[FoRK] Mises: Will We Run Out of Energy? by Mark Brandly

Contempt for Meatheads jbone at place.org
Thu May 20 11:15:59 PDT 2004


This crossed >Htech this afternoon...  not much new content directly  
here re: Hubbert's Peak, forwarding it primarily for the links.

Will We Run Out of Energy? by Mark Brandly
http://www.mises.org/fullstory.asp?control=1519
    [Posted May 19, 2004]

    With gas prices exceeding $2 per gallon, an alarmed American public  
is
    prone to believe scary predictions about a future without gas. And so
    into this hyper-charge environment will step a number of commentators
    who claim to marshall all the data to show that we must dramatically
    change our lives.

    For example: "Civilization as we know it will come to an end sometime
    in this century unless we can find a way to live without fossil
    fuels." Alarmist David Goodstein begins and ends his new book, Out of
    Gas, with this warning.

    According to Goodstein's worst case scenario, an oil crisis in the
    near future may lead to "Runaway inflation and worldwide depression
    [leaving] many billions of people with no alternative but to burn  
coal
    in vast quantities for warmth, cooking, and primitive industry. The
    change in the greenhouse effect that results eventually tips Earth's
    climate into a new state hostile to life.[15][1] End of story" (p.
    37).

    Dire warnings about oil shortages have been around almost since oil
    wells were first drilled. In the late 1800s, the oil fields in the
    eastern U.S. were in decline raising doubts about the possibility of
    providing for U.S. energy needs. The U.S. Geological Survey was
    founded at this time in part because of fears of oil  
shortages.[16][2]
    Then the discovery, in 1897, of a single oil well in northeastern
    Oklahoma, the famous Nellie Johnstone #1, started the Oklahoma oil
    boom and temporarily ended any threat of an oil shortage. Even though
    past forecasts of oil crises have continually been proven wrong,
    there's no shortage of additional predictions of this sort.

    The Hubbert Model

    Goodstein's book is the latest work to use the Hubbert model to
    predict an oil crisis. Marion King Hubbert, a geophysicist and a
    geologist for the USGS, is known for predicting, in 1956, that U.S.
    oil production would peak in 1970 and decline thereafter. This peak
    has come to be known as [17]Hubbert's peak and is used to allegedly
    demonstrate that the current demand for oil will lead to a crisis and
    that that crisis is nearly upon us.

    Goodstein applies Hubbert's argument to world oil production and
    concludes that world oil production will begin a continuous decline  
in
    the near future. The world is nearing Hubbert's peak and Goodstein
    expects the "crisis to occur when the peak is reached, rather than
    when the last drop [of oil] is pumped" (p. 30). And market forces  
will
    not prevent this crisis.

    While Goodstein can't predict for certain, he notes that "we can all
    too easily envision a dying civilization, the landscape littered with
    the rusting hulks of useless SUVs," which could lead to "Oil War III"
    (p. 31). And as "we learned in 1973, the effects of an oil shortage
    can be immediate and drastic, while it may take years, perhaps
    decades, to replace the vast infrastructure that supports the
    manufacture, distribution, and consumption of the products of the . .
    . oil we Americans alone gobble up each day" (p. 18). In short, the
    crisis will be so severe that energy suppliers might not be able to
    make the adjustments needed to save civilization.

    Goodstein has a solution, though. Science and the "laws of nature"
    cannot be changed. We can, however, change the "laws of people."
    Goodstein prescribes energy conservation and weaning ourselves off of
    fossil fuels. We also need higher gasoline prices and we must use
    hybrid cars, insulate our homes better, redesign our cities, improve
    public transportation, and move towards other energy sources such as
    nuclear power and solar power.[18][3]

    Reliance on Empirical Findings

    The problems with Goodstein's conclusions, and this applies to
    Hubbert's followers in general, begin with his reliance on empirical
    findings to generate the Hubbert curves. He projects decreases in the
    rate of growth of oil production into the future and then estimates
    the date of Hubbert's peak and the resulting decline in available  
oil.
    However, empirical findings do not always support this thesis.

    Many countries' oil production curves are not shaped like Hubbert's
    bell curve. For example, some oil production curves have multiple
    peaks. This does not discourage Goodstein. The exact timing of
    Hubbert's peak is not the essential issue. The important lesson is
    that "the crisis will come . . . when the rate at which oil can be
    pumped out of the ground starts to diminish" (p. 37).

    However, oil production curves that do not conform to Hubbert's model
    create insurmountable problems for Hubbert's followers. Since oil
    production curves have multiple peaks, the problem then becomes one  
of
    determining which peak is the final peak. A Hubbertarian needs to  
know
    the timing of the final peak in order to determine the start of the
    crisis.

    One cannot predict that the crisis is near unless one knows that the
    oil production decline is a permanent one. Oil production declines
    will tend to lead to increased incentives to find more oil reserves
    preventing the decline from becoming a crisis. In order to predict a
    crisis, Hubbertarians need to be secure in their assumption that the
    decline is permanent and empirically this assumption is suspect.

    The alarmists have repeatedly underestimated future production
    capabilities. Even recent predictions about future oil reserves have
    been revised upward due to the discovery of the Kashagan field in
    Kazakhstan and the Azadegan field in Iran. Any upturn in production
    anywhere seems to take the Hubbertarians by surprise. Simply put,
    Goodstein and his kind continually underestimate future oil
    projections (and much oil remains [19]undiscovered.)

    Goodstein also limits his analysis to conventional oil reserves.  
While
    he notes that there are unconventional sources for oil, he dismisses
    the possibility of finding economical methods to recover this oil.  
The
    world contains more unconventional oil, as far as we know, than
    conventional oil.

    Venezuela's Orinoco heavy oil belt is estimated to have over 1
    trillion barrels of reserves and the reserves in Canada's Athabasca
    Tar Sands are estimated to be as high as 1.8 trillion barrels. In
    addition, there are large deposits of oil shale in the United States
    and several other countries. While most of these reserves are not
    financially viable at this time, we know these reserves are in place.
    Higher energy prices or advanced technologies might make it feasible
    to use this unconventional oil.

    Empirical refutation does not deter the Hubbertarians, however. One
    Hubbert acolyte, Colin J. Campbell, anticipating a negative response
    to his changing data sets, [20]defends himself: "critics relish
    pointing out how the assessment has evolved over time, taking it as
    evidence that depletion studies are meaningless. A good response  
would
    be to quote the famous economist, Maynard Keynes, who on being  
accused
    of inconsistency replied. "When I have new information, I change my
    conclusions. What do you do? Sir."[21][4] I suppose that it's
    encouraging to find a Hubbertarian quoting any economist given their
    lack of understanding of the fundamentals of economics.

    Geological Considerations and Market Forces

    An even more critical failure of the Hubbertarians, including
    Goodstein, is their assumption that geological considerations in oil
    producing regions are the deciding factors in determining available
    oil reserves. For Goodstein, a decrease in reserves indicates a lack
    of potential exploration opportunities.

    He overlooks the role that investment plays in oil exploration. While
    Goodstein recognizes the argument that market forces will respond to  
a
    potential oil shortage, he dismisses this possibility out of hand.
    While geology is a factor affecting oil reserves, investment in
    exploration, driven by the demand for energy, determines reserve
    levels.

    If the demand for oil begins to exceed available oil production, oil
    prices will rise. This price increase indicates that there is a need
    for more oil, or energy substitutes, and provides an incentive for  
oil
    producers to find more oil reserves. A potential oil shortage will
    lead to an increase in existing oil reserves in three ways.

    First, higher oil prices will lead to more exploration and the
    discovery of new oil fields.

    Second, higher prices provide an incentive to improve production and
    exploration technology. Better exploration technology will make it
    easier to find more oil and improved production technology will
    increase the reserves in existing oil fields.

    Third, rising oil prices increase oil reserves even without any
    additional exploration or changes in technology. Reserves are the
    estimated amounts of discovered economically viable oil production.  
At
    higher prices it's profitable to recover more of the oil available in
    previously discovered fields. We therefore have more oil reserves
    simply by having higher oil prices.

    Higher oil prices may also make unconventional oil reserves
    economically viable. Again, it's estimated that there is more
    unconventional oil available than there is conventional oil. Any
    potential oil shortage will tend to spur oil producers to find a way
    to use these unconventional oil sources. Goodstein correctly notes
    that given current technology, unconventional oil cannot be  
profitable
    because we currently use as much or more energy to recover this oil
    than we gain from the oil itself. New technologies will be required  
in
    order to make it worthwhile to use tar sands and heavy oils as a fuel
    source. Higher oil prices, however, provide the incentive to develop
    such technologies.

    Regarding the possibility of finding non-hydrocarbon substitutes for
    oil, Goodstein concedes that we will need to use energy substitutes,
    he prefers solar and nuclear power, but apparently rejects the
    possibility that free markets will solve this problem. According to
    Goodstein, energy markets failed us in the past and we can't rely on
    them in the future.

    Government Intervention

    This leads to another one of Goodstein's oversights, namely his
    failure to attribute energy problems to government intervention. He
    fails to note how intervention instigated and prolonged the energy
    problems of the 1970s. To recap, in response to the U.S. government's
    support for Israel in the 1973 war, OPEC restricted its oil
    production. Oil prices roughly quadrupled within 90 days. The U.S.
    government responded with price controls on oil and gasoline.

    The controls on gasoline were short lived, given that the effect of
    the controls, long lines of buyers waiting to purchase gasoline, were
    obvious and were a political liability. However, the oil price
    controls lasted until 1980 and were followed by a heavy windfall
    profits tax on oil production. In addition, the oil severance tax
    rates and gasoline taxes increased during this time as states took
    advantage of the energy situation to swell their budgets. Also,
    environmental regulations became more stringent making oil  
exploration
    increasingly more difficult.

    All of these U.S. policies harmed U.S. oil production and  
strengthened
    OPEC's market power. Attributing the energy crisis to market failure
    shows that Goodstein fails to see the role that private markets play
    in providing for our energy needs.

    Goodstein also disregards how intervention is currently interfering
    with the discovery and production of oil. Taxes and regulations  
reduce
    projected net oil prices and investors react by cutting exploration
    funding. Also, the U.S. government restricts exploration in areas  
such
    as the Arctic National Wildlife Refuge and the Outer Continental
    Shelf.

    Intervention in foreign countries has also had a negative effect on
    oil exploration. For instance, OPEC's production restrictions in 1973
    led to decreased exploration in OPEC countries. These countries saw
    little need in further exploration for oil that they wouldn't be able
    to sell for years. The nationalization of these foreign oil sources
    has also led to less competition and less exploration.

    While Saudi Arabia has maintained a surplus capacity for oil, other
    OPEC members have little or no surplus capacity. This makes sense.
    Saudi Arabia has more reserves than any other country. Its surplus
    capacity gives it market power. It has some say in setting oil  
prices,
    both up and down. Even if other countries were to develop some  
surplus
    capacity, they still would not have much market power. It's simply  
not
    in their interest to have this surplus capacity. The economic
    interplay between these countries in the last three decades has led  
to
    less oil exploration than otherwise might have occurred.

    Also, exploration in Iraq and Iran fell sharply after 1980 due to the
    Iraq/Iran war. The two Gulf wars and a decade of severe trade
    sanctions also prevented Iraq from developing its oil fields over the
    last 14 years.

    The former Soviet Union provides another example of how political
    decisions have affected exploration decisions. While there have been
    recent discoveries in the FSU, political instability in this region
    has made oil exploration a risky proposition.

    The point is that government intervention, here and abroad, tends to
    negatively affect oil exploration and production. Removing these
    political restrictions would tend to increase our available oil
    reserves. The Hubbertarians tend to overlook this possibility.

    Conclusion

    Let me first note a positive in Goodstein's work. He spends much of
    his book providing us with a brief history of energy and discussions
    about energy issues such as thermodynamics and electromagnetism.  
These
    sections are both interesting and entertaining. However, this does  
not
    make up for his lack of economic understanding.

    Goodstein depends on empirical findings while ignoring the data that
    contradicts his argument. He ignores the fact that energy alarmists
    have always underestimated future oil supplies and he dismisses the
    possibility of developing vast quantities of unconventional sources  
of
    oil.

    Oil production declines will create incentives to find more
    conventional oil, to use unconventional oil, and to develop new  
energy
    alternatives. Government intervention makes our energy situation more
    precarious. Goodstein fails to understand any of these issues.

    Though the book has received favorable press[22][5] for alerting us  
to
    alleged energy problems that confront us, its main value is that it
    compiles the economic fallacies regarding a potential energy crisis
    into a single slim volume.

    ------

    Mark Brandly ([23]brandlym at ferris.edu) teaches economics at Ferris
    State University and is an adjunct scholar of the the Mises Institute
    and Mackinac Center for Public Policy. Comment on the [24]blog.
    _______________________

    [25][1] While this review focuses on economic issues and ignores the
    environmental warnings in Goodstein's argument, it's important to  
note
    that Goodstein ignores the sharp differences of opinions on the issue
    of global warming and the greenhouse effect. Even the EPA admits that
    scientists are not in agreement on this issue.

    [26][2] The USGS, in its early years, continually underestimated
    available U.S. oil. In 1920, the USGS chief geologist estimated total
    oil remaining in the U.S. at 6.7 billion barrels with a margin of
    error of 25%. In 1972, by comparison, U.S. reserves were estimated at
    36 billions barrels.

    [27][3] In his discussion on solar power, Goodstein notes that one
    proposed solution for global warming is to place a giant parasol,  
1200
    miles in diameter, in orbit around the earth in order to block a
    portion of the suns rays. It's to Goodstein's credit that he opposes
    this plan (p. 102). The parasol idea reminds me of Bastiat's
    Candlestick Makers' Petition, where the candlestick makers propose
    blocking out some of the suns rays in order to benefit the  
candlestick
    industry, the difference being that the concept of a giant parasol in
    space is a serious proposal.

    [28][4] Campbell also [29]derides his detractors as the flat-earth
    society: "Some members of the flat-earth fraternity have made a  
career
    from pointing out how earlier estimates needed revision and
    correction. They will not be disappointed with this assessment that
    differs yet again from earlier ones. Whereas a scientist would
    describe this evolution as progress based on a growing knowledge of
    Nature, the flat-earth fraternity will claim it as evidence that a
    resource-based approach to forecasting production is fundamentally
    flawed."

    [30][5] See this [31]Newsweek article, for example.

                   [32]Ludwig von Mises Institute Articles
      * [33]The Myth of the Model   Even the most useful, most
        sophisticated models are only skeletal images of some full
        experience, writes Gene Callahan. Watching a simulation of a
        hurricane on a computer screen is a far cry from actually being  
in
        the midst of one. The chaos that ensues once a real battle is
        underway is never captured in a model of the conflict. The same  
is
        true of the real world of economics, which belies the models time
        and again.
      * [34]Will We Run Out of Energy?   It is time for the energy
        alarmists to have their moment in the sun, writes Mark Brandly.
      * [35]Nicholas Oresme and the First Monetary Treatise   Austrian
        monetary thought can be traced back right to the very founding
        father of monetary economics, the great Nicholas Oresme, the 14th
        century Bishop of Lisieux.
      * [36]And the Regulators Propose: Regulations   Even if most hedge
        funds were dogs, writes Gregory Bresiger, why is it the business
        of the government to regulate them?
      * [37]Innovation and the State   Murray Rothbard argues that
        socially beneficial scientific innovation comes from independent
        thinkers working within the market economy.

References

   15. http://www.mises.org/fullstory.asp?control=1519#_ftn1
   16. http://www.mises.org/fullstory.asp?control=1519#_ftn2
   17. http://hubbertpeak.com/midpoint.htm
   18. http://www.mises.org/fullstory.asp?control=1519#_ftn3
   19.  
http://www.usgs.gov/public/press/public_affairs/press_releases/ 
pr1183m.html
   20. http://www.hubbertpeak.com/campbell/assessments.htm
   21. http://www.mises.org/fullstory.asp?control=1519#_ftn4
   22. http://www.mises.org/fullstory.asp?control=1519#_ftn5
   23. mailto:brandlym at ferris.edu
   24. http://www.mises.org/blog
   25. http://www.mises.org/fullstory.asp?control=1519#_ftnref1
   26. http://www.mises.org/fullstory.asp?control=1519#_ftnref2
   27. http://www.mises.org/fullstory.asp?control=1519#_ftnref3
   28. http://www.mises.org/fullstory.asp?control=1519#_ftnref4
   29. http://www.hubbertpeak.com/campbell/update2002.htm
   30. http://www.mises.org/fullstory.asp?control=1519#_ftnref5
   31. http://msnbc.msn.com/id/4287300/
   32. http://www.mises.org/
   33. http://www.mises.org/fullarticle.asp?control=1517
   34. http://www.mises.org/fullarticle.asp?control=1519
   35. http://www.mises.org/fullarticle.asp?control=1516
   36. http://www.mises.org/fullarticle.asp?control=1515
   37. http://www.mises.org/fullarticle.asp?control=1514



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