Questioning peak oil economic assumptions

There is a large and expanding economic literature that seeks to explain why the steep oil price rise since 2003 has not led to a recession. The common conclusion, arrived at by different models and analysis methods, is that the U.S. economy is now mostly immune to oil prices hikes and has been so since the mid-80’s. Many peak oil proponents assume a simple model of the relation between oil supply or price shocks and economic performance. Economists have called into question some aspects of that model. Those studying peak oil need to make cogent responses to ensure that their view is taken seriously. It is beyond the scope of this column to do a detailed analysis, but it is possible to lay out some of the current debate and the issues that need to be addressed.
Many of those concerned about peak oil take their economic assumptions—naively, peak followed by collapse—as axiomatic. So-called “doomers” assume the worst, but they have not done all of their homework. Peak oil theorists or commentators often ignore the economic literature that discusses the complex relationship between GDP growth and the oil markets. They do so at their peril. By default, the oil supply and price is seen as the single overwhelming determinant of economic performance. This simple model is belied by the demand-driven price shock of the 2003-2007 period. Many economists have also been taken by surprise, and they are scrambling around to come up with explanations.

It is time for many of those studying peak oil to develop well thought-out scenarios that include models of future economic activity based on their oil supply projections instead of running around telling everybody the sky is falling. The good news is that there may be time to develop such scenarios and implement solutions, like a robust national railroad system, that make sense. Time will tell.

Energy Bulletin