Wednesday, March 31, 2010

Peak Oil's Not So Bad, Shit Happens

When I was in middle school and high school, I was a big fan of what Paleo-future refers to as "apocalypse porn"--that is, media that preaches an imminent Armageddon, at least in our lifetime. Apocalypse porn has been around for a long time and appeals to people without any hope in their place in the prevailing socio-economic system, such as Roman plebeians or angsty sixteen-year-olds.

My favorite piece of apocalypse porn was probably the most believable--peak oil. If you haven't heard of peak oil, it's a pretty rational and straightforward idea. Every oil field has a rate of production that increases and decreases in a bell curve. Hubbard, the guy who thought it up, predicted a peak for the United States during the 1970's. While the oil industry laughed at him, production peaked. His predicted peak for the world was ~1995. This was delayed by the oil crisis in the 70's. Many experts think we have hit peak production; others think we are very close.

What makes peak oil so bad is not that we'll run out of oil--there will always be oil. The problem is that the price of oil will go up. As supplies remain constant or decrease, demand increases in the developing world.

Generally, oil is associated with driving, so this, at face value, sounds like it will just be more expensive to drive. Driving, however, is critical to the economy as a whole. Nearly all products and services involve an automobile somewhere in the course of their purchase and delivery. Therefore, higher fuel prices make all prices higher; they add friction to the economy and slow growth.

A lot of the peak oil literature delves into apocalypse porn at this point. People predict virtually spontaneous changes in prices and, as a result, food shortages, wars, and the breakdown of law and order.

The reality is not spontaneous. Prices can be thought of as direct, mathematical relationships, but in actuality, there's a delay in the communication and adjustment of those prices. This slows economic changes. The price of bread will increase steadily, but we won't wake up one morning where no one can afford food.

These price changes will increment over time. The actual adjustments will have to move around the economy a bit. Here's an example--let's say Farmer Joe has to increase the sale price of his wheat. Steelworker Bob then must pay more for wheat, and his wages increase once his union goes on strike for them. This increases the price of steel, which increases the price of tractors, which increases the amount Farmer Joe will have to spend reinvesting in capital.

The economy is full of many deeper, intertwined chains like these. Actual price changes take time to move from one part of the economy and reach equilibrium. As a result, the increases in prices are slow. This isn't a bad thing. Some people are barely at the line where they can afford to commute in an automobile. As the price of fuel increases, these people won't be able to afford to commute, and they'll have to chose an alternative mode of transportation such as carpooling, cycling, mass transit, or moving closer to their job so they can do one of those. Either way, these people stop spending money on gasoline, lowering demand a bit and bringing prices slightly down.

The price of oil will continue to increase, though this trimming of the hedge will soften the blow. This won't stop the price from continuing to rise, however, and demand for cheap transportation will drive the development of alternatives. Either serious money will be put towards developing alternatives, or people will change their life styles into more affordable ones--that is, they will move into cities instead of living in suburbs and commuting.

In either case, civilization will not collapse. The blow will be cushioned. Since more money will, for a time, have to be invested in transportation, the standard of living may decrease, but people will have to deal with that. It's nothing to panic about, and when the time comes--as it is now--the economics will redirect our goals and motives. It won't be pretty, but shit happens.

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