My Last Word about the Peak Oil Debate

Many people interests have increased on this blog due to the debate between me and “step back” in the comments section and my following poll. My colleague Not Albert Speer also gave his two sense twice about the debate. This is to clear up my position and the misrepresentation on The Oil Drum.

First, the misrepresentation: It was stated that the PC Capitalist is a pro-market science major. This is wrong. Not Albert Speer is a pro-market science major, if am inferring the right information from his two posts. The PC Capitalist, who is writing right now, is a Economist. Please pay close attention to who posts the posts.

Second, my colleague cleared up his position for you and now I will do mine:

When people use natural resources they are often worried about when are we going to run out and when production is going to decrease. As I understand these are two different issues the production reduction does not matter if you believe that we will not run out.

I believe along with many Economists that we will be able to innovate to the point where we will no longer need oil before we run out. This is to say that when whale oil was in high demand and the cost of catching whales went up, people innovated kerosene to be install in lamps. Even in the oil debate itself. We have seen fuel injection engines and hybrid cars spur up when oil was very costly.

We have yet to fully innovate our way away from oil, but it can be done. The entrepreneur acts in errors in markets. The fact that the price of oil is rising quickly isn’t always a supply problem but assuming it is as the price goes up so does the rewards from an innovation. If oil stayed cheap during the middle part of the last century, we would have not need the investment in fuel injection motors. If oil wouldn’t have spiked in the 2000s, we would have no need for a hybrid car.

Things like the tar sands and shale oil were looked at in the ’70s and deemed to expensive to use but now the cost has gone up there is a market for that stuff. This will keep the supply up.

The reasons why people freak out and I have gotten a lot of hits from this debate is because a life without oil would be a gloomy one. In reality, it is an largely but not perfectly inelastic demand curve. That means, for non-economist, that price has little effect on the demand of the good. A good example is cigarette smokers. If I told cigarette smokers that we are running out of tobacco, they would flip out like you all are.

What the part that you are accounting for is that a private business, in this case cigarette manufactures, have huge incentives to not be out of jobs later. They will innovate and roll the cigarette with less tobacco or a substitute.

If that example doesn’t make sense just focus on the fact that businesses want to reduce costs, so no matter why the price goes up they will come up with a way to lower cost and most of time they use substitutes.

This is not a natural resource problem but I hope you see the parallels. Grab a Coke and take a look at the fact that it does not have any sugar in it, but go to Europe and you will see sugar in that. This is because the United States government has a large tariff on imported sugar. Coke then decided to innovate and substitute high fructose corn syrup for sugar.

The reason why we can have a debate like this on the Internet through computers is because of innovation. The reason why you cannot wrap your head around this is because no one can predict an innovation. No one knew they wanted the Internet until it was invented.

As long as someone owns something, it will never go extinct. Cow and Chickens will never go extinct, but the tiger will. Unless policy changes and we are allowed to own tigers and other endangered species. If you do not believe me, try to go to Sea World with a harpoon and you will see that Shamoo is the most protected whale in the world.

There will be at least one barrel of oil that will not be consumed because that one barrel will be worth so much that people will not be able to use it.

Since I have used mostly possible renewable resources in my examples, think about copper. This was one of the first natural resources used by man. It was once predicted that we would run out of copper int he early 1990s. This did not account for innovation. The penny itself had to change it composition because copper because the supply of copper went down and the price went up.

Private industry has innovated where there are profits to be made. The very fact that you are so interested and scared shows the future entrepreneur that there is a huge market for a new invention that could reduce use or even come up with a new way to power cars.

The market will allocate resources to more efficient means…

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Published in: on February 29, 2008 at 5:31 am  Comments (11)  

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  1. If this was true Alchemy would be a growing field right now with gold at $970 an ounce.

    We replaced whale oil with something better, there are presently no better substitutes for oil. Is it possible that we will discover some miracle source of power? sure. But we would be wise to plan for the worst and hope for the best.

  2. If to “plan for the worst” you mean stimulate development of alternatives through, say tax breaks, bingo. If you mean, raise taxes to so the government can hand out no-bid contracts or simply force changes, big mistake. Economic regulation will only make the problem worse, because we will spend money pursuing innovation while others simply enjoy cheaper oil (our cost, their gain).

    As for having no substitutes for oil, you are at best 70% wrong. Most oil in the world is consumed in electrical-current producing factories, NOT automobiles. Nuclear energy 50 years ago was more efficient, but is much higher up front than buying the same old relatively cheap oil. If you want proof, look around, the demand for more nuclear reactors is exploding and a dozen new plants will be completed within the next 15 years.

    I don’t like oil, because it pollutes the air I breath, and threatens my existence (in the long run). I honestly hope I see the day when oil is no longer the second-most dominant energy source on the planet (the first is and will always be electromagnetic radiation from the sun). But in my most negative of dispositions, oil will not be the end of industrialized society, because the necessary advancements are already in the works (nuclear energy, solar power, the list goes on and on).

  3. Dear PCC Economist,

    Thank you for clarifying that there are two different people posting on your blog, you and Not-Albert.

    Now that we know you are a pure “economist” and not an undismal “scientist”, the basis of your writings start to make more sense.

    As an economist, you probably appreciate the beauty of the capitalist system: each person “specializes” in a specific trade and thus becomes very competent (or at least highly conversant) in that one area.

    However, you may fail to see the flip side of that coin: each specialist becomes highly ignorant (and usually inconversant) in all other fields of endeavor.

    Since you personally have chosen to “specialize” in the study of economics, it does not surprise many of us non-economists (or anti-economists) out here that you demonstrate a high degree of ignorance (not to be confused with stupidity) about the “innovation” business.

    As one commenter notes above: Gee, why haven’t the Alchemists “innovated” in the last 3 centuries and come up with a way to turn lead into gold at 10 cents per ounce?

    Or to put it more broadly and bluntly, Gee why haven’t chemists “innovated” in the last 3 centuries and come up with more than a measly 114 stable elements in the Periodic Table?

    After all, thanks to the “ingenuity” of the human mind and its unlimited capabilities, surely “we” should have innovated a few more elements in these recent hundreds of years. The Market demands “innovation” and therefore the “we” out there (otherwise known as “they”) surely must have delivered by now. The inconvenient truth is that “we” haven’t and we probably never will.

    But as I said, specialization breeds ignorance. You are an “economist”, not a rocket scientist. We forgive you because you know not what you talk about. 🙂

    p.s. All the many gifted scientists and engineers at The Oil Drum have been racking their brains for years trying to find avenues of “innovation” for getting around the Peak Oil problem. We’ve come up with nada (a.k.a. 0). It wasn’t for lack of trying or lack of a desire to come up with something.

    p.p.s. Congressman Roscoe Bartlett (who is an engineer) was on the House floor yesterday trying to explain why “bio-fuels” and essentially all other workarounds fail. I won’t bore you with the details because the devil lurks there. 🙂

  4. I really wanted to give you the benefit of the doubt and read your response, but your post is ILLITERATE:

    Many people [sic] interests have increased on this blog due to the debate between me and “step back” [sic] in the comments section and my following poll. My colleague Not Albert Speer also gave his two sense [sic] twice about the debate. This is to clear up my position and the misrepresentation on The Oil Drum.

    Why bother reading further?

  5. I know you are “a Economist” so I’ll try to be gentle and compassionate.

    1. We did not “innovate” kerosene. We found it in the ground, just lying there waiting to ignite the 20th century.

    2. “Things like the tar sands and shale oil were looked at in the ’70s and deemed to [sic] expensive to use but now the cost has gone up there is a market for that stuff. This will keep the supply up.”

    The issue is GROWTH. Can you GROW the supply, year by year, by exhausting your natural gas resources to melt the tar out of sand???

    As the cost of energy rises, the cost of extracting energy rise, and you’re like Alice in Wonderland’s “Red Queen,” who says “You have to run faster and faster just to stand still.”

    3. “The reason why you cannot wrap your head around this is because no one can predict an innovation.”

    This follows your comment:

    “we will be able to innovate to the point where we will no longer need oil before we run out. “

    This is known as a “contradiction.”

    “We cannot predict innovation, but it will happen anyway.”

    4. “It was once predicted that we would run out of copper int he early 1990s. This did not account for innovation. The penny itself had to change it composition because copper because the supply of copper went down and the price went up.”

    HAVE YOU NOT LOOKED AT THE PRICE OF COPPER LATELY? Don’t you know a “penny” is now “worth” 2 cents in raw materials? Have you not noticed that COPPER WIRE is being stolen left and right???

    These are known as “clues.”

    5. You can intone the word “innovate” all you like, but vast abundant cheap versatile liquid fuels will not rain down on you like manna.

    I’m sorry.

  6. To respond to a few comments here…

    Yes, I realize I made some grammar errors as I was typing it fast last night on a Apple that delete things sometimes when you type them. (Someone needs to innovate a fix ;))

    Next: This statement…
    “Since you personally have chosen to “specialize” in the study of economics, it does not surprise many of us non-economists (or anti-economists) out here that you demonstrate a high degree of ignorance (not to be confused with stupidity) about the “innovation” business.”

    Makes it clear that you do not understand Economics and even better Austrian Economics that is studied at my home University. We focus on how the entrepreneur is the center force of the market economy. How there are errors in the market and the entrepreneur innovates to capture profits… but whatever we can talk about specialization and if it breed ignorance… in that case you “Scientist” who are not Economists should stop using the words supply and demand, quantity and price, when you debate anymore… because you do not fully understand how all of these things work…

    To the next thing:

    Yes, we “found” kerosene in the ground… just like I found rocks in the ground… should I even go further or do you get my point? Okay, I will go further since I am ignorant in science. Last time I checked, it takes more than just a discover to realize it potential…

    Shifting to the Copper idea… yes Copper is more expensive, my point was because of this we have not run out… because of this we have innovated… copper has other special little things going on to it because of a lot of recent INNOVATIONS have increased the use of copper in technology…

    I mean they discovered it so there was no innovation… okay I am being too mean…

    The only thing that is going to solve this debate will be time… and if all of you are right then we will have plenty of time to sit on the computer with no gas in our cars to go anywhere and you all can tell me I am wrong…

    Until then every time you get in your hybrid car… see it as a stepping stone to the new innovation that will completely change the way how we see the world….

    P.S. tell all of your friends how stupid I am so that when someone innovates something I will be famous for predicting that we would innovate

  7. Heres a clue.I spent close to 20 years in the nuclear industry trying to ensure the public safety of the beasts.During this time ,a lot of my time was spent attempting to figure out/foresee the “H.S.” factor in events that lead up to a “unusual event”.
    “H.S.”,or human stupidity can be a nightmare to orderly operation of any organization,government,market.
    Your faith in “the market”as a means to deal with the coming resource shortages is touching.It reminds me of “the preacher”in “Brother Loves traveling salvation show”{Pack up the babies and grab the old ladies and everyone goes}

    What you fail to address is the fact that it takes a operational .gov,and the enforcement of law,as well as a agreed medium of exchange for anything passing as a market to exist.A market is a creation of regulation,enforcement of contract law,as well as force to back up the decision making of the governing authority.There is no such thing as a “free market”A real economist understand this.
    This crisis our whole civilization faces,and yes it is a crisis of that magnitude.From where you are sitting now warm and safe at your computer,there is little sign of the tidal wave that will soon sweep away the underpinnings of your life….the easy transport,the {fairly}cheap food,the safety of police at a moments call,the very social stability that defines your existence…will be changed.Soon.

    These are the good old days.

  8. Read into Anarcho-Capitalism…

    Government impedes the free-market, it does not need government… if you didn’t have government you would still trade and so on…

  9. Makes it clear that you do not understand Economics [of the entrepreneur] that is studied at my home University. We focus on how the entrepreneur is the center force of the market economy. How there are errors in the market and the entrepreneur innovates to capture profits … but … in that case [it is] you “Scientist[s]” who are not Economists [and] should stop using the words [like] supply and demand, quantity and price, when you debate anymore… because you do not fully understand how all of these things work…

    Dear PCC,

    I very much enjoy our ongoing debate because for the most part it is civil.

    From my “step[ped] back” position I see us as talking past each other rather than to each other.

    I use words of science and these fly right over your head. You use words of the economist and believe these fly over my head.

    I never said that economists are “stupid”.

    Many of them (but not all) are “ignorant” –especially about science. But then again, we are all “ignorant”. The more I learn, the more ignorant I feel because I come to realize how little I know.

    Now, as for you “studying” entrepreneurs from the Ivory Tower perch of your University, there stands the viva le diffa-france [sic]. I “work” on an almost everyday basis with entrepreneurs. I don’t study them from afar.

    I understand how much of what scientists and engineers do appears to be “magic” when looked at by the untrained eye and from far away pastures.

    Yes, it all looks wonderfully magical: all these “computers”, hybrid cars, solar powered photo voltaic cells, hydrogen fuel cells and renewable clean coal psychobabble “technology” words.

    Let me give you a simple hint. Nothing is “renewable”.

    “Renewable” is a marketing BS word that was “innovated” out of thin air, that stuck and has nothing to do with real science. Under the second law of thermodynamics (entropy}, once you have used a given energy, its useabilty is gone forever. Off into outer space as diffuse IR radiation. It is not “renewable”.

    And in that you see the fallibility of the human mind. We are easily fooled by our own psychobabble words.

    And that, of course, brings us full circle to words like “supply”, “demand” (a.k.a. consumption), “price” (a.k.a. valuation noises made by irrational human beings), “costs”/profits (a.k.a. refusal to account for everything), etc. Those are topics each worthy of their own post and comment. 🙂

  10. The market will allocate resources to more efficient means…

    …if more efficient means exist. This important caveat often gets overlooked, and thus your unqualified conclusion is unsupported. The entrepeneur tries to find better ways, but that does not guarantee success.

    I can understand how economics provides a framework where engineers are encouraged to exploit things that are there to be discovered. But I don’t understand how economics can create things to be discovered; that is a property of the Universe, not economic theory.

    Engineers understand limits, we deal with them every day. Would it hurt economic theory to admit that it also has limits? (The limits are there, in the equations and models you use).

    This apparently unshakeable belief that economics has no limits is more akin to religion than science, and engineers don’t do religion.

    As an investor, I would heed engineers who say “I found a great new way to do X”. I would also heed engineers who say “After 50 years of looking, we haven’t found a better way to do X”. But hey, it’s your money!

  11. I wasn’t going to respond anymore because this post is old and I felt like we were all going in circles…

    But the efficiency argument is good to understand…

    People often do not understand efficiency but the classic example is flying vs. taking a bus… most people would say flying is more efficient… but it is only for the rich who value their time more and the ticket doesn’t take a whole lot of their income…

    If I were too look at you and tell you that in order to get our 3 gallons of gas to go to work it is 300 dollars… and instead you and another person decide to car pool even though it takes more time it may still be more efficient…

    There is no such thing as an inelastic demand curve… saying that you can not find other ways to do something…or I could say “more efficient”


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