My Other Car is a Horse-Drawn Plow

I’ve received about a dozen replies to “Oil Supply and Demand.” About half of the replies were hostile and insulting, which would seem to be a strange reaction considering that all I suggested is that oil production is not peaking and that if it were government intervention wouldn’t help. These letters reinforce my suspicion (expressed in “Oil and Instinct“) that economics is counter-instinctual. The worst ones I’ve ignored.

Here’s a message from Melvin Hoffman (italicized) and my replies:

I find it fascinating that the human brain could reach conclusions such as those posited by Mr. Koritz. First, obviously fossil fuel sources are finite. No one has ever argued otherwise.

I’ve repeatedly defined the peak oil debate in terms of a current production decline or a near-term decline. The fact that fossil fuels are finite is not necessarily relevant. If there were, (to use an absurd example) say, ten million years’ worth of oil to burn, the amount of oil would be finite but it would be absurd (rather than just incorrect) to argue that governments need to prepare us for the coming shortage.

Second, usage of fossil fuels have increased dramatically.

Yes, as has production of fossil fuels and just about everything else.

Third, no alternative practical replacement is available for such fuels…

There has been little incentive to replace fossil fuels because they are relatively cheap and plentiful.

and trends indicate that the major economies of the world will continue to use such fuels at rate which will result in competition and conflict.

People and their aggregates, national economies, constantly “compete” for goods and services; this competition is called “price.” Goods that are scarce and desired are valued more highly than goods that are cheap and plentiful. The price mechanism thus creates incentives to increase the efficiency of production of scarce and desired goods, as well as to conserve them, and to replace them with similar goods. When this occurs (actually, it’s an ongoing process) the formerly scarce and desired goods become less scarce and desired, and the price falls. This is the system of wealth-creation that has caused the unprecedented increase in human health and wealth that began with the industrial revolution. As for “conflict” over fuel, that could happen, and economic ignorance increases the chance of this.

If Mr. Koritz has a practical solution, I believe such a genius should patent it and he will immediately become the world’s richest person. How does he suggest we will replace our current means of transport? How does he suggest we will heat our homes? Come on, Sam, give us the answers.

I don’t believe that there’s a fuel shortage problem that needs a solution.

We now have our children in Iraq using the full force and killing power of our wealth to support our greed and excess. If we have such readily available alternatives and the shift will be made so seamlessly, then why are we in Iraq? Why are we spending hundreds of billions of dollars (trillions over a period of decades) to protect sources of energy and oil shipping lanes?

You don’t provide any polling data or anything else to indicate that Americans were primarily motivated by greed in supporting the invasion of Iraq, but even if that were the case, that doesn’t mean that military aggression actually succeeds in making a country rich. The people who’ve gotten wealthier so far from the invasion are (1) those taking US tax dollars (wealth created by Americans) and (2) those (oil companies, for example) who have benefited from the increased price of oil the invasion caused (the “risk premium“). Both of these things make Americans, on average, poorer. I also didn’t notice an influx of Haitian, Serbian, or Panamanian goods after those interventions.

Fools are born every day. That is unfortunately a fact which cannot be denied.

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Dominic Schmelzer writes:

Peak Oil certainly has nothing to do with Easter Island. But it also has nothing to do with whether a geologist gets a job. Many peak oilers would argue the oil companies’ present exploration attitude like this: Finding and extracting new oil is becoming expensive. But how expensive cannot be measured in dollars. It has to be measured in energy. How much energy does it take to supply 1 unit of energy to the consumer? With existing reserves, this is about 1:20. With not-yet found reserves, it could be 1:5. Tar sands are much more efficient than that at the moment. Until the two catch up with each other, however, oil companies are not going to be willing to spend too much money on exploration. Until then, Tom Lowe is going to be out of a job. In the end, however, (and this might take a century) energy expense to energy gain is going to be 1:1. At this point, it does not matter how much a barrel of oil costs. It’s simply not worth it to explore.

The cost of producing oil can be measured in dollars, since all relevant costs (including the energy costs) of oil production are tradable, and their exchange ratios are measured in dollars. Over time, each unit of fuel is producing more and more wealth, which would not be the case if a higher and higher percentage of the economies’ resources were required to extract the fuel. According to a pdf file provided by peak oil advocate Marty Sereno, “Total energy per capita peaked in 1980.” Yet per capita wealth has grown over the same time period (the very poor have done especially well. See “India and China Are Poised to Share Defining Moment“: “According to the World Bank, their combined growth can be credited with cutting the share of the world’s population living in extreme poverty to 20 percent in 2001 from 40 percent two decades earlier”). This means that percentage of resources (including energy) required to produce a given unit of fuel is decreasing not increasing.

“Regardless, both economic theory and history suggest that the market is capable of adjusting, without major crisis, to commodity depletion.” I am an historian. Economic theory (and the last 300 years) may suggest that that the market is capable of adjusting. History does not. There is still no wood on Crete. China has suffered centuries of famine again and again. Iraq still hasn’t recovered from over-irrigation in the Middle Ages. Resources run out. My question to you is: What do you consider a major crisis? And I’m not talking about Easter Island.

By “market” I meant an economic system consisting of (among other things) self-ownership, private property, and a low-friction medium of exchange (money). None of your examples qualify. By “major crisis” I mean one large enough to justify this debate.

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Tjalf Boris Prößdorf writes:

…[T]he fuel efficiency of industrial plants is a function of money invested — with marginal increase in efficiency costing increasing capital investment. Thus, at given fuel prices, economic efficiency over the lifespan of the plant is to be balanced against technical efficiency. Again, dramatic increases in fuel prices may be absorbed by the market as a whole, but may needlessly ruin those, who planned on less dramatic fuel price increases. Planning on dramatic price increases however means constructing plants that cannot function economically here and now, as capital investment will be too high. Therefore it seems to me, that your optimism is not entirely founded.

Fuel-dependent companies often hedge their fuel costs using futures contracts. It’s true that companies that make poor capital investment decisions are punished for those decisions. That’s fine by me, and no cause for alarm.

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Bill Meyer writes:

Only an economist would claim that capital can create energy.

I’m not an economist and I didn’t claim that capital can create energy, though the market system has certainly increased the usefulness of given quantities of energy.

A physicist knows that energy can be neither created nor destroyed. Oil is running out now. At $50 a barrel it’s twice the price that it was in the fall of 2003.

Yes, and cheaper than what you paid 25 years ago. Has anything happened recently that might explain a rise in gas prices? Oh yeah, the US invaded Iraq, al-Qaeda threatened Saudi and Iraqi oil fields, and demand for oil rose in China, India and the US.

Oil use probably increases exponentially like the planet’s population so the price will double every 18 months until it’s gone. That means oil will be $100 a barrel in the fall of 2006, $200 a barrel in the spring of 2008 and $400 a barrel in the fall of 2009.

You can become very rich if your predictions are accurate by trading oil futures contracts. As it happens, the people who trade these contracts for a living are betting on sub-1980 prices.

The decline of oil will also mean no more asphalt for roads, no more lubricants for machinery. It will also mean the demise of electricity for there will be no more insulation for cables, no more oil for oil filled transformers and no more resins for dry type transformers, and no more heavy equipment to repair transmission towers when ice storms bring them down. Fuel cells won’t be able to provide electricity because they require a proton exchange membrane, which is a petrochemical product. 99% of all modern miracle materials are made from petrochemicals. Before oil, wheat fields used to yield 30 bushels per acre. With tractors and fertilizers and irrigation (all made possible by oil) yields increased to 130 bushels per acre. So soon agricultural yield will be reduced and millions will starve. It will also mean the end of the information age because printed circuit boards, packaging for IC chips and computer cases are petrochemical products. Even liquid crystals for computer displays are made from petrochemicals. It will also mean the end of the aviation industry. There is no substitute for oil in commercial aviation. There is no fuel source, which can pack as much energy into such a light weight. Aviation started when oil became available and will end when oil is gone. This of course also has grave military implications, as the world’s armies are utterly dependent on oil to extend their military might. No doubt most societies will become very unstable as evidenced by the behavior of groups who compete for a dwindling resource. So buying copious amounts of firearms would be a judicious investment. The people least affected will be groups such the Amish and the Hutterites, who eschew modern machinery. We should teach our children how to engage in agriculture using horses and handmade tools in order to insure their future survival and prosperity.