free html hit counter Peak Oil Debunked: 290. THE PEAK OILER ARGUMENT FOR RECESSION

Wednesday, April 19, 2006

290. THE PEAK OILER ARGUMENT FOR RECESSION

In responding to the previous article, diemos trotted out the usual peak oiler argument for recession, and because it is so pervasive, let's give it a closer look.

diemos writes:
Assume prices double but you still have the same amount of money. You and everyone else are now buying half of what you were buying before. Your standard of living goes down.
This assumption is simplistic and has nothing to do with the real world. The current annual inflation rate in the U.S. is about 3.4%, and that's fairly high by recent standards. At that rate, it would take about 20 years for prices to double. In fact, the CPI-U currently stands at 199.8 against a basis number of 100 for 1984 (Source). Which means it has taken 22 years for prices to double. So diemos is essentially asking us to assume that wages and salaries remain constant over the course of decades. That's a bad assumption which we shouldn't grant.

Another important point: Even assuming that things work as diemos says they do above, it's not clear why this would be a problem for, say, oil companies. If the price of oil doubles, and you buy half as much, it has no net effect at all on the oil companies. You're still paying them the same amount of money, which means that their revenues are unaffected by your behavior.

So let's talk about the real situation instead of a fairy tale. I refer you again to the case of Stacey Harper in #180.

Stacey was not faced with a sudden doubling of all prices. She was, however, faced with a doubling of gasoline prices, which she deftly handled by van pooling. This enabled Stacy to reduce her monthly commuting costs from about $190/month to $20/month. Now, it's true that Stacey is buying less gasoline and automobile services than before. But has her standard of living gone down? Let's see what she has to say:
Harper, the South Hill resident, decided to leave her car for a van pool – much to her own surprise.

"I was really resistant to it," she says. "It was going to be a big hassle."

Prices at the pump changed her mind.

She got on a waiting list for a van pool offered by Pierce Transit. She took a driving course. Now she pays $22 a month to van-pool as opposed to the $180 to $200 a month she paid to commute alone.

Even if the price of gas drops below $2, she says, she's not going back.

Part of her reasoning is that she likes to shed the day's stress by talking with her co-workers during the ride home. Part of it is helping the environment by taking a few more cars off the road.

And there's another reason. A big one. "I have extra money," she says.
Isn't that astounding? She actually enjoys van pooling. So how is this a drop in her standard of living? She's getting the exact same functionality (transport from A to B), paying less, and enjoying it more. Where's the "drop"?

You could say the same thing about telecommuting. Gas prices double, so you negotiate a telecommuting contract with your employer to commute half the time. You're getting the same functionality (commuting to work) for half the cost, saving hours and hours of wasted, braindead driving time, and you get to work in the comfort of your own home. You can sleep later. So where's the "drop"?

Same goes for moving closer to your job/shopping. You get from point A to B by bike or foot, so the functionality hasn't changed. You're saving time and money. You're healthier because you're getting exercise. Where's the "drop"?

diemos continues:
The people who made their living providing the stuff that you used to buy but don't any more now have no job and thus no money. They stop buying things and their standard of living REALLY goes down. This is a recession.
There is some truth in this. As Stacey Harper and people like her improve their standard of living by shifting away from car dependence, this does put stress on those employed in car related industries. And it does lead to people being laid off. However, this is a temporary situation, which is largely (if not totally) compensated by rising employment in growing sectors -- i.e. the sectors where Stacey spends her new monthly surplus of $160-180. The people who lose their jobs get a new one. The autoworkers laid off by GM get new jobs, like commissioning wind turbines for GE. The key questions are how smoothly this transition can be achieved, and how many new jobs are created relative to those that are lost.

-- by JD

24 Comments:

At Wednesday, April 19, 2006 at 9:13:00 PM PDT, Blogger Jon said...

I realize that not everyone can take transit to work everyday, but the reality is that there is a incredibly large percentage of people who COULD take transit to work everyday but don't due to various excuses.

Living in Calgary, we have a rather small transit system, yet it has gotten me to school and work everyday for the last 4 years or so. Some days it really sucked, but looking back, I am happy to say that I was able to do that.

What blows my mind are the people who drive large trucks, SUVs and Hummers (after all, we are a cowboy town) to work downtown by themselves only to pay 250+ a month to park.

I think the best part of taking transit however is that with my 'flex-time' (meaning, work overtime) job, I can say: 'Well, I can't stay because I have to catch a bus!'

 
At Wednesday, April 19, 2006 at 11:46:00 PM PDT, Blogger BlackSun said...

Very well reasoned argument, JD.

You are essentially battling a doomer religion, and thus are condemned to make the same basic points over and over again.

It's pretty clear that posters such as diemos, patrick david, nukeengineer (are you really an engineer?? coulda fooled me) and others aren't interested in facts. Only their perceptions and beliefs that they seem to hope will be a self-fulfilling prophecy. They also lack creativity and any trust whatsoever in the human race.

I'm tired of these same arguments being made over and over. It's like every new person who wakes up one day and realizes we've got an energy problem has to go through the entire 5 stages of grieving the old way of life.

Wake up! It's going to be a better world, not a worse one. Things suck NOW. We're trashing the planet for no good reason. We've got the technology to change to renewables, and in fact we've had it for decades. We're spoiled rotten, and all the whining is because we might have to make a few changes. Well good. I look forward to it. Even if I lost my house, car, job, and had to cut my calorie intake in half, I'd still be happy that the world was finally done with fossil fuels.

Bring it on!!!!!

Oh, and the poor are disadvantaged in good times as well as bad. That they may suffer disproportionately from the energy transition is not a policy argument.

Fact is, none of this will probably happen. But even if it did, it would still be worth it to make the world sustainable.

Oil use keeps us chained to a treadmill of corporate externalities and geopolitical nightmares that never end. Though they've spurred great progress, fossil fuels have been the biggest curse the human race has ever endured.

Except, of course, religion. Which includes the doomer religion.

 
At Thursday, April 20, 2006 at 1:09:00 AM PDT, Blogger Chris Vernon said...

I would agree with you to a point. You’re basically saying as supply reduces (relative to demand) pushing prices up there is enough scope for conservation to more than offset the resultant increased energy costs. That is certainly true when it comes to driving around.

The problem comes with industries that can’t ‘choose’ different behaviour that reduces their energy bill whilst maintaining their energy services. My company is a case in point, our electricity bill (millions of pounds) has increased more than three-fold since 2000 and I can assure you there aren’t any significant demand savings that can be made to offset that price rise.

When the ‘conservation’ comes from consuming less energy services (rather than just less energy) that’s when you have recession. I think that’s where most demand reduction will come from for two reasons. Firstly the people/companies that can’t reduce energy consumption without reducing energy services and secondly the dumb people/companies that won’t increase their efficiency and end up being forced to reduce energy services.

 
At Thursday, April 20, 2006 at 2:00:00 AM PDT, Blogger JD said...

When the ‘conservation’ comes from consuming less energy services (rather than just less energy) that’s when you have recession.

chris, I'm having trouble understanding you clearly. Can you explain what you're describing with a specific example so I can see what you mean by "consuming less energy services" vs. "consuming less energy"? What do you mean by "energy services"?

 
At Thursday, April 20, 2006 at 4:09:00 AM PDT, Blogger EnergySpin said...

@jd:
The difference between energy service consumption and energy consumption is best given by exampless.
Consider a lighting "device" with a constant luminosity output. The energy service consumption is the same irrespective of how you realzied the device i.e. incandescant light, LED, fluoroscent. But the energy consumption is vastly different.

The difference between ES consumption and E consumption is the main reason that the Jevons paradox should NEVER be invoked to justify the continuation of conspicuous consumption patterns in the face of dwidling/insecure energy supplies.
The word "dumb" used by chris comes correctly identifies the problem with the JP i,e, the companies / people he mentioned were all JP worshippers

 
At Thursday, April 20, 2006 at 4:58:00 AM PDT, Blogger Thomas said...

I guess that by energy service Chris means transport from A to B and by energy he means gasoline.

Other examples: Comfortable temperature vs energy for heating/cooling.

But let's let Chris explain it himself.

My personal opinion: As long as we transport chew toys for dogs hundreds or thousands of miles by truck, we have plenty of energy!!! (and energy services)

-Thomas

 
At Thursday, April 20, 2006 at 5:01:00 AM PDT, Blogger Patrick David said...

Hydrocarbons used for more than commuting. Ex: plastics, pharmaceuticals, shipping. How will THEY save money when oil is $100 / barrel?

Consumer prices will go up and those that can car pool will and great for them, but those that cannot will be hit hard.

 
At Thursday, April 20, 2006 at 6:12:00 AM PDT, Blogger Thomas said...

Patric David,
We probably use more oil for driving in one week than our total consumption of plastic in a whole year.

Consequently, oil for plastic will not be a problem for decades/centuries. A five-fold increase in the cost of raw material for plastic is most likely insignificant compared to the intellectual value, mold casting etc. (prove me wrong if you have data to support it. I haven't found any).

If one gallon of fossil oil can result in either:

1) One trip to the mall

2) A dvd player, two synthetic blankets, a large box of LEGO for the kids and 70 diabetes syringes,

then I bet we will save on the first to preserve the latter...

-Thomas

 
At Thursday, April 20, 2006 at 6:52:00 AM PDT, Blogger Omnitir said...

I think there are many possible economic benefits and opportunities of PO that are often overlooked. One example is telecommuting. By possessing the ability to work from home, you open up a much greater range of job opportunities. Perhaps telecommuting and globalisation will continue to encourage increased employment opportunities for the work from home savvy, as per the current trend?

 
At Thursday, April 20, 2006 at 7:05:00 AM PDT, Blogger Fernando said...

I tend to disagree.

Recessions hit harder to already low income people.

Resourceful people have more options. You give an example of someone who has a car (in an rich society) that switchs to van-pooling.

What about poor people?

And regarding switching careers, that's easy when you're young or well educated. Tell that to a 55 years old low-class worker.

Fernando

 
At Thursday, April 20, 2006 at 8:14:00 AM PDT, Blogger EnergySpin said...

What about poor people?
This is why we generally need growth in our economies. Either that, or a socialist society.
One cannot have his cake (steady state agrarian economies) and eat it too (no social problems due to imbalanced allocation of proceeds).

Since very few people actually want to live under a Soviet Era type of socialist regime, methinks there will be many incentives to engineer solutions, processes and attitudes to deal with this.

 
At Thursday, April 20, 2006 at 9:34:00 AM PDT, Blogger Patrick David said...

Thomas, I think you missed the point. It doesn't matter how much oil we use for transportation relative to feed stock. What matters is that for plastics manufacturers and others, spiking oil prices will erode profits and / or push prices of consumer goods up. Besides, factor in transportation cost to deliver goods to markets and all bets are off. What about Walmart's 10,000 supply chain?

No data necessary to understand that spiking oil prices will result in higher prices for food and consumer goods.

 
At Thursday, April 20, 2006 at 11:36:00 AM PDT, Blogger DC said...

No data necessary to understand that spiking oil prices will result in higher prices for food and consumer goods.

And yet, all economic evidence to date points to the contrary position that in the past 15 years, increased productivity has been sufficient to counter increases in raw material prices:

"An empirical examination of causal price relationships from a stage-of-processing approach reveals that changes in the indexes for crude- and intermediate-goods prices often preceded changes in the CPI during the 1970s and 1980s; since the early 1990s, however, the relationship has become more tenuous"

source: http://www.bls.gov/opub/mlr/
2002/11/art1full.pdf

Now, where is YOUR evidence that increases in the price of oil will filter through the manufacturing process and into the final price of manufactured goods so as to overtake innovation and productivity growth? And before you get into some contrived, first-principles argument of how productivity has/will reach some kind of "diminshing returns," please provide some evidence. You see, cherrypicking Econ 101 does not make for solid analysis.

 
At Thursday, April 20, 2006 at 5:24:00 PM PDT, Blogger diemos said...

The cost of a finished item is equal to the cost of the inputs plus profit. (pace government intervention)

If one looks at a period in which the price of one input is going up while other inputs are going down one can easily conclude that there is no relationship between an increase in the cost of the first input and the final cost of the item.

But that conclusion would be faulty, prima facie. During the last 15 years cheap chinese labor has flooded the market and held final costs down. Which explains the "breakdown" in correlation between energy costs and CPI.

If it takes a barrel of oil to make item A, and a barrel of oil costs $70. Then item A will never cost less than $70. No invocations of "productivity" or "innovation" will change that.

 
At Thursday, April 20, 2006 at 7:27:00 PM PDT, Blogger DC said...

The cost of a finished item is equal to the cost of the inputs plus profit. (pace government intervention)

No shit, Sherlock. The point you seem to be missing (and you might actually get if you read the paper) is that producers haven't been passing costs to customers. Why not? How can they get away with this? Obviously there were some structural changes in the 90's. What were they?

If one looks at a period in which the price of one input is going up while other inputs are going down one can easily conclude that there is no relationship between an increase in the cost of the first input and the final cost of the item.

Dude, read the paper and quit talking out of your ass. The author's analysis IS based on a sensitivity analysis. There are plenty of neat little graphs showing the CPI response to shocks in the net cost of manufacuring goods.

But that conclusion would be faulty, prima facie.

Faulty unless you actually demonstrated anything along the lines of a substantive rebuttal to disprove my argument.

During the last 15 years cheap chinese labor has flooded the market and held final costs down. Which explains the "breakdown" in correlation between energy costs and CPI.

Yet another case of a post hoc ergo propter hoc fallacy. Chinese imports really didn't flood the US market until 1998. Want evidence? Go look up a chart of the trade deficit. It blew up after 1998. In other words, US producers stopped passing production costs onto consumers well before 1998. Thus, your explanation is insufficient.

Why don't we defer to the top economic dog in the US? Consider Ben Bernanke's explanation:

Almost certainly, the most important economic development in the United States in the past decade has been the sustained increase in the rate of growth of labor productivity, or output per hour of work. From the early 1970s until 1995, productivity growth in the U.S. nonfarm business sector averaged about 1-1/2 percent per year--a disappointingly low figure relative both to historical U.S. experience and to the performance of other industrial economies over the same period.1 Between 1995 and 2001, however, the rate of productivity growth picked up significantly, to about 2-1/2 percent per year--a figure that contributed to a growing perception that the United States might be entering a new economic era. Talk of the "new economy" faded with the sharp declines in the stock valuations of high-tech firms at the turn of the millennium; yet, remarkably, productivity growth continued to rise. The pace of productivity gains averaged better than 4 percent per year since 2001 despite adverse developments that included the 2001 recession, the September 11 terrorist attacks, corporate governance scandals, and, most recently, a sharp rise in energy costs.

...

I draw two conclusions: First, on the whole, the relatively optimistic estimates of secular productivity growth espoused by leading scholars in the field do not seem unreasonable, so that, for the longer term, continued growth in productivity in the range of, say, 2 percent to 2-1/2 percent per year probably represents a good baseline assumption.


Source: http://www.federalreserve.gov/
BoardDocs/speeches/2005/
20050119/default.htm

No invocations of "productivity" or "innovation" will change that.

Again, all credible evidence point to the opposite. As I wrote before, cherrypicking Econ 101 does not make for a solid analysis. Anyhow, the main point to take away from this is that any doomer claims about ineffectual or "diminshing returns" in productivity growth is unsubstantiated hogwash. Just about every leading economic scholar sees a continuation in the substantial rate of productivity growth for the foreseeable future, even in the face of persistently higher energy costs.

 
At Thursday, April 20, 2006 at 7:38:00 PM PDT, Blogger DC said...

From the same source (i.e. Bernanke):

Why has productivity growth increased? The favored explanation of the rise in productivity growth since about 1995 has evolved somewhat over time. By 2000 or so, an emerging consensus held that the pickup in productivity growth was, for the most part, the product of rapid technological progress and increased investment in new information and communication technologies (ICT) during the 1990s (Jorgenson and Stiroh, 2000; Oliner and Sichel, 2000). According to this view, rapid developments in ICT promoted U.S. productivity growth in two ways. First, technological advances allowed the ICT-producing sectors themselves to exhibit rapid productivity growth.

...

Second, ICT advances also promoted productivity growth outside the ICT-producing sector, as firms in a wide range of industries expanded their investments in high-tech equipment and software and used the new technologies to reduce costs and increase quality (McKinsey, 2001). For example, some large retailers, most notably Walmart, developed ICT-based tools to improve the management of their supply chains and to increase their responsiveness to changes in the level and mix of customer demand. Securities brokers and dealers achieved substantial productivity gains by automating their trading processes and their back-office operations. In the durable goods sector, General Motors and other automobile producers developed programmable tooling systems to increase the flexibility of their manufacturing processes--for example, to permit vehicles based on different platforms to be produced on the same assembly line. One study found that nearly two-thirds of U.S. industries, comprising about 70 percent of total employment, experienced an acceleration of productivity in the latter part of the 1990s. Significantly, the study also found the gains to be the greatest in industries using ICT capital most intensively (Stiroh, 2002).


The next wave of productivity growth will be even more amazing. Hell, I don't even commute to my office anymore. With VoIP teleconferencing software like Skype and project management tools like Ventana Systems' WebEx, I've been able to INCREASE my productivity. Last week I was working with one person in Las Vegas and another in Atlanta using Skype and Webex to develop a model. That's something that could have been accomplished only in person a short time ago.

I find it telling that the realists are the ones offering evidence, sources and solid anecdotes while the doomers are the ones given to elaborate contrivances and dubious citations.

 
At Thursday, April 20, 2006 at 8:52:00 PM PDT, Blogger diemos said...

since the early 1990s, however, the relationship has become more tenuous"

source: http://www.bls.gov/opub/mlr/
2002/11/art1full.pdf


Obviously there were some structural changes in the 90's. What were they?

Why, what a fascinating paper. He finds a clear relationship up until 1990 when it breaks down.

What an interesting coincidence that the 1990's was when the feds started cooking the books on the CPI calculation with hedonic adjustments, quality adjustments and substitution. I wonder what his conclusions would be if he used the original uncooked numbers.
According to the Shadow Government Statistics website,
http://www.gillespieresearch.com/cgi-bin/bgn

inflation has been running at around 5%. I suspect all your vaunted productivity improvements disappear if you use that number.

Chinese imports really didn't flood the US market until 1998. Want evidence? Go look up a chart of the trade deficit. It blew up after 1998.

Thanks for clearing that up. Since the current run up in energy prices started in 1998 that doesn't really invalidate my point.

Why don't we defer to the top economic dog in the US? Consider Ben Bernanke's explanation:

You're going to appeal to Ben "Helicopter Commander" Bernanke as an authority? LOL. I hope they kept his seat warm at Princeton, he'll be back there before he's been in office a year. The only open question is whether he'll be sent back in disgrace for raising rates and popping the housing bubble or whether he'll be sent back in disgrace for not raising rates and devaluing the dollar.

 
At Thursday, April 20, 2006 at 10:03:00 PM PDT, Blogger DC said...

What an interesting coincidence that the 1990's was when the feds started cooking the books on the CPI calculation with hedonic adjustments, quality adjustments and substitution.

Basically, you're arguing some kind of conspiracy. Typically doomer.

Like other fields, financial analysis has evolved. Valuation techniques have become more sophisticated. I guess in your paranoid, cloistered world, that translates into "cooking the books."

"Thanks for clearing that up. Since the current run up in energy prices started in 1998 that doesn't really invalidate my point."

Now you're all over the place. Here, let me hold your hand: it was argued that an increase in energy inputs would be passed on to the consumer. I argued that there is no evidence to support this claim over the last 15 years. I cited a bls publication. You postulated cheap Chinese imports as the reason that producers have stopped passing material costs increases to consumers. I refuted your claim, citing the current Fed chairman whom along with many leading economic scholars, attributes the change to productivity growth. Now you're discounting any evidence of a change in the material cost/CPI relationship and arguing that the rise of energy prices paradoxically led to increased trade volume. In other words, you have NO point. Oh wait, that's right: phantom inflation.

"You're going to appeal to Ben "Helicopter Commander" Bernanke as an authority?"

Ad hominem. But if we're going to play that game, I rather take Ben "MIT PhD., Economic Scholar and current Fed Chairman" Bernake to John
"Shadow Government Statistics,
P.O. Box 1251" Williams. Sorry, I'm not much for X-files escapism.

 
At Thursday, April 20, 2006 at 11:31:00 PM PDT, Blogger JD said...

Nice one, dc. But shouldn't that be John "Shadow Government Statistics,
P.O. Box 1251, Only $9.95!!!" Williams?

 
At Friday, April 21, 2006 at 2:20:00 PM PDT, Blogger sameu said...

yes, carpooling the solution for everything

you know, in petrochemical plants they already use bicycles to drive to their various installations :-)

no, oil is used in far too many products, as a raw material or for transport
you just can't carpool a recession away

 
At Friday, April 21, 2006 at 3:52:00 PM PDT, Blogger Override367 said...

"no, oil is used in far too many products, as a raw material or for transport
you just can't carpool a recession away"

I think you are missing the point that the oil used for feedstock is both such a small monetary component of the end product (as it is in food) that oil would have to rise in price to such a degree to affect it that there is no way in hell demand could remain constant in the transport sector, once demand drops in transport sector supplies are kept up high enough for other sectors.

We'd need a good hundred years of decline for there to physically not be enough oil for feedstock :)

 
At Friday, April 21, 2006 at 6:15:00 PM PDT, Blogger sameu said...

and who says people will cut back on transportation

they could save money with carpooling but they could also decide not to go on holiday anymore or not to buy that new model of dvd player/ipod/bigscreen tv or not to go out eating that often or wait to upgrade their personal computer
probably a combination of those things

so you have your touristic sector in trouble airplane companies, and ofcourse the airplane service and manufactor boys and girls, the automotive sector won't be too happy, your restaurant holder sees declining profits and so on

in other words, recession

 
At Saturday, April 22, 2006 at 1:20:00 AM PDT, Blogger Chris Vernon said...

chris, I'm having trouble understanding you clearly. Can you explain what you're describing with a specific example so I can see what you mean by "consuming less energy services" vs. "consuming less energy"? What do you mean by "energy services"?

Sorry for the delay, I've been on the road all week. Yeah, as was mentioned above, energy services are light to read by, a warm house, ability to work (by getting to factory or teleworking etc). Where as the amount of energy used is the kWh of electricity, the litre of petrol etc.

Here's an example of where the recession angle comes in where it could theoretically be avoided or at least partially mitigated. For a household for whom energy costs are significant expense they might light their poorly insulated house with incandescent bulbs and drive a 30mpg car 20 miles a day to a factory.

As energy prices rise their disposable income is reduced - reducing their contribution to the national economy and encouraging a recession. Sure they could car share, move house or jobs, swap out their light bulbs and insulate their house but they are either to dumb to recognise the benefit or can't afford the increased one time cost of the change.

It doesn't really matter why they don't improve efficiency but the end result is the same, increased energy costs = less disposable income = increased risk of recession.

 
At Sunday, April 23, 2006 at 9:55:00 PM PDT, Blogger peter huston said...

Jd-check your real-world experience and tell me it takes 20 years for the buying value of relative money to halve.15 years max if energy,education health and housing factored in.Also, what use is increased gdp if it goes to only 10% of the population?.Richard Duncan was never able to prove his theory with invariable tautological implications,can you defend your ideas when the variables of China, India and global warming are added?

 

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