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June 02, 2009

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Denial must be so hard-wired into our brains that it's futile to even critique it. We'll lumber along various pathways marked Amnesia, Rationalization, Wishful Thinking, and Entitlement because those are the roads with the nicest scenery.

And when we finally slam into the wall of unforgiving reality, we'll look for someone to blame, say an environmentalist who wouldn't let us drill in coastal waters. Or some do-gooder more worried about polar bears than God-fearing Americans.

The scripts have already been written. There's nothing left to worry about except who gets to direct this epic. I wouldn't be surprised if Newt or Mitt throws in some special effects, too. Say, a tax cut that talks, or cloud that looks like Ronald Reagan. In the end, America transforms itself into a flying flotilla of SUVs ascending heavenward just as some dark beast devours the pagans and secular humanists.

I don't think that the arguments of either side are impressive.

I agree with Mr. Talton that, given a non-renewable resource, continued demand for that resource will eventually result in a decrease in supply, such that, relative to this demand, resource acquisition becomes more expensive. Obviously, when that resource is a primary energy source as well as a major industrial input, that has systemic economic implications. That said,

A. It isn't clear when "peak oil" occurs: it may have already, but there's no convincing evidence of it; the mere fact that producers and refiners limit production is as much evidence for ordinary greed as for peak oil: one doesn't necessarily maximize profits by exceeding (or even meeting) the demand curve; the formula for profit maximization is industry and circumstance specific. As for predictions of the future date of peak oil, that's a matter of guesswork too. If nobody knows how much oil there is in the world, then the question of when half of it has/will be used is open to debate. Still, the existence of a pressing problem is generally agreed upon.

B. It doesn't follow that when half the oil is used, the rest will be immediately more expensive to extract. Cost of extraction is related to productivity, and productivity is largely a function of technological development, today. Doomsters who dismiss the possibility of technological advances and refinements out of hand (not necessarily those of their most Pollyanic opponents) have the weight of history against them: nearly every increase in productivity since the 19th century has been the result of technological advance; and the broader the technology base, the faster improvements building upon it occur, particularly when the prospect of big money drives it. Otherwise, we'd all be using XT clones running at 4 megahertz with 128k memory and 10 MB hard-drives.

C. It doesn't follow that when oil is more expensive to extract, that it will cost more in real terms. At some point, increased prices dampen the very demand that supported them: look how American drivers reduced miles driven when gasoline prices increased to $4.00 a gallon. These producers tend to maintain prices at levels which maximize total profits, not necessarily by maximizing per unit mark-up.

Furthermore, as economies grow, so too does personal income (though income distribution is a separate question). The question isn't how much oil costs, but rather, what percentage of the buyer's income this cost represents. If oil price increases are offset by income growth, and/or by decreased prices of other goods/services, the increased cost of oil is not an increased burden for buyers. The question is "How much stuff can I buy, and what percentage of my income is the total cost of that market basket?" not "What is the absolute dollar price of any single item in the basket, without reference to economic growth or personal income?".

D. Increases in demand for oil due to increased manufacturing by China and India (and by general population growth) will be partially offset by the switch to non-petroleum based electricity generation, whether by coal, nuclear, or other. France has already shown that a well-run, state-controlled nuclear energy sector can produce safe, cheap, nuclear-generated electrical power. Others will follow, in Asia and elsewhere, whenever politically feasible; and there is nothing like an electorate fed-up with expensive energy prices to make radical changes in energy policy and investment politically feasible.

Other offsetting influences include a strong trend toward motor vehicles with higher mileage and those that run partially or wholly on electricity. Is there really any question that this is only a matter of time, even in the U.S.? This too will moderate demand for oil.

E. Recent roller-coaster changes in which the price of oil surges and falls by huge amounts over very short periods of time (sometimes as short as weeks) -- including events before the recession -- demonstrate that large, short-term oil price fluctuations are not due primarily to demand by the real world economy (which doesn't change that much, that quickly) but are subject to the same kind of investor-generated bubbles that other commodities are. Whether speculators are "sinister" depends on whether you consider socially irresponsible, profit-motivated arbitrage to be inherently sinister: most capitalists don't.

If governments the world over had an ounce of sense, they would pass laws making oil purchases a privilege of national governments, and making domestic private wholesale corporations buy from them in turn; together with an international treaty giving governments a share of oil resources proportional to purchasing power and demand, they could cut speculators out of the process and, as a trading bloc, negotiate a lower price from producers, without having to nationalize or expropriate a single oilfield. Faced with the prospect of gaining or losing the purchases of such a bloc, individual OPEC countries would quickly convert to full competitive mode.

Oil is sold as "futures contracts" on the commodities market. There is nothing to prevent private commodities speculators, for whom oil is not an industrial input but rather a paper investment, from buying up a large fraction of these oil futures, thus driving up oil prices. They know that there is a market for the resale of these contracts before the delivery date, provided there is a market for oil; and as long as the world economy is in growth mode (or poised to enter it) investors smell demand for oil and thus easy profits.

The problem is akin to scalpers who buy, in advance, huge blocks of tickets at window prices, only to resell them at a huge mark-up when actual theatergoers want to attend shows. That's why most states have made wholesale scalping illegal. If governments worshipping "free-market" forces regard oil speculators any differently, they deserve to be kicked in the ass, hard, first by market forces, and then by an angry electorate which, chumps though they may be, will eventually tumble to the game.

Unless your argument is that: (a) peak oil has definitely, long since occurred, and (b) that speculative oil futures trading has no significant effect on market prices (in which case you need to present a compelling explanation of why large, short-term oil price fluctuations with no seeming relation to actual world demand occur), you're going to have a problem plausibly denying the influence of commodities speculators on oil futures markets and thus on bid-determined oil prices.

F. I agree with Mr. Talton that oil companies have no incentive to support alternative energy in anything other than a superficial, politically-correct propaganda sense. At first glance, one might imagine that oil companies, foreseeing their ultimate demise, would have a strong profit motive in getting into alternative energy on the ground floor; but oil companies are run by individuals, whose primary interest as capitalists is to sustain their own personal profits until retirement -- something which increased oil prices will do, as long as there is no viable alternative. That isn't to say that they won't conduct studies, quietly, or eventually invest cash reserves to establish ownership in alternative energy companies, or that small oil companies, seeing which way the wind is blowing, won't change course; but the industry has no financial motive to support early radical changes which threaten their profits in the energy consumption chain.

G. I also agree with Mr. Talton that, regardless of all this, non-renewable resources like oil will either become too expensive, run out, or else be replaced by demand for a substitute product. And I agree that the need for a viable, systemic substitute for oil is of immediate, dire consequence, whether for one or two generations into the future. I furthermore assert (again, I believe in agreement with Mr. Talton), that the sooner the transition begins, the easier it will be; and that government policy, wisely wielding a combination of carrot and stick, is the best means to insure an early transition while guaranteeing a level playing field to private innovators. It IS a serious problem and the time to act is NOW.

With the surge in cases of swine flu, I think that we should be thinking about low oil prices, as demand for air fuel is likely to crash and take oil prices with it.

Oil companies are investing in finding new sources of energy, the problem is that it's a token effort at best, as no shareholder-serving/self-serving stock-optioned CEO would throw all that money down the drain 5 years before his retirement.
Until the oil companies are REALLY up against it with their diminishing resources no white knight new energy source will arrive to solve the world's energy crisis.

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