free html hit counter Peak Oil Debunked: 8. GEOLOGY VS. ECONOMICS

Tuesday, August 16, 2005

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.

6 Comments:

At Tuesday, August 16, 2005 at 5:55:00 PM PDT, Anonymous Anonymous said...

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.


One problem with this analysis is that CPI during the period cited omits oil and food from the basket of commodities used to calculate inflation.

You can read about how inflation measurements changed here: Financal Sense

I guess this doesn't as yet detract from your working hypothesis... however sustained high oil prices are cutting into consumer discretionary spending, effecting retail stocks. Reuters

...another criticism of peak oil pundits on economics is that on one hand they cite the fact that economics is a lousy predictor of the future (no argument there!) but then go right ahead and make their own economic predictions of absolute certainty!

 
At Wednesday, August 17, 2005 at 5:04:00 AM PDT, Blogger JD said...

One problem with this analysis is that CPI during the period cited omits oil and food from the basket of commodities used to calculate inflation.

I believe you are referring to the "core CPI" not the CPI. The CPI (used in my calculation) does include oil and food. See the BLS FAQ.

 
At Wednesday, August 17, 2005 at 6:02:00 PM PDT, Anonymous Anonymous said...

Do Energy Price Spikes Cause Inflation?

Quote:

Are Energy Price Shocks Passé?
Our model suggests that the impact of energy price shocks on the U.S. economy —both on prices and output—has not been very dramatic over the past 20 years. Prior to the early 1980s, energy prices apparently had a profound effect on business cycle activity. In 1983, for example, economist James Hamilton noted that energy price spikes preceded nearly every U.S. recession since World War II, and he verified this relationship statistically. More recently, however, the connection between energy price spikes and business cycle patterns has seemed less certain. By 1996, Mark Hooker could find little evidence of a relationship. Although energy price spikes preceded the two recent recessions, the downturns were conspicuously mild.

 
At Friday, August 19, 2005 at 12:16:00 AM PDT, Blogger JD said...

Are Energy Price Shocks Passé?
Thanks! This is just the sort of link I am looking for: sober data and analysis.

 
At Saturday, August 27, 2005 at 3:47:00 AM PDT, Anonymous Anonymous said...

Again JD, it's spelt out in the Hirsch report that the consequences will be dire. Until you can learn to read official government reports on peak oil, duh!

Or try this more conservatively put statement on oil prices...


Quote from the US Department of Energy.

"The OPEC embargoes in the 1970s provide an historic lesson and offer insight to the potential impacts of petroleum shortages (see section 5.4). Shortages, albeit temporary in the 1970s, drove oil prices higher, and led to high inflation, high unemployment and high interest rates, all at the same time. These adverse effects can be expected in the future if the U.S. once again experiences a supply shock."

http://eclipsenow.org/Facts/economic.html

Again JD, DUH!

 
At Sunday, December 18, 2005 at 4:08:00 AM PST, Anonymous Anonymous said...

Can't you quit saying "DUH"? it's really an immature word I haven't used since 3rd grade and only then it was said extremely loud to drown out anything the other person said.

 

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