[eclipse]

This article was written by a friend of mine, so if you feel the need to leave a comment on his blog, please, please don’t dump abuse on him. Instead, please focus on the subject matter and be as factual and detailed as you like… but no flaming please!

http://one-salient-oversight.blogspot.c ... ional.html

If this longer link does not work, please go to OSO below and look for "Peakniks must embrace conventional economics".

http://one-salient-oversight.blogspot.com

Peakniks must embrace conventional economics

Many Peak Oil advocates - collectively known as "Peakniks" - are rightly suspicious of economists and the study of economics. In fact, the first opponents of Peak Oil were not actually oil geologists but energy economists.

The reasons why so many modern economists have it wrong about Peak Oil are actually quite simple - they do not understand the Peak Oil theory and their own economic theories and prognostications do not take into account the geological limit to oil extraction that is proved by Hubbert's Peak. The problem is essentially one of supply - oil production cannot be "ramped up" endlessly to meet demand. A good illustration for this is to pretend that oil production is like water going through a tap - at some point, despite the tap being open as wide as possible, the amount of water coming out the nozzle is getting slower and slower.

I believe that once economists understand the implications of Peak Oil, they will adjust their theories accordingly.

However, it is important that the Peakniks do not simply write off economists and the study of economics. Although confidence in the the study of economics is rightfully low amongst them, Peakniks must realise that the problem that Economists have is simply one of ignorance. The economic models that have been developed over the years are not somehow destroyed or made redundant by the spectre of Peak Oil. Economists, when they have the right information, are very valuable and can be very useful. The problem at the moment is not the economic models and theories that Economists have created over the years, but their lack of understanding of Peak Oil. Peakniks who worry about these things should therefore focus mainly on the ignorance of economists, rather than simply panning economic theories.

The reason I am saying all of this is because I see myself as understanding both sides - as a Peaknik and as a person who understands economics. And let me point out that many Peakniks need to understand basic economics.

The problem is that many peakniks have come up with what I term "Static Outcome Theory" when they look at Peak Oil. Realising that oil supplies will eventually begin to dwindle and understanding how important oil is to the modern economy, they see the world heading towards a particular conclusion. Extreme peakniks - "called Doomers" - actually see the end of western civilization altogether. Influenced by Richard Duncan's Olduvai Theory, "Doomers" view the lack of energy production caused by Peak Oil will eventually lead to a Malthusian Catastrophe - essentially a massive and prolonged population reduction.

Doomers represent a minority of Peakniks, but they are still very influential. Doomers see no answer at all to Peak Oil, and many are actually storing away food and ammunition so they can survive the coming apocalypse. The rest of the Peakniks, however, are more moderate and hold out hope that the world may be able to survive the coming Peak.

Nevertheless, when Peakniks look at the economic impact, they are essentially focused upon an end goal. "When the Peak happens, our society will end up in this particular situation" is what the Peaknik will argue. The particular situation that they argue will happen differs from Peaknik to Peaknik, but virtually all of them argue that the result will be economic chaos.

As a Peaknik myself, I also believe that Peak Oil will lead to massive economic problems. I, however, choose to use the more refined words that economists use. I would not argue that Peak Oil leads to economic chaos, but I would argue that Peak Oil will lead to a major economic realignment.

The reason I use "realignment" rather than "chaos" is simple. "Chaos" in the context of Peaknik argumentation, is a static outcome - it is a final outcome with nothing beyond it. "Realignment" infers a dynamic situation - a future beyond the major event. In other words, many Peakniks will simply point out that we are heading for a single, immovable social and economic situation called chaos. Beyond that, the Peaknik does not know what will occur. Those who understand economics, however, do have the skills and knowledge to work out what might happen. It is my understanding of economics that has allowed me to take a very "optimistic" position on Peak Oil.

Nevertheless, Peakniks need to reassess their static outcome theories, which I will now begin to address.

Static Outcome #1: Endless Hyperinflation
The economic "chaos" many peakniks argue will happen differs from Peaknik to Peaknik. Some argue that the situation will be like the 1973 and 1979 oil crises, except far worse. They see the "chaos" to be an endless bout of hyperinflation that cannot be overcome by traditional economic models. In this static view, hyperinflation causes people to invest in precious metals such as gold. Needless to say, massive unemployment and poverty will accompany this endless hyper inflationary outcome.

Much of the reasoning behind this view is based upon what I call the "Commercial Bank Money Printing Conspiracy". This is a rather popular but fatally flawed understanding of how money is created in a modern economy, and has been around for much longer than most modern Peakniks. It was developed apart from Peak Oil, but many Peakniks today seem to be embracing its flawed understanding of how money works in the modern economy.

The argument basically is that Commercial banks have the ability to print money, and rely entirely upon economic growth for their profitability. But when Peak Oil hits, and when the economy begins to contract/collapse (depending upon your POV), the bank's money printing will not match economic growth, causing a massive inflationary spiral.

All I will say about this is that this understanding of money creation is fatally flawed. Commercial banks do have the power to create money, but they are exceptionally limited in how much money they can actually create. A good illustration of how this works would be to compare the bank's ability to create money with an accountant's ability to create invoices. An accountant can only create as many invoices as can be matched by the debtors who are on the ledger. The accountant could choose to create invoices that are not matched on the ledger, but that would be stupid - no one would pay them and he would eventually lose his job. In the same way, Banks can only create as much money as the economy itself chooses to create. If a Commercial Bank chose to create money apart from this, then they would have their banking license stripped by the Central Bank.

Many Peakniks nevertheless would argue that a continual state of hyperinflation is a serious possibility, regardless of whether they believe the "Commercial Bank Money Printing Conspiracy" - but such an understanding would be more rooted in a misunderstanding or ignorance of how monetary policy is used in price stability. It would be well worth the effort of Peakniks to examine how monetarism gained influence during the 1970s, and how people like Paul Volcker, Allan Greenspan's predecessor at the Federal Reserve Bank, was able to use monetary policy to kill the rampant inflationary pressures from the 1970s. Many Peakniks would argue that lower inflation was due to a collapse in oil prices from about 1981 onwards, but are probably unaware that this collapse was caused by a major world recession that had its basis in Paul Volker's actions at the Federal Reserve.

Static Outcome #2: Endlessly high oil prices
Peakniks are right when they argue that the price of oil will go up because the supply of oil will be restricted as Hubbert's Peak begins to kick in. Nevertheless, Peakniks may not realise that the price of oil does also depend greatly upon demand. Demand, like supply, is not constant. If the demand for oil drops, then so will its price.

Many Peakniks would counter this by arguing that oil is the backbone of the modern economy. We can do without Coca Cola, but we can't do without oil. This is a half-truth, and it results in the belief that the demand for oil is actually a continual demand. In other words, oil is not subject to the normal fluctuations of the marketplace since demand is essentially constant and rising. Peakniks may even believe that, even while the world economy begins to contract, the demand for oil will just continue to increase. Moderate Peakniks may understand that there will certainly be peaks and troughs caused by market fluctuations, but would still argue that the price of oil will, over time, get higher and higher and higher.

And the reason, of course, is that many Peakniks see high prices in comparison to what they are today. If oil gets scarce, the price of oil gets higher, therefore the future oil price will be very very high because supply will be so low. It's a simple equation, and it has some truth in it, but it will not really reflect what will happen.

Statistics pretty much show that the demand for oil drops during a recession. The only way oil can continue increasing in price is if there is economic growth to push demand higher. Oil demand is NOT a constant.

I need to reinforce this point because some Peakniks may somehow think that I do not realise the massive importance that oil has in our society. Oil, they would argue, is more than just pumped into your car. It is also used for chemical feedstock to produce plastics and to produce fertilizers and other chemicals that are vital to maintain current agricultural output. Oil, in other words, is also directly responsible for the quantity - and cheapness - of the food we eat. In this sense, oil is an integral part of the "Green Revolution" and any scarcity of oil will, in fact, result in a loss of farm productivity. Moreover, we can't just suddenly reduce the demand for food - if food supplies drop because of Peak Oil, then the result will be mass starvation.

All this is true and I accept most of these arguments. However I would like to point out that, while oil is definitely needed to keep farm productivity at the current rate, a substantial majority of oil is still used to pour into our fuel tanks. It is this sector of oil usage that is capable of a reduction in demand. All I am pointing out here is that, even if oil production dropped to 50% of what it is now, there would still be more than enough to keep food being produced. Given a choice between cars and food, the majority would choose food. So while oil demand for agriculture is a constant, oil demand for other sectors is quite flexible - and is in those other sectors (transport, polymers etc.) that demand can be reduced without causing world-wide starvation. The market itself will ensure that this will occur.

Certainly, as a Peaknik myself, I do see the price of oil climbing to exceptionally high levels. Nevertheless, predictions of $1000 per barrel are just simply outrageous. The reason being that I believe that the scarcity of oil, over the long term (decades), will not be reflected by an ever-increasing oil price, but through other economic indicators.

Static Outcome #3: Endless unemployment
As a Peaknik I am convinced that the coming scarcity of oil will lead to a major economic readjustment - and that one of the results of this adjustment will be major unemployment levels. No one can ever accurately predict what these levels may be, but it is obvious from my point of view that the readjustment will be at least as bad as the 1930s depression - at least. Therefore I would argue that unemployment levels during this readjustment will reach levels never before experienced by anyone living in this current generation.

But my study of economics shows that unemployment has a cyclical nature to it, and that when a recession is over, employment levels begin to increase. Therefore I also see that, while Peak Oil will eventually cause massive unemployment, the economy will also eventually learn to adjust, leading to increased employment.

It is quite inconceivable that massive unemployment levels would remain on a permanent basis. Even Western Europe, for all the complaints over the seemingly permanent 10-12% unemployment rates that afflict nations like France, Germany, Italy and Spain - these nations still have 88-90% of the workforce employed.

It is perhaps at this point that a simple economic model can be drawn up to explain things better. Imagine you are living in an Amish community - albeit one that has no contact at all with anyone outside. The Amish community represents the world economy and everyone living in the world. Now let's say that one day a tornado rips through our Amish community and destroys every single house. Suddenly the entire Amish community is homeless and has suffered great economic and social loss. Of course, that tornado represents Peak Oil. After the tornado, what would the Amish do? They would band together and help rebuild their community. Everyone is gainfully employed (as they rebuild), but everyone has, at the same time, experienced a great deal of economic loss.

It is therefore entirely reasonable to assume, despite the continual onset of Peak Oil, that the massive unemployment it causes will have a temporary nature to it. No doubt the world economy will be permanently changed as a result of the peak, but there will still be a need for labour, and for production, and a demand for consumption. The world may be "poorer" because of Peak Oil, but this won't necessarily lead to permanent, massive unemployment levels.

Of course the Amish/Tornado model I have just proposed does not fit exactly - but then, nor will any "model" or illustration. Peak Oil is a continual problem while the tornado appears once and is gone. Nevertheless I would argue that the result is the same.

One thing that many people believe today is that economic growth and employment go hand-in-hand. Peak Oil, it is assumed, will lead to a continual and debilitating economic decline. Since unemployment only drops during economic growth, it is assumed that unemployment will be massive and permanent.

But, again, this assumption does not take into account "Steady-state economics" - which would probably argue that it is possible to have an economy that is neither growing nor declining, but still able to keep people employed.

There is an historical precedent to this - the Black Plague in Europe. The Plague devastated huge parts of Europe, leading to a massive reduction in population. Yet there is no evidence that I am aware of which shows that ordinary Europeans at the time had massive unemployment problems.

We need to remember that unemployment is actually a modern phenomenon that came along with the Industrial Revolution. Increases in productivity led to both cheaper prices and the obsolescence of many traditional industries. The industrialised world became urbanised as a result. Since the Industrial Revolution, the world economy has been continually growing. This means that current thinking about unemployment is wedded to the notion that the economy must always be growing in order for unemployment to be low. Theoretically, I can see no reason as to why the phenomenon of ultra-low unemployment that we see in the pre-industrialized world (which was essentially a steady-state economy, or growing at a very low rate) cannot exist in an industrialized world that has been rocked by Peak Oil.

What will happen?
It is difficult to know whether the current high oil prices we are suffering is the beginning of the Peak. Certainly I have seen evidence from OPEC that Light sweet crude has peaked, while total oil supplies have continued to grow. To me this indicates that "The Peak" is still a few years off, but then I may be making this assumption based on the wrong information (can we really trust OPEC?)

We are already seeing the results of high oil prices. Already monetary policy has been tightened in the last two years in almost every major industrialised economy to pre-empt inflation. What is going to happen when the peak is reached?

The first thing is obviously a sustained increase in the price of oil. With demand still high and supply unable to meet demand, prices will begin to rise.

Secondly, as the price of oil rises, so will inflation. Inflation is essentially the devaluing of money in relation to all goods and services that are produced. With oil supplies becoming less reliable, and with so many parts of the economy reliant upon the price of oil for factoring in to end costs for goods and services, inflation itself will begin to rise.

Thirdly, in response to a growing inflationary threat, central banks like the US Federal Reserve will begin to tighten monetary policy - they will raise interest rates. Raising interest rates increases the value of money since the central bank is creating a demand for them. The reason why interest rates are increased is to prevent inflation from breaking out. Interest rates are inflation killers. Unfortunately, higher interest rates are also economy-killers. Increased interest rates mean that people will borrow less and save more. Since much of the western economic system is based upon "borrowing and spending", interest rates will simultaneously punish both those who borrow (by making it more expensive) and those who spend (by making saving more attractive than spending).

Which leads, fourthly, to a recession. There will be a period of "negative economic growth" (which, to me, is essentially an economic decline). Bankruptcies, growing unemployment and mortgage foreclosures will accompany this.

The recession will, sixthly, lead to a drop in demand. The price of goods and services will begin to decrease - including the price of oil.

Seventh, with a decrease in prices, interest rates will then begin to fall, thus making it easier for people and businesses to borrow and spend again.

Eighth, this increase in consumption will lead to a drop in unemployment.

Ninth, this drop in unemployment will lead to economic growth and an increased demand for goods and services.

And, finally, tenth, this increase in demand for goods and services will lead to increase in the price of oil again.

After the tenth point, you can simply go back to point one - the situation starts over again.

This economic cycle is well known to all economists. However, I need to point out that, because oil supplies are still hard to procure (due to the Peak), the recovery will not, in real terms, match the level reached in the previous cycle. What I am pointing out here is that, although the economic cycle will continue throughout the post-peak years, there will be a structural decline so long as oil remains an integral part of the world economic system. Since modern economies appear to be getting better and better at preventing inflationary pressures through pre-emptive monetary policy, I would assert that the "structural decline" will be experienced as very low year on year GDP figures, and a decline in GDP per capita figures in nations that, on paper, are still growing economically.

But, of course, once the peak has been reached, and once governments, businesses and ordinary people finally understand the reason why this has occurred, the market itself (with a lot of government intervention) will seek to reduce its own reliance upon conventional oil supplies. While oil will still be pumped out of the Middle-east and the Gulf of Mexico, more and more alternative sources of oil - such as oil shale, tar sands and coal liquefaction - will become a market priority. Wasteful energy consumption that we see happening today in the form of Four Wheeled Drives (SUVs), badly insulated houses that rely upon fossil fuels for heating and/or cooling, as well as other things, will be curtailed.

EREOI and market prices
Peak Oilers speak of something called EROEI - Energy Returned On Energy Invested. It is essentially the idea that it would be stupid to use up, say, 10 barrels of oil in expended energy in order to recover, say, 8 barrels of oil. Peakniks are very strong on this subject, and it is one reason why so many believe that the so called "Hydrogen economy" mooted by many environmentalists will just not work, along with a whole host of other forms of alternative energy. The argument is that it is useless to be in a situation in which you lose more energy than you gain. It is a very powerful argument and it is also very true.

Peakniks who don't understand economics will point out that EROEI is the thing that needs to be examined - not price. So when an oil company decides to invest money in tar sands, they should not do so because it is economically viable, but only if it has a realistic EROEI. There is no point, they would argue, to divert economic resources into an energy source that returns less energy than the amount invested. Therefore, the argument goes, the decision must not be made on price but upon science.

All this is true, except that many Peakniks don't realise that, the more expensive energy becomes, the more an EREOI is reflected in the price the market is willing to pay. In a world awash in cheap energy - as we are at the moment - EREOI can mean quite little. Let's take the Athabasca Tar sands in Alberta, Canada. While it is obvious that this stored petroleum is massive, very little has been invested in the area in the last 25 years. The reason was simple - the price of oil was too low, and the cost of extracting oil from tar sands was too high. What is also obvious to those in the know is that the EREOI of traditional oil fields is much higher than the tar sands of Athabasca - thus making traditional oil fields more energy efficient than extracting oil from tar sands. In other words, the market price for oil and EREOI are actually linked together.

The upshot of this is that Peakniks should not need to worry too much about EREOI and not spend time slamming economics and businesses for their focus upon price rather than science. When energy becomes scarce, this is reflected in market prices. The market will not invest anything into any energy project with a negative EREOI simply because the cost invested will not match the money returned. In this sense, money and energy are essentially linked.

The Future
As energy becomes more expensive - since oil scarcity will make it so - the economy will adjust in order to cope with the increased cost. Fuel efficient cars, increased public transport, increased medium and higher density living will typify a society and an economy that will be trying to save money on energy costs. It remains to be seen whether solar and wind power, as well as other alternative forms of energy, will be viable. The use of disposable plastic will decrease as plastic prices increase, which means an adjustment in the way in which many people purchase certain goods.

The future is not bright, but nor is it bleak. Peak Oil will transform our world's use of energy way beyond out lifetimes. Historians will look back on this period and note that our values and economic activity were linked quite obviously to cheap energy in the form of oil. But the changes that we will eventually face will not come suddenly and rapidly, but slowly and painfully. Peak Oil was never about the world suddenly running out of oil (as some anti-peak oilers so ignorantly believe), but about the massive economic and social changes that will result from an ever-decreasing source of energy.

In the meantime, Peakniks must continue to warn people about the coming danger. It is not the end of the world - despite the protestations of "Doomers" - but it is a serious challenge to our way of life. The earlier we realise the Peak is coming, the better prepared we will be for the changes that will inevitably occur. What Peakniks must not do is dismiss economics and treat it as though it no longer applies. Instead, Peakniks must try hard to understand how economics works, and get a basic framework that includes monetary policy and the importance of supply and demand. Moreover, they must be very wary of promoting false and misleading theories, including the popular "Commercial Bank Money Printing Conspiracy" that I mentioned above. Peakniks are unlikely to convince those in power of the truth or Peak Oil if their understanding of economics is fatally flawed. Those in power are more likely to listen to truth coming out of the mouths (or websites) of those who have a sound understanding of more than just the physics of Hubbert's Peak.

[seldom_seen]

$this->bbcode_second_pass_quote('', 'T')he earlier we realise the Peak is coming, the better prepared we will be for the changes that will inevitably occur.

[RacerJace]

$this->bbcode_second_pass_quote('', ' ')The reason I use "realignment" rather than "chaos" is simple. "Chaos" in the context of Peaknik argumentation, is a static outcome - it is a final outcome with nothing beyond it. "Realignment" infers a dynamic situation - a future beyond the major event. In other words, many Peakniks will simply point out that we are heading for a single, immovable social and economic situation called chaos. Beyond that, the Peaknik does not know what will occur. Those who understand economics, however, do have the skills and knowledge to work out what might happen. It is my understanding of economics that has allowed me to take a very "optimistic" position on Peak Oil.

[DigitalCubano]

$this->bbcode_second_pass_quote('seldom_seen', 'D')iseconomies of scale

[CARVER]

$this->bbcode_second_pass_quote('eclipse', 'P')eakniks must embrace conventional economics
... their own economic theories and prognostications do not take into account the geological limit to oil extraction that is proved by Hubbert's Peak.
... I believe that once economists understand the implications of Peak Oil, they will adjust their theories accordingly.
...
Peakniks who worry about these things should therefore focus mainly on the ignorance of economists, rather than simply panning economic theories.

[Heineken]

I can't speak for others, but I find the appellation "peaknik" unflattering. The casual way it is used throughout that long article is intensely irritating.

[aahala]

I don't think the friend's article is as much wrong, as wrong headed.
The article accepts a strawman built by others who do not understand
what the studyof economics is about.

Economic theory is about limits and finiteness. Any statement consistent
with economics has implicit one or both requirements: over the relevant
range and all other things held constant.

It's legit to question what the relevant range is and why that range was
appropriate and not others, or require those making economic claims
to explicitly state which factors held constant are important and which
aren't.

When we say supply will go up if the price does, it does NOT mean the
supply will go up forever if the price does, such a claim is being made
within some price/supply range.

[waveNRG]

I posted my reply to the original blogspot, quoted below,

Aahla, I am not sure I understand your post fully, but in the last paragraph you concentrate on supply going up with price. Surely, the most interesting effect is the supply alternatives going up with price combined with demand for oil dropping with price.

$this->bbcode_second_pass_quote('waveNRG', '
')
Very nice article.

I think that on the spectrum of peakniks, I am somewhere very close to the author ..although I myself am an engineer working on wave energy research. It's nice to see an economist and an engineer meeting somewhere in the middle ground!

I also put an essay together that proposes that the free market does have the best chance of guiding this problem above any global governance mechanism ...so we should learn to work with it.

http://www.peakoil.com/fortopic15516.html

Ian, I don't agree that the bridge to sustainable energy is not within our grasp. Peak oil will hurt as energy gets expensive ...a necessary pain and one that will exist for the very reason that we have a sound largely free market based global economy that can respond to these issues. Remember that after peak oil, we still have half the oil in the ground, plenty coal and prospective clean coal technology, nuclear as you point out, natural gas, biomass and some renewables to fuel a "bridging economy". That could buy us 50 years while we get our act together, no? Once peak oil is universally recognised, even in a recession, there will be plenty economic impetus to seriously develop a sustainable energy infrastructure.

It's daunting but not at all impossible ...we have flown to the moon after all. Here in Sweden, where I am a temporary immigrant, it is commendable to see that their national grid is entirely fossil fuel independent and their housing is dense and well planned (and a bit crap to be honest). If cars got too expensive to run tomorrow, the trams and cycle lanes might be a bit more busy on the way to work but we would go to work and figure out the alternatives. If Sweden can do it why not others ...in fact the secret to the peak oil is probably in the demand line. I think it is growing so fast simply because oil is so damn cheap. We CAN run growth economies on significantly less dependence on energy in general and oil in particular. In fact this economic "reallignment" could be quite exciting. Countries able to continue to provide stable energy at a predictible price and get labour to work everyday are likely to become very attractive places to do business. That will put a whole new incentive on energy security, planning, conservation and consumerism. Being an engineer and an alternative energy developer, I don't believe I underestimate the scale of the challenge...but it's not the doomesday scenario that many talk about ...that's a seductive prophecy that is scarily realistic ....as was the chance of getting nuked in 1960's. But I think we are too clever to let this challenge get the better of us.

[coyote]

I am pleased to hear an economist at least attempting to address peak oil issues, instead of the usual "you guys are just a bunch of whackos." This is one of the discourses we need to begin. I didn't agree with everything in the article, of course. Example:

$this->bbcode_second_pass_quote('eclipse', '
')The upshot of this is that Peakniks should not need to worry too much about EREOI and not spend time slamming economics and businesses for their focus upon price rather than science. When energy becomes scarce, this is reflected in market prices. The market will not invest anything into any energy project with a negative EREOI simply because the cost invested will not match the money returned. In this sense, money and energy are essentially linked.

[ubercynicmeister]

As it happens, I think that those who do beleive in Peak Oil should get involved in Economics.

But not for any of the reasons stated in the above article. Simply put, the whole of that article, sprinkled with the sneering terms "peakniks" (invented by the cornucopians over at wikipedia, it seems, to convey their contempt towards the whole idea of Peak Oil) could be boiled down to one statement: "Everything is FINE, the Freemarket will protect us." Others have posted more eleoquent and more insightful dismissals of this idea - but we should add the following: remember that embarrassment, the Dot Con Boom?

Yup, we're gunna drag that hoary ole chestnut out, - why? Because it really is an embarrassing flop, brought on entirely by the ignorance of the Freemarkets. The Freemarkets were utterly clueless when it came to thinking about how it was that the "Internet" could turn anyone a dollar (other than the pornographers). The whole of the New Economy turned out to be more talk than anything else. It fell apart, taking billions of investor's dollars with it. We'll still be paying for that "Tulipmania" in 20 year's time, I reckon, Peak Oil or no Peak Oil. So....we're supposed to believe that the Freemarket Fundamentalists have learnt their lesson?

Really? Then why the present run on Gold?

Let's ask ourselves: can gold be eaten? If there's any form of interuption to our food supply, for whatever reason, food and clean water will be more expensive than gold. In fact, gold only has value if we humans attach value to it. There's many more useful and more practial substances out there. One cannot eat or drink gold - we can only trade gold for something that we can eat or drink. What happens if that person we're trying to trade our gold with wants their food and /or water more than they want our gold? I guess we starve.

Therein lies the problem with Economics - it does NOTstudy reality, it does not study that which is "useful". Example: Gold isn't very useful outside of the electronics industry, for example. What Economics really studies is the fictional value we stupid humans attach to things. To continue the example, gold gets priced high because "demand" is high. But why do we "demand" something we really cannot use? After all, gold can only be exhanged for something else that we can use - food, to pick one item. Even limiting our considerations to the electronics industry, most of us could not turn a lump of gold into a computer, instead we have to hand it on to someone ELSE who can make the thing we actually want. Same with those bits of paper (or , these days, plastic) with some numbers stamped on the front which we call "money". We really cannot use the stuff - we have to "hand it on" to someone else who will then supply us with whatever it is we really want. This point is so obvious it should never need stating, but again and again, the Cornucopian Freemarket Fundamentalists miss it.

Matt Savinar eloquently points out that "money" is actually a tradable version of energy. In the whole of the (above) article, I could not spot one refutation of that basic principle. This is why economics is so derided by "ordinary people". Most people can vaguely spot (but cannot formally refute) the discrepancy that Economics proposes as the fundamental for western society, which is that money creates everything else, and one of those things is energy.

In essence, this idea is - even if there is no Oil at all, if one has enough money, one can still buy some. This is why the cornucopians still think that "the freemarket will solve all problems", and as an idea, it is very hard to shake. After all, think of it there way: at the Peak of Oil Production we'll have never produced more Oil than we do today (whenever that Peak is). Therefore, why do we have to worry? Past experience of Oil says that whenever demand exceeded supply, then the supply was able to go up. Problem solved, according to the Freemarket Fundamentalists. In a sense, they're right: problem solved...past tense.

On the other hand, if one is grumbling about the high Price of Fuel, then someone (ie: those who beleive in Peak Oil) insisting that the price is going to go higher without end, will not be the most welcome of persons nor bringing the most welcome of news.

Again, given the way that the "freemarket" now cannot seem to think beyond the next quarterly results (ie: three months) then Peak Oil - which requires very long term thinking - is an idea that is nearly beyond them.

Think about this: you are an investor - you are investing other people's money, not your own. Do you:

#1. Invest in any company, collection of individuals / group that insists that we urgently need a replacement for Oil even as Oil Supplies (seemingly) go up, and would required a huge amount of money that will not see a return for at least 20 years...?

or

#2. Invest in an Oil company, since, as the Price of Oil gets higher and higher (especially if Peak Oil is true), the Oil Stocks will also go higher?

There's not an investment broker out there who would commit the finanical and profession suicide of picking the first option. This is the way the Freemarket punishes those who would invest in such schemes to try and deflect (ameliorate? counter? Avert?) the effects of Peak Oil. Remember: all such schemes must inherently be of long-term varieties - thus any Peak Oil Aversion Company will be a loss-making enterprise for decades, until a hoped-for low return, at some future point, betting everything on a theory that flies entirely in the face of all previous experience.

OR: one can go for the obvious investment road: as Oil gets scarcer, then oil Companies' stocks will skyrocket, and returns from such are gonna be assured and spectacular. Thus we see that under modern economics the scarcity of a substance, whether artificial scarcity or real scarcity, makes that substance - and all companies that are in that area - the way to invest, the sure return, the "inside deal", the "hot pick", the "star performer".

NOT IT'S ALTERNATIVE.

As Peak Oil kicks in, the Oil Companies will thus be in an ever more unenviable position of trying to explain to irate consumers why it is that they (the Oil Companies) are literally being showered with an embarrassment of riches, while the consumer is being sucked towards financial ruin. As the Price of Oil goes Up, the Oil Companies' product will pull all of the money out of the economy, even as less money goes in. Please remember: energy IS the basis of money, whether we acknoweldge that or not. So if there's less energy (oil is a form of energy) going IN, then there's also less money going in to a given economy.

What will the Oil Companies invest all this "embarrassment of riches" in? Well, if the past is anything to go by, they'll stuff money into whatever is "performing well". Gold, right now. Other Oil Companies, perhaps? But what about that most troublous of investments, the Peak Oil Alternative, assuming one exists? The performace of something that simply will not turn a profit for another 20 years (or so) cannot be described as "spectacular", indeed, it could well be described as "moribund". That places our hypothetical Peak Oil Aversion Company right up there alongside General Motors and Ford, both of whom now cannot tell the Stock Market if they will even turn a profit "at some future date", cannot tell what their debts are or will be, cannot tell what their costs are or will be. Thus the down-grading of their stocks to "junk bond" status. And you're asking Oil Companies - already labouring under the image of "irresponsible greedy fools" - to invest in something like THAT?!?!?! To add "squandering investor resources" (actually a crime, and punishable under both criminal law and business law) by investing heavily in some theory they've spent their entire existances telling everyone "doesn't exist"? You place massive faith in the robustness of the average Chief Financial Officer of the average Oil Company, who would be facing all sorts of acutely embarrassing questions from the Board, from the stock-holders AND from the presumably increasingly irate Regulatory Authorities as to "why are you stuffing money into averting a crisis you say doesn't exist?"

This is why the Freemarket actively punishes those who would seek a non-oil energy source and, at the same time, actively rewards those who wish to invest in scarcity, whether real or imagined.

The Freemarket is the problem, NOT the solution.

We, all of us, need a new Economic Model, urgently. One that places energy at the heart, with money at the periphery. All Economic Models up to now have been placing money at the centre, with everything else, energy included, at the outside. One that dismisses the idea of creating everything else by first creating money; one that stops this mad idea that, in order to "get rich" one must do anything especially if it's unethical; one that throws out the poverty-entrenching idea of "interest" on deposits.

[RacerJace]

nice slam dunk there ubercynicmeister. my sentiments exactly... good post

[Nano]

This is a great thread. Thanks, contributors!

I have nothing to add except to propose that the 'doomer' state is the final state that one may aspire to attain in this discussion. Once one is a 'doomer' and thus has come to wisdom, one may again turn to our present, doomed society almost unchanged from the previous state of cornucopian bliss. The subtle difference is that one no longer labours under the impression that humanity is progressing toward a greater good and that there will always be untapped prospects for the creation of wealth. Instead, one labours intent more and more on securing existing wealth.

What will have dissappeared from ones mind is any lingering thought or consideration for the wellbeing of others (though one may pretend). Other people, the masses, those not of one's own blood or clan will appear as walking corpses in the best case or as future competitors and adversaries in the worst. Realising that supplies of everything will dwindle prompts one to seek the wealth that is left in the grasp of strangers.

This is what frightens otherwise rational people from accepting the doomer conclusion. They are to weak, scared or loath to 'enter the Thunderdome' even after they realise they must. At the same time they rightly mistrust those who have evidently not been similarely repelled. That is why a true doomer keeps his opinion about the future private (except on internet message boards of course!) It is also why those with the understanding and power to shape our future away from the most painfull outcome will not do so if it requires exposing they in fact believe in the doom.

[jaws]

Of course peak oil can only be studied as an economic event. We clearly have several other sources of energy available to us. The reason we prefer oil, and the source of the peak problem, is affordability. Peak oil creates a worldwide reversal in energy affordability, and its consequences must be rationally analyzed.

People who believe peak oil will create a crash and permanent unemployment obviously have no idea how the economy works and where employment comes from, and should investigate the processes at work before making predictions.

[jaws]

$this->bbcode_second_pass_quote('ubercynicmeister', 'Y')up, we're gunna drag that hoary ole chestnut out, - why? Because it really is an embarrassing flop, brought on entirely by the ignorance of the Freemarkets. The Freemarkets were utterly clueless when it came to thinking about how it was that the "Internet" could turn anyone a dollar (other than the pornographers). The whole of the New Economy turned out to be more talk than anything else. It fell apart, taking billions of investor's dollars with it. We'll still be paying for that "Tulipmania" in 20 year's time, I reckon, Peak Oil or no Peak Oil. So....we're supposed to believe that the Freemarket Fundamentalists have learnt their lesson?

Really? Then why the present run on Gold?

Let's ask ourselves: can gold be eaten? If there's any form of interuption to our food supply, for whatever reason, food and clean water will be more expensive than gold. In fact, gold only has value if we humans attach value to it. There's many more useful and more practial substances out there. One cannot eat or drink gold - we can only trade gold for something that we can eat or drink. What happens if that person we're trying to trade our gold with wants their food and /or water more than they want our gold? I guess we starve.

Therein lies the problem with Economics - it does NOTstudy reality, it does not study that which is "useful". Example: Gold isn't very useful outside of the electronics industry, for example. What Economics really studies is the fictional value we stupid humans attach to things. To continue the example, gold gets priced high because "demand" is high. But why do we "demand" something we really cannot use? After all, gold can only be exhanged for something else that we can use - food, to pick one item. Even limiting our considerations to the electronics industry, most of us could not turn a lump of gold into a computer, instead we have to hand it on to someone ELSE who can make the thing we actually want. Same with those bits of paper (or , these days, plastic) with some numbers stamped on the front which we call "money". We really cannot use the stuff - we have to "hand it on" to someone else who will then supply us with whatever it is we really want. This point is so obvious it should never need stating, but again and again, the Cornucopian Freemarket Fundamentalists miss it.

Matt Savinar eloquently points out that "money" is actually a tradable version of energy. In the whole of the (above) article, I could not spot one refutation of that basic principle. This is why economics is so derided by "ordinary people". Most people can vaguely spot (but cannot formally refute) the discrepancy that Economics proposes as the fundamental for western society, which is that money creates everything else, and one of those things is energy.

[RacerJace]

$this->bbcode_second_pass_quote('Nano', 'T')his is a great thread. Thanks, contributors!

I have nothing to add except to propose that the 'doomer' state is the final state that one may aspire to attain in this discussion. Once one is a 'doomer' and thus has come to wisdom, one may again turn to our present, doomed society almost unchanged from the previous state of cornucopian bliss. The subtle difference is that one no longer labours under the impression that humanity is progressing toward a greater good and that there will always be untapped prospects for the creation of wealth. Instead, one labours intent more and more on securing existing wealth.

What will have dissappeared from ones mind is any lingering thought or consideration for the wellbeing of others (though one may pretend). Other people, the masses, those not of one's own blood or clan will appear as walking corpses in the best case or as future competitors and adversaries in the worst. Realising that supplies of everything will dwindle prompts one to seek the wealth that is left in the grasp of strangers.

This is what frightens otherwise rational people from accepting the doomer conclusion. They are to weak, scared or loath to 'enter the Thunderdome' even after they realise they must. At the same time they rightly mistrust those who have evidently not been similarely repelled. That is why a true doomer keeps his opinion about the future private (except on internet message boards of course!) It is also why those with the understanding and power to shape our future away from the most painfull outcome will not do so if it requires exposing they in fact believe in the doom.

[Doly]

$this->bbcode_second_pass_quote('Nano', 'T')hat is why a true doomer keeps his opinion about the future private (except on internet message boards of course!).

[bobcousins]

I see a lot of misunderstanding about economics on both sides of this debate. What the cornucopians say is that a free market will find new solutions. There is a crucially important rider - if they exist. Supply and demand provides a way of allocating existing resource, but it does not guarantee that new resources will be found or created. A valid solution to the supply/demand equation is a very low supply and a very high price.

What doomers fail to realise is that economics is merely an effective way of organising production and consumption of resources. This is what society wants, and economics provides the framework. You cannot blame economics if it is the desires of people that are driving it.

The economic model has been refined during a period of plentiful resources to reinforce growth of the human population. What we simply don't know is how the economic model will behave during the period of contracting resources. If there are alternatives, in theory the economic model is the best way to find and exploit them. Governments have a lousy track record at managing society.

If it turns out there are indeed no viable alternatives, then it won't matter what method of social organisation we have.

[drew]

Thank you, Eclipse, for an excellent post. I agree that there is a fundamental disconnect between some individuals of the doom and gloom variety, and economists/economics.

I must say though, our economic system is the problem we face, although there appear to be no others that we have tried that would not have landed us in the same mess enviroment wise.

I think part of the problem is humanity's 'need' for more and more, as well as the desire to reproduce as much as possible. These are hard if not impossible forces to overcome.

Capatilism runs parallel to these drives, and supports and encourages them.

Now we may be facing PO, which will put some very serious constraints on our ability to carry on as we have been doing. I think this is real, and will happen in some form in my near life.

What is surprising is that I'm not stocking my bunker, or buying ammo, or even contemplating doing so.

I am trying, almost desperately, to understand and take advantage of our economic system as it pertains to PO.

In the end, if Eclipse is even half right in his scenario, a lot of money will be made by those lucky, and careful enough, to plan for the future in this way.

The present political/economic system will continue for a long time yet, and no one here, even a potential revolutionist, has a chance in hell of changing it.

Hunker down in you bunker, or make some coin?

Bunkers, farms, communes, solar, turbines, etc, can be bought.....

...............................................................................with coin

You decide.

Drew

[DigitalCubano]

$this->bbcode_second_pass_quote('bobcousins', 'W')hat the cornucopians say is that a free market will find new solutions. There is a crucially important rider - if they exist.