oil all of a sudden and the world as we know it will end.””

    That is not peak oil; that sounds like your own projected idea of what environmentalists worry about / wish for.

    T.Boone Pickens, Texas Awl man “believes” in peak oil, and he contributed to George Bush. Matt Simmons was on the Cheney energy task force and he “believes” in peak oil.

    Here is an accurate definition.
    Peak Oil is the point at which oil production maxes out, and then begins a long decline of approx 2-5% a year.

    Every individual oil field can be observed to follow this pattern, thus the extrapolation to ALL the oil fields.

    Comment by Jon S. — August 28, 2005 @ 6:36 pm

  4. Here’s the Wiki definition presented by Google:

    The Hubbert peak theory, also known as peak oil, is an influential theory concerning the long-term rate of conventional oil and other fossil fuels production and depletion. It predicts that future world oil production will soon reach a peak and then rapidly decline. The actual peak year will only be known after it has passed. Based on available production data, proponents have predicted the peak years to be 1989, 1995, 1995-2000, or, according to one influential group, 2007 for oil and somewhat …. (Google definition ends)

    You say “long decline of approx 2%-5% per year.” The accepted definition says “soon reach a peak and rapidly decline.” Big difference.

    As Peak Oil is defined in Google extracted from Wiki, my definition, presented facetiously, is closer than yours. The market can and will successfully adapt to your (inaccurate) definition. The accepted Wiki definition is in my opinion not a credible prediction of future events–hence my ridicule of it.

    By not even accurately defining the term, you have literally shown that you don’t know what you’re talking about.

    Comment by TBlumer — August 28, 2005 @ 6:47 pm

  5. and I trust them as rational people not to use up the last drop and say “oops, it’s all gone.”

    You won’t like this either: that’s exactly what happened to the passenger pigeon population.

    Comment by Webster Hubble Telescope — August 29, 2005 @ 8:11 pm

  6. #5, there aren’t thousands of people with oil drills running around trying to steal the last drop out of the ground. But if you find a way for oil drops to mate, you’ll be the richest person on earth–Zheesh.

    Martha, the last passenger pigeon, died in this metro area at the Cincinnati Zoo:

    http://www.roadsideamerica.com/pet/martha.html

    Yes, it was a sad day. But, the ecosystem didn’t collapse.

    Comment by TBlumer — August 30, 2005 @ 3:26 am

  7. As an corporate energy geek who’s been in favor of higher mileage standards (as is my brother who’s worked for Amoco/BP for 35+ years); The opposite of conservation is waste.

    Lighter cars are not *necessarily* “more flimsy”. The main advantage of heavier vehicles in a two vehicle crash is the disparity in energy transfer between vehicles of differing weight. The heavier vehicles also often have higher bumpers, thus delivering a deadlier blow. Personally, I’d rather not improve my own chances of surviving a crash by delivering a bigger blow to my fellow driver. If you’re extremely interested in the topic, The Journal of Crashworthiness is worth a look.

    Thomas Sowell in the excerpt wrote:
    Many of the same people who cry “No blood for oil!” also want higher gas mileage standards for cars. But higher mileage standards have meant lighter and more flimsy cars, leading to more injuries and deaths in accidents — in other words, trading blood for oil.

    Comment by Gumby — September 1, 2005 @ 5:13 pm

  8. #7, I recharacterized (correctly) the source of the blood for oil quote as coming from Sowell.

    I also think there are issues to look at with crashworthiness.

    You wrote:

    I’d rather not improve my own chances of surviving a crash by delivering a bigger blow to my fellow driver.

    Fair enough, but I wouldn’t feel the same way about any passengers.

    Economically, the price at the pump is supposed the be where supply and demand meet, and is supposed to be the point where conservation and reasonable use come to their closest possible agreement.

    Comment by TBlumer — September 1, 2005 @ 6:31 pm

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