The Oil Drum: New York City

Helping New Yorkers understand, prepare and adapt to the implications of Peak Oil

Sunday, August 21, 2005

Peak Oil Going Mainstream

I have read through the whole Maass piece on peak oil in the Sunday Magazine section of the NY Times. I have many thoughts but I'm just going to rattle off a couple of key points and then post a copy my letter to Dr. Stephen Levitt, author of "Freakonomics", who wrote a dismissive review of the article on his blog.

First of all, hats off to Maass for scoring the interview with Sadad al-Husseini, the ex-Aramco executive. I think we might finally have our credible Saudi insider who is not beholden to the Saudi government or any other interest group that I can see. His comments seem to suggest that the Saudis have a limit to their production somewhere between 12 and 15 mbd. If true, this means they haven't peaked yet, but really don't have much excess supply capacity. It seems Matt Simmons is pretty close to the scary truth without the inside information and al-Husseini just gave us the wink and nod that he is close. I look forward to Maass' full book and hopefully more public statements from Sadad al-Husseini.

Second, the implications of this article for introducing the concept of peak oil to the public should not be underestimated. While the Times certainly has its critics, it is still highly respected as the paper of record. While this will not be an instant revelation that will cause a massive popular response, it does represent a critical step in bringing peak oil out of the relm of "wacko" conspiracy & doomsday theorists and into more respectable circles of political and economic debate. This is a tool that should be used to at least raise conciousness in the general community. I urge all of you to read the article and pass it on to your friends.

Ok, now onto Dr. Freakonomics....who I am very disappointed in. Here's a link to his knee-jerk economic analysis of peak oil. I was appalled, but not really surprised. Here is the gist of his counter-argument:

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.

That might work if we were talking about a commodity or manufactured good that had easy substitutes and was not the main foundation of our modern society. Here is my reply:

Dr. Levitt

I urge you not to make hasty comments about this subject without deeper analysis. Oil is not just a commodity, it is THE commodity that makes everything in our modern world possible, in particular food production and most forms of transportation. Barring some major innovation, there is no technology or energy source that can replace oil and it's many uses. It's like water and air. 6 Billion people need oil. 100 million maybe...

If you read the Maass article closer you will find that really the oil market right now suffers from gross price distortion (probably way too low) because of a dearth of basic data on reserves and a well by well analysis of production rates. This is why people like Matt Simmons have been crying out for more data. Until we have more data I don't think anyone should be complacent about oil prices moving slowly in any direction.

The problem is that we have invested Trillions of Dollars into an economic structure predicated on consistently low oil prices. We have trusted politically motivated leaders and economic interests that oil is plentiful and can meet an ever rising level of demand. If we had better data then the market could have continuously bid up the price as it became increasingly apparent that oil supplies were becoming scarce.

Instead we are left with a situation in which all of this will become apparent when there are real shortages which will cause a huge spike in prices and the Saudis simply cannot increase production to alleviate the shortage. Then the market will react with brutal efficiency throwing the economy into an economic depression. Will oil restabilize at a lower price? Perhaps. It depends on whether you think inflation will be the main effect or an economic collapse causing rapid deflation of asset and massive unemployment. Remember that everything is relative. If there is rapid deflation and massive unemployment, then $10/barrel may be unaffordable. Please research this subject more closely and come back to us with a more thorough analysis of the subject. It's only the fate of our economy and civilization that hang in the balance.

If you want to share your thoughts with Dr. Levitt, his email is at this site.

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8 Comments:

At 9:48 AM, Blogger peakguy said...

Dr. Levitt replied to my email:

I know more than I admitted about oil.

My point is that even if you take the numbers in the
Maass article as true, there is no reason to think
disaster is near.

Steve

peakguy: you make your own judgements on his level of knowledge....

 
At 4:29 PM, Anonymous Anonymous said...

Well let's see. Levitt's a highly-respected economist at a top institution. You work in marketing and have got a blog. I think I'll trust the experts on this one.

 
At 4:55 PM, Blogger peakguy said...

You can weigh the arguments by far greater experts than myself - Matt Simmons, the folks over at www.oildrum.com, etc. I would encourage you to read more and decide for yourself. I am not saying Levitt is not an expert on economics, but rather that he did not give this matter much thought before stating an opinion (it happens to all of us). I hope he does more rigorous investigation of the price elasticity of oil, the lack of data on reserves and comes to the same conclusions as I have, but until then I will keep prodding him to give more thought to the theory of peak oil and the implications to our entire civiliation. It's a lot more important to have a proper discussion than be right. In fact, I hope I'm wrong and man can adapt or we find a few more trillion barrels of oil somewhere.

 
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