Tuesday, July 12, 2005

Econbrowser On Markets And Peak Oil

"I for one", starts Econbrowser's latest post on peak oil, "would like to see better communication between economists, geologists, and petroleum engineers about the timing and consequences of the eventual decline in global annual production rates of crude petroleum." Hear, hear. The economists and a fair number of the geologists seem to be talking through each other, with both sides missing the others' point.
I know that many physical scientists feel that economists have a misguided, mystical faith that "markets will always solve everything." Though I understand how outsiders might get this impression, I would guess that more than half of the published research in economics has to do with how the market can misallocate resources rather than how it always does a perfect job. But one thing in which most economists do place a great deal of faith is the powerful forces that are unleashed, for good or ill, by people's efforts to make themselves richer. The argument I'm making here is not an abstract, mystical claim about the market, but rather a very specific claim about the particular matter of interest. The claim is that profit-seeking works strongly in this instance to make the oil price rise now rather than wait until production actually declines, and that this force further works to produce the kind of changes that society needs to make now in order to prepare for the coming production decline.
It's another reason I'm skeptical of Apollo-type programs in the energy milieu. Apollo had a specific engineering goal: get a man safely to the moon and back. As with all such projects, the old saw goes "cost, quality, schedule: pick two", and Apollo's project managers picked quality and schedule. We don't know which two the government will pick with some new energy source, but if they don't pick "cost" (read: ITER), everything else is ultimately immaterial. It's a mistake sellers in an open market can never make.