More on: Fossil Fuels

Dan Yergin’s weekend essay on peak oil in the Wall Street Journal (summary: don’t worry) has certainly stirred up passions in the blogosphere. Lynne Kiesling and Michael Giberson, both at Knowledge Problem, are big fans: economic forces and human ingenuity, they agree, will stave off the feared peak indefinitely. Christopher Mims, writing at Grist, seems to have completely flipped out upon reading the article, accusing Yergin of being a “peak oil denier” akin to the frauds who claim that climate change is a hoax. (Note to Chris: you’re insulting climate science if you think it’s no more settled than the debate over oil futures.) Jim Hamilton at UCSD has a more measured and substantive but still highly critical take (which The Economist’s Free Exchange blogger mostly endorses):

“I submit that meeting the growing global demand for crude oil over the last five years has posed significant challenges for the world economy. And those who worry that the next 5-10 years might be like the last should not be dismissed as crackpots.”

As for me, I find these sorts of muddled, often faith based dustups utterly exasperating. Peak oil types tend to assume that stagnant global production over the past half decade is, in itself, evidence that oil production is headed for decline, when in reality, it doesn’t predict anything by itself. (They also tend to throw in some Hubbert peak theory, but that doesn’t really work once you pay attention to economics.) They also tend to assume that any decline will be economically disastrous, when there’s actually very little analysis of what it would really imply. On the other side, those who are convinced that peak oil is nonsense tend too often to resort to a similar sort of slippery logic: people predicted peaks in the past, but they were wrong; ergo, they are wrong this time too. Peak oil proponents didn’t realize that innovation would deliver more oil in the past; therefore, it will also deliver more oil in the future. Peak oil opponents also seem to claim that since the peak oilers have mangled their economics, the opposite of whatever they predict is what will actually happen. Not exactly sound logic.

Is there a way out of this morass? Let me try. There are three different debates being conflated here. The first is over whether geological limits are bringing the world to a point where global production must soon start to steadily decline. The second is over whether political decisions will lead global production to soon start steadily declining. The third is over what the consequences will be if either of these things actually happen.

On debate #1, there is little evidence that the world is short of oil in the ground. Without far more extensive access to the Middle East, we can’t really know for sure how much oil is there. That said, we can be pretty confident that there’s a ton of unconventional oil around elsewhere. In any case, the fact that production has been stagnant in recent years doesn’t by itself tell you anything one way or another about what the geological endowment is. Perhaps oil is becoming more scarce; perhaps governments are restricting its production, whether explicitly (as in OPEC) or through taxes and regulation (as in many other places).

On debate #2, well, that’s much more difficult – something that Yergin himself flags as a huge issue. Middle Eastern producers are pumping out a lot less oil than they were projected to a decade ago – indeed that’s pretty central to understanding why prices are so high today. Other producers have responded less robustly to high prices than some might have anticipated, in part because high prices tend to invite high taxes that blunt the economic impulse to produce more. It’s worth observing that political and geological limits are pretty much impossible to distinguish by simply looking at overall historical production data. They’re of very difference consequence for the future and for policy thinking, though, since policy shifts can move political limits but can’t do anything about geological ones.

As for the consequences of any decline or stagnation, whether driven by geological or political boundaries, there’s actually a dearth of analysis available. The IMF modeled a case this spring in which oil production basically flattened out over the next couple decades; the result was only a 3.5% decline in U.S. GDP (and a 3% fall in global GDP) relative to business as usual, spread out over two decades. (To be precise, the IMF economists modeled a 20% shortfall from BAU production; that works out to roughly flat production when juxtaposed with typical supply projections.) They also looked at a truly terrifying scenario in which production fell by about 40% over the next couple decades, and found U.S. GDP reduced by 15% below trend, ugly but still well short of some kind of Mad Max world. To be clear, I have no idea whether these IMF numbers are right – they’re extrapolating pretty far beyond past experience – but there isn’t much competing analysis out there. I’d love to see some more people tackle these sorts of questions. In particular, the IMF models doesn’t explore the impact of periodic shocks against a lower supply (and hence higher price) background. Some back of the envelope estimates suggests that it’s the mix of high and volatile prices, rather than one or the other alone, that could be a real problem.

It’s also worth observing that while most people identify peak oil with problematically high prices and continually increasing supplies with a much more benign world, there’s nothing that says that things need to be that way. It’s possible to have a peak alongside pretty benign prices (assuming that alternatives are coming in), and it’s possible to have modest supply increases alongside high, volatile, and economically problematic prices.

So where does this leave us? With considerable uncertainty, no doubt. Rather than trying to fight holy wars over whose theology is right, we might do better to think about an energy policy that manages all the risks that are getting mixed up in this debate. Geological risks in places like the Middle East are basically impossible to deal with directly, so a policy that takes them seriously would maximize the odds that well known resources elsewhere are available to development if necessary. Political risks can be ameliorated in part through smart diplomacy, but also through efforts to ensure that oil supply bets are spread widely. The risk that supply constraints of any kind could have ugly economic consequences can be lessened by serious efforts to cut demand, increase the availability of alternatives (which is basically the same thing), and help society cope with shocks. The nice thing about this sort of strategy is that you don’t need to settle any peak oil debates to agree on it. I have an odd suspicion, though, that a lot of people would rather fight over the fundamentals than figure out a common way of dealing with the often irreducible uncertainty we face.