[mmm]

It has struck me that it may be counter-productive to act as if we reject classical economic theories. This makes many economists turn a deaf ear to what we are saying, and the truth is, the Peak Oil predictions can be explained completely in terms of classical economic theories. Here's why.

The points that we come up against consistently is that peak oil is not a real problem because:
1. people will switch to "substitutes" for oil, thus reducing the demand for it
2. people will conserve as a reaction to higher prices

We all agree that the above points are true, just not the optimistic view that the new equillibrium found through substitution or conservation will be comfortable -- or at least comfortable enough that the status quo complacency on the topic is a wise course of action.

In reality, the substitutes are 5-7 times or more expensive than the real thing, and conservation as a reaction to much higher prices is just another way of saying recession/depression. The classical economic theories describe what will happen to the U.S. economy quite well -- and the results will be horrendous.

Anyway, I would like to propose that such terms as "flat earth" economist stop being used. There will be economists who don't get it, but it seems like a whole field of study is being rejected unnecessarily because a few practioners of economics don't realize how difficult the new equillibrium will be. I think even your most "flat earth" economist would agree that oil prices several times higher than current prices would be a massive blow to the world economy. And classical economic theories predict a new demand/supply equillibrium at a much higher price, given the lack of good substitutes.

So let's be careful to be inclusive of economists in our discussions and writings. We have a lot of common ground with them, and their theories strengthen our position.

[smiley]

The laws of nature are irrefutable and unchangeable. Therefore a physical theory can always be tested before being dismissed or approved.

In economics, the laws are set by governments and subject to change. We cannot change the gravitational constant but we can change the interest rate.

A good economist will acknowledge that and will make his predictions carefully. He’ll start from the current situation, devise some possible scenarios and pick the most likely one.

As an example. In Europe oil products are heavily taxed. When confronted with price rises the EU could decide to abandon some of the taxes. This would make oil more affordable. On the other hand it would also stimulate demand and would disencourage alternatives.

This is an entirely plausible scenario, but in this case the universal rules of supply, demand and price do not apply since the governments are bending the rules.

A flat-earth economist reminds me of a gambler at the blackjack table which claims he has found the winning system. They claim that they have found some universal rules to which the economy applies, much like the physical laws. They refuse to believe that anything can have an impact on the course of the economy.

These are typically the people who think that they can predict the future stock values by sketching some lines on a market chart.

I think the term flat-earth economist is entirely justified in their case since these people really refuse to look at something in more than 2-dimensions.

But of course I agree that we shouldn't simply put all economists in that category

[Whitecrab]

Oil is fairly "inelastic" in the short-term, which means people (and societies) have trouble altering their habits when prices change. That means, if prices were cut in half people don't suddenly drive twice as much. But more importantly, if they double people can't suddenly cut their consumption in half. Nevermind industries using oil as a feedstock. Therefore, oil panic = definate short-term problem

What about long-term? Alternatives? Well, you can then point out how much all the alternatives suck and how we're running out of natural gas as well. Since there are no viable alternatives in place yet, it shouldn't be too hard to convince them if you have enough time

Conservation? It will help at first, but since some projections say oil production drops 3%/year while demand rises 2-3%/year, it's not too hard to envision the situation absolutely forcing people to do without and companies out of business way too quickly to adapt. And overtime, you can't conserve to nothing, and again there are no viable alternatives so...


I think economists can be convinced if you have the time. Just bring up the 1970's recession to get them into a cold sweat, and point out that's just the start of it. At least they'll agree this is worth looking the heck into.

[small_steps]

in regard to the 70's recession:
if they bring up the reduction in oil use afterward (and expansion of supply), point out that this was due to increased auto efficincy AND the near elimination of oil fired electrical generation. Increased transportation will get us only so far, so don't count on the current JIT craze to continue much longer. And ask them if anything resembling the north sea or north slope oil is in the waiting.

[Pops]

The decline in oil demand after the embargoes, happened because we took all the easy conservation measures, insulation, weather-stripping; more efficient cars, appliances, manufacturing, farming, etc. I believe it may be harder to increase efficiency now without real pain; brand new $40,000. SUV’s of course are a case in point.

Of course I don’t have any facts to back up that assertion. Perhaps I should work on that.

[nero]

I heartily agree that the term flat-earth economists should not be used. I think its the equivalent of calling someone a "crackpot peak oil theorist". Calling someone names is sometimes an effective rhetorical device but it's playing dirty, and some of the mud sticks to yourself.

I think that the derogatory term "flat earth economist" should be reserved for only those economists who display a complete lack of understanding about peak oil by saying that we don't have to worry for 41 years becasue of the world R/P ratio.

The belief that technology/substitution will always come to the rescue should have a different derogatory term. I nominate "faith based economics".

[MattSavinar]

I use the term "techno-messiah" to refer to the belief that technology will save us.

Maybe "economic-evangelical" is appropriate for those who refuse to believe economics can't properly address this situation

Matt

[Soft_Landing]

As I understand it, the term 'flat-earth economist' refers to an economist who ignores physical resource constraints. To quote "Oil Based Prospects for the Future",who are in turn quoting John Mitchell et al.,

$this->bbcode_second_pass_quote('Danish Scientists', 'T')hey argue that reserves are not fixed but determined by
$this->bbcode_second_pass_quote('John Mitchell et al', '�')��the mix of knowledge, technology and investment that sustains the process of exploration and production sufficiently to meet short- and medium-term demand expectations. Reserves depend on the interaction of this process, government policies and, finally, the price people are willing to pay for oil products. Since we cannot know future technology or prices, we cannot quantify future reserves. This should not be a concern, since it is these processes that are important. Ultimately, as [Morris A.] Adelman commented, ‘oil resources are unknown, unknowable and unimportant’"

[gg3]

Good point, mmm. Setting up goodguy/badguy paradigms and looking for a-priori bogeymen is a pretty common problem humans fall into. And I have to admit, despite believing it to be a moral wrong as well as empirically invalid in most cases, I fell into this one myself re. economics vs. engineering.

So yeah, I'll drop the prejudice and come along on this issue.

Seems to me that the key here is to find economists who understand the concept of finite resources, and understand what's going to happen when oil production starts to decline. They can educate us as to the relevant terms & concepts for debate. They can also persuade their more skeptical peers. Eventually the persuasion will proceed as it has with respect to global warming, so the remaining few extremist nay-sayers will marginalize themselves. Whether this happens before TSHTF is anyone's guess.

I would suggest a useful tool for the dialog is to avoid using labels that are composed of verbs or idea-nouns turned into thing-nouns. For that matter, avoiding buzzwords in general is a good thing, because then our opponents can't latch onto the buzzwords as symbols of things they stand against. The ideal case is to use language that requires a bit of time to parse and process, because that's the opening for rational thinking to get into the loop.

[nero]

Thanks for clearing that up Soft_Landing, I understand the term "flat-earth" a little better. I still think it should be avoided, as unhelpful in opening peoples minds.

On the topic of fundamental differences between oil and minerals that are mined. I don't see any fundamental diffenece because of oil being a liquid. If you increase the price smaller, poorer quality reserves suddenly become economic reserves just like with other minerals. The oil water interface doesn't change that.

There are two ideas that I think might be important in showing to an economist that energy is different from other resources.

First if the available reserves versus price graph for energy has a different profile than other mineable minerals. Has anyone done any work on this? If there is a plateau in this graph because of oil I think it would go a long way to refuting the economist's argument that there is nothing to worry about with regard to the consequences of oil depletion. They are all assuming that there is a smooth increase in the available reserves with respect to price.

Second (with a bit more theoretical bent just to show economists that there is a fundamental difference), energy is unique in being an essential input to the acquisition of more energy. It is arguable that you do not need iron to mine iron or copper to mine copper, but just try to do anything without energy. EROEI puts a definite upper limit to the energy reserves to price profile. Any other mineable mineral goes to infinity when price goes to infinity since at some point it becomes economic to go into space and mine asteroids.

Just had a third idea. There is also a theoretical upper limit to the rate at which you can extract energy. Since, you can only increase the depletion rate by increasing the energy input, at some depletion rate the EROEI goes to one.

Those ideas would be where I would start if arguing with an economist, has anyone got any sources that estimate what the current possible energy reserves versus price graph looks like?

[Ben]

There are two kinds of economists: flat-earth and non-flat-earth. The flat earthers are a religious bunch who will never be convinced. In fact, the events of peak oil will likely actually INCREASE their devotion to their religion. You see this with various cults when their "prophecies" turn out to be false.

I've found you can tell who is who in about 30 seconds to a minute. After that, they are either interested in learning more or discussing certain issues, or they just shrug it off. Personally I think the best way to approach these people is to not approach them. With any luck their stupidity will remove them from the gene pool and future generations of humanity will be much more intelligent.

[Chicagoan]

Imagine a guy who makes 100,000 dollars per year. He assumes he will always have that job and is living paycheck to paycheck. He took out massive loans to pay for everything he wanted.

Now imagine that guy finds out that he is being laid off in one year. His boss hinted at the possibility ten years ago, but he failed consider the ramifications. This was a one-of-a-kind job. There is no way he can make as much money as he had been. Yes, there are alternatives. He can work at McDonalds. He can work at Wallmart. The question is, can this man pay off all his debts before it is too late?

[Rincewind]

Just following on from Soft_Landing and Nero's points about how economists treat oil (or gas or coal) the same as non-energy minerals such as copper, gold etc. Economists fail to recognise that what happens when prices increase is that it allows increased levels of energy to be used to extract and refine the ore.

Without the availability of high quality energy the price of the mineral can go sky high and supply would not increase signficantly. Just as an aside Culter Cleveland atributes a lot of the 20th Century's economic growth not to improvements in economic efficiency as usually claimed, but to increased use of high quality sources of energy (in terms of EROEI).

However, this logic breaks down when using energy to mine energy (e.g oil, uranium etc.) increasing price may give you some flexiblity in the short term as you can divert energy from other lower valued uses within the economy (rearranging the deck chairs so to speak), but eventually diminishing returns will come into play and it will come down to the system's overall EROEI.

Cheers Doug

[Pops]

Chi. Said, “Imagine a guy who makes 100,000 dollars per year. He assumes he will always have that job and is living paycheck to paycheck. He took out massive loans to pay for everything he wanted.”

Imagine that guy is an economist whose reason for being is to give guidance to Corp.Gov.

Does he throw away his future by convincing his client/boss that all the things he has been espousing for years stops when it comes to depletion of THE finite resource that fuels most (if not all) macro-enterprises? And additionally, his services will no longer be needed at all since the “Forever Expanding Economy” soon won’t be.

How can he reconcile in his bean-computer, that demand can’t make oil, when his computer says demand can increases the supply of anything?



I appreciate the idea that we need to try and convince as many influential people as possible in order to bring about a serious change in attitude and avoid a catastrophe. However, placating and kowtowing to the very “science” that says; “standing at the pump with a dollar in my hand actually creates gasoline”, iMHO, isn’t the way to bring about that change.

I could be wrong – it wouldn’t be the first time.


Standing in line...

[nero]

Re:
$this->bbcode_second_pass_quote('', 'I') appreciate the idea that we need to try and convince as many influential people as possible in order to bring about a serious change in attitude and avoid a catastrophe. However, placating and kowtowing to the very “science” that says; “standing at the pump with a dollar in my hand actually creates gasoline”, In my honest opinion, isn’t the way to bring about that change.

[Pops]

Nero, my post seems a little harsh as I review it over coffee this morning as opposed to the sorghum martini (sorry – that’s from a different thread) of last night.

I certainly have no expertise in economics, aside from the regular arguments here that posit when energy prices go up enough, the invisible hand will make alternatives viable and or bring more expensive to recover oil to market. While I don’t doubt that is true, it of course ignores the central problem with PO – energy prices will go up.

I wish very much to hear from someone with knowledge of economics as well as a real grasp of geology, to spin out their future scenarios like so many of us armchair Greenspans have. A Matt Simmons without a business to run in other words.

While I suppose we all have our predispositions, when it comes to a topic as all encompassing and critical as PO, it seems hard to take an objective view.

[nero]

I'd class myself in there with the peanut gallery when it comes to economics. I too would like to see some thoughtful economic analysis of peak oil. I'm not sure the geological mind has to be in the same body as the economic mind. But a multi-disciplinary collaboration could lead to some interesting insights. We should be demanding that some thought be given to how our economies might function when available energy is on the down slope.

My thoughts from the peanut gallery are:

1. that Cuba's experience post 1991 means that the DieOff idea is wildly pessimistic.

2. The ingenuity of the human mind is not infinite (see easter island)

3. That what ever analysis is performed is sure to be grossly wrong as are most predictions but that unbiased analysis is still worthwhile.

[Whitecrab]

Not all economists are "useless." Some are trying to help, see this site: http://www.feasta.org/ I was going to post that later, once I had time to look through it, but it seems interesting. They have ideas like allocating every person on earth CO2 emissions credits as "a human right," and then you can buy credits off other people and the level of credits decreases every year. That way, the US can buy credits off a 3rd world country to finance their coal burning, sure, but they can see it directly costing them money and know eventually they'll lose the ability to do this. Meanwhile, the 3rd world people aren't automatically eager to set up their own coal plant, because then they'd lose the revenue from the Americans.

It's kind of funny, I was reading "The Idiot's Guide to Economics" (made 2000) to learn more about it. The author mentioned the importance of oil about 5x (more often then any other commodity), said economists generally agree prices over $30/barrel would be bad ( ), and also that deficet spending is unwise unless generates assets and investment within America. Poor guy must be awfully sad right now.

[Soft_Landing]

Nice site Whitecrab. I enjoyed this article about the feasibility of Alberta tar sands.

http://www.feasta.org/documents/wells/contents.html?one/panel1.html

[Ender]

$this->bbcode_second_pass_quote('Pops', 'W')hile I don’t doubt that is true, it of course ignores the central problem with peak oil – energy prices will go up.