11 November 2005

Denver Peak Oil Conference Redux.

Denver's Conference on Peak Oil had a balanced group of attendees.

Conference attendees included a contingent of environmentalists and renewable-energy advocates, but a show of hands during introductory remarks indicated that the largest group at the conference were petroleum-industry employees.

The message was fairly nuanced. Peak oil is an inevitable phenomena in a world with ever growing consumption of oil and a finite supply that has received heavy use, mostly from automobiles and trucks, but also for myriad other demands like jet fuel, fertilizer and plastics. No one is saying that one day, all of the sudden we will run out of oil.

It isn't that higher prices and better technology won't continue to increase oil reserves, they will. But, cheap oil is getting harder and harder to come by, and more involved efforts to do things like wringing oil out of oil shale in Western Colorado, and deep sea wells, increase the costs of production dramatically.

Peak oil doesn't mean the Earth is running out of oil, several speakers said, but it suggests that after a presumed production peak in the next decade or two, oil will be harder to find, supplies will drop and prices will steadily rise. . . . "You never really run out of oil . . . But many years ago we ran out of $2 (a barrel) oil, then we ran out of $25 oil, and now we're running out of $40 oil." . . . "These higher prices have already set in motion the very powerful market forces that will stimulate conservation and technology for new sources of oil and even non-petroleum alternatives."

Gradual changes in prices can produce dramatic changes in the economy. At $3 a gallon, electric cars aren't a good deal compared to traditional gasoline cars. At $16 a gallon, gasoline cars far to expensive to operate compared to an electric car over the lifetime of the vehicle. You don't see the proportion of electic cars increase gradually on a straight line basis over a span of years, however. When the breakeven point is crossed, you see almost the entire fleet of cars on the road replaced in the 10-15 years it takes for vehicles on the road to end their useful lives. Economic forces can produce decisive changes throughout the economy in response to some very basic price signals.

We could sit on our laurels and wait for the market to do its thing. But, we could also pay a very high price for doing so. Things like electrically driven rail alternatives to cars, epitomized in Denver's Fastracks program, take a decade or more to build. Fine tuned electric car designs don't spring up overnight. As economist Joseph Schumpeter observed:

Development ... is then defined by the carrying out of new combinations. ... New combinations are, as a rule, embodied ... in firms which generally do not arise out of the old ones but start producing beside them. ... It is not the owner of a stage coach who builds railways.

The Theory of Economic Development, p.66.

He also makes the related observation that:

Savings is clearly an important factor in explaining the course of economic history through the centuries, but it is completely overshadowed by the fact that development consists primarily in employing existing resources in a different way.

The Theory of Economic Development, p. 68.

Our current political leadership wants to spend an immense amount of money to reduce taxation on savings to encourage economic growth. House Ways and Means Committee Chairman Bill Thomas, for example, is very interested in continuing the drive to reduce taxes on capital gains and dividends to the tune of about $70 billion in lost revenues, even if it means that most upper middle class families see huge new alternative minimum tax bills as a result.

But, once an industry takes off, effects similar to those in Silcon Valley and Hollywood and Wall Street are at work, and the place that started to develop a new technology reaps most of the associated benefits. If we, as a nation, don't come up with a timely response to Peak Oil, which has the virtue of being a predictable source of economic turmoil, those benefits will accrue to some place else. But, if we act swiftly to develop a post-Peak Oil economy, even if it takes some nudging to get it started, the technologies that power that economy will be rooted here.

Savings can increase development at the margins, but if we really want to prosper as an economy, we need to promote technological innovation, not simply benefit the investor class (e.g. about half of the market value of stocks on the NYSE are owned by under 1 million people, a large group to be sure, but still only about 0.3% of the population of the United States). This requires broadbased investments in infrastructure, education and regulatory frameworks that privatge industry is ill suited to make on their own.

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