Betting on Balderdash

John Tierney competently glosses-over the complexities of "proving" who is correct in the longstanding economics debate between the Malthusians and the Cornucopians about the behavior of commodity prices over time. (New York Times, Economic Optimism? Yes, I’ll Take That Bet)
Five years ago, Tierney and an oil markets expert named Matthew R. Simmons made a bet. Simmons, who sadly has passed earlier this year, strenuously warned about the pending effects of a peak in global oil production and accused the Saudi Arabian government of overstating the condition of their remaining oil reserves. Not that the Saudis would ever do such a thing to manipulate the markets, but I digress...
In 2005 Simmons bet Tierney $5,000 that oil prices, which hovered around $65 a barrel, would in 2010 rise past $200. With prices now at $91 and going up, Tierney claims victory and demands respect for his brand of cornucopian macroeconomics: an unbridled faith in the ability of the free markets to regulate our consumption of natural resources.
As many free-market zealots are apt to do, Tierney criticizes the renewable energy industry's need for subsidies while not mentioning how our Government coddles the producers of nonrenewables with a plethora of tax breaks, discounts, waivers, guarantees and other socialized business expenses.
Never once does he mention the environmental externalities which are excluded from the cheap prices that he claims in his bet with Simmons: not a peep about the Exxon Valdez, BP's Macondo well blowout, the poisoning of underground aquifers by natural gas drillers, the TVA's coal ash lagoon disaster, or many more less well-known cases of energy costs not reflected in market prices.
Tierney ought to ask the residents of the Prince William Sound and the Gulf who have lost their livelihoods, the people in Pennsylvania who have lost their drinking water, and those in Tennessee who lost their towns how accurately they think current energy prices reflect the true costs that are exacted.
He really needs to get out from behind his computer.
Even more astoundingly, Tierney touts the success of the Canadian tar sands project in the same paragraph that he mentions how current trends in the energy industry may lead to reduced climate-changing gas emissions. Back in the real world, the Canadian tar sands project is a disaster both in the way that it strip mines vast areas of Alberta's pristine forests and in the way that it creates more carbon dioxide pollution than any other form of energy production.
Matthew R. Simmons, rest his soul, deserves to eat crow over his bet with John Tierney, but only because he should have known better than to make specific predictions about a commodity as chaotic as oil. As for Mr. Tierney, winning a bet is not the same as winning the argument. He has only proven that forecasting is for suckers, and so is blind faith in the "free markets" that are anything but free.

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Peak Oil Out of the Closet

"Conventional oil production has been flat for four years; in that sense, at least, peak oil has arrived."

Yesterday, the Nobel Prize-winning economist Paul Krugman unceremoniously gave Peak Oil theory a shout-out in his NY Times column and with it a badly-needed shot of cred.
Crude oil prices have recently marched north of $91 a barrel, and gas pumps in the United States of Happy Motoring currently run at an average $3.05 a gallon. We have not seen prices this high since October of 2008, and there is no relief in sight.
Peak Oil is the theory that oil, like most natural resources, can be cost-effectively extracted for human consumption so long as we continue to discover new sources apace of our rising appetites for it. If the pace of those new discoveries falls behind the growth of demand, then eventually its availability also will fall behind.
Industry experts and reporters are fond of the term "oil production" when referring to the amount of oil that is available for our use where it is needed, although this term misleads in that we can "produce" oil no more than we can "produce" eggs at the church Easter egg hunt.
As with any finite resource, there comes a day when the pace of our discoveries reaches a peak, when the fruits of our continued enterprise produce fewer and fewer Easter eggs no matter how hard we try and how deftly we improve upon our methods. In our geologically-bound world of oil, that in turn leads to diminished "production," and then to higher prices and to various forms of conflict depending on the severity of this gap between supply and demand.
Krugman writes that while prices for oil and other commodities are increasing rapidly, some commentators are trying to blame it on government economic policies, to make this a political issue.
Krugman argues how the facts fail to support this claim, and that we are now experiencing real limitations to economic growth that transcend culture, ideology and nationality. Finally, what is painfully obvious to so many has made it to the pages of the NY Times.
We have entered an age where, like it or not, we will (at long last) reckon with geology, physics and chemistry when formulating our economic and social policies. If you are like most economists, it's high time you re-learn your craft.

- As always, thank you for reading and stay in touch!