Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Monday, August 08, 2005

The Hubbert Peak, Oil Prices, and Speculation

Over the past weekend, MA and I had several e-mail exchanges about Twilight in the Desert, about which I wrote this brief item yesterday. He pointed out some similarities between Simmons' views and those of M. King Hubbert, who used mathematical models to predict that for a specific oil field, oil production peaks and then drops off suddenly. From Wikipedia:

The Hubbert peak theory, also known as peak oil, is an influential theory concerning the long-term rate of conventional oil (and other fossil fuel) extraction and depletion. It predicts that future world oil production will reach a peak and then rapidly decline. The actual peak year will only be known after it has passed. Based on available production data, proponents have predicted the peak year to be 1989, 1995, 1995-2000, or, according to the Association for the Study of Peak Oil and Gas, 2007 for oil and somewhat later for natural gas. This may lead to major economic consequences for the world since modern civilization is dependent on cheap and abundant fossil fuels, especially for transportation, food production, chemical industrial processes, water treatment, home heating and power generation. The Hubbert peak theory is named for geophysicist M. King Hubbert, who correctly predicted the peak of U.S. oil production fifteen years in advance. While controversial, the theory increasingly influences policy makers within government and the oil industry. The current debate is rarely about whether there will be a peak, but rather when it will occur and the severity of the post-peak effects. Even the most generous mainstream reports estimate petroleum reserves lasting no more than 100 years.
My reaction: Show me some economics. Show me the effects of expectations on prices.

First, it is incorrect to generalize what might be a geological condition in one field to the world economy. As (or if ) world oil becomes more scarce, prices will rise and extraction rates will decline. Also, higher prices induce more exploration. As Phil Miller says, "We will never run out of oil."

Second, suppose Hubbert is correct. Sort of. Then speculators ought to be driving up the price of oil now by slowing the extraction rate, if not in Saudi Arabia then elsewhere. And keep in mind that even thought the U.S. imports only a small percentage of its oil from Saudi Arabia, if their oil stopped flowing into the world market, that would have a big impact on the world markets.

There was a very informative discussion of these topics by Hamilton and Kaufman recently here. Hamilton points out that the December 2011 future price of oil isn't much different from the current spot price. Apparently, speculators disagree with those who are predicting doom and gloom. If you really think the Hubbert peak is drawing nigh, this is a good time to buy lots of long-term oil futures.

Where is Julian Simon when we need him?

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