8. GEOLOGY VS. ECONOMICS
We really need to distinguish the two peak oil theories:
PO1) Oil is a finite resource, whose production will peak and decline according to a Hubbert Curve, just as it did in the U.S. in the 1970.
PO2) The event described by PO1 will have devastating economic consequences.
PO1 is a geologic fact, which nobody in their right mind can dispute. Colin Campbell and other peak oilers are perfectly justified in attacking economists who step onto geologist turf and dispute PO1.
PO2, on the other hand, has nothing to do with geology. It's an economic issue. So it's a little surprising to see a geologist like Campbell, who is so keen to protect the turf of his own discipline, stepping beyond the bounds of geology and making sweeping, apocalyptic statements about economics like PO2.
Since it is economists, not geologists, who study things like the economic effects of crude oil prices, wouldn't they be the proper authority on PO2? Well, you could say that, but the peak oilers despise economists and don't want to listen to them. They think the economists are "flat earthers" who are "in denial", and they don't like it when the economists say things like "we're not that dependent on oil anymore", even though it is the economists who would know something like that! I think this is a form of willful ignorance which will lead the doomers to error.
One example: Because the peak oilers want to believe in PO2, they have a tendency to overestimate the importance of oil to the economy. They also have very unclear ideas on the mechanism by which higher oil prices will crash the economy. They make posturing, scary statements like: "Higher oil prices are going to drive up inflation because oil is in everything, and when that happens TSHTF*."
The fact is, rising oil prices don't drive up general prices that much. To see this, consider the interval from Dec. 1998, when crude oil cost $10/bbl, to Aug. 2004, when crude cost $45/bbl. That's a total price increase of 350%, so during that period oil was appreciating at about 28% a year. Now, the rise in inflation (CPI-U) over that entire period was 15.6% (or roughly 2.4%) a year. Even though crude more than quadrupled in price, inflation averaged a low, almost unnoticeable 2.4%. Today, when crude is at $55, inflation is still only 2.65%. So I don't get it. How is TSGTHTF with these minor effects? There's not enough destructive force there. The mechanism is implausible.
My working theory: inflation is not the mechanism by which oil shocks cause recessions.
*) TSHTF: The Shit Hits the Fan. A doomer term for the collapse of society due to peak oil.