Paul Krugman: Running Out of Planet to Exploit

Will increasing world demand for limited resource supplies pose a threat to world economic growth, or will technology keep peak oil and other such commodity peaks safely out in front of us?:

Running Out of Planet to Exploit by Paul Krugman, Commentary, NY Times: ...Last week, oil hit $117. It’s not just oil... Food prices have also soared, as have the prices of basic metals. And the global surge in commodity prices is reviving a question we haven’t heard much since the 1970s: Will limited supplies of natural resources pose an obstacle to future world economic growth?

How you answer ... depends largely on what you believe is driving the rise in resource prices. Broadly speaking, there are three competing views.

The first is that it’s mainly speculation — that investors ... at a time of low interest rates have piled into commodity futures, driving up prices. On this view, someday soon the bubble will burst and high resource prices will go the way of Pets.com.

The second view is that soaring resource prices do, in fact, have a basis in fundamentals — especially rapidly growing demand from newly meat-eating, car-driving Chinese — but that given time we’ll drill more wells, plant more acres, and increased supply will push prices right back down again.

The third view is that the era of cheap resources is over for good — ...we’re running out of oil, running out of land to expand food production and generally running out of planet to exploit.

I find myself somewhere between the second and third views.

There are some very smart people ... who believe that we’re in a commodities bubble... My problem with this view...: Where are the inventories? ...inventories of food and metals are at or near historic lows, while oil inventories are only normal.

The best argument for the second view, that the resource crunch is real but temporary, is the strong resemblance between ... now and ... the 1970s.

What Americans mostly remember about the 1970s are soaring oil prices... But there was also a severe global food crisis...

In retrospect, the commodity boom of 1972-75 was probably the result of rapid world economic growth that outpaced supplies,... bad weather and Middle Eastern conflict. Eventually, the bad luck came to an end, new land was placed under cultivation, new sources of oil were found..., and resources got cheap again.

But this time may be different: concerns about what happens when an ever-growing world economy pushes up against the limits of a finite planet ring truer now than they did in the 1970s.

For one thing, I don’t expect growth in China to slow sharply anytime soon. That’s a big contrast with ... the 1970s, when growth in Japan and Europe ... downshifted — and thereby took ... pressure off ... resources.

Meanwhile,... Big oil discoveries ... have become few and far between, and in the last few years oil production from new sources has ... barely ... offset declining production from established sources.

And the bad weather hitting agricultural production this time is starting to look more fundamental and permanent... Australia, in particular, is now in the 10th year of a drought that looks more and more like a long-term manifestation of climate change.

Suppose that we really are running up against global limits. What does it mean?

Even if it turns out that we’re really at or near peak world oil production, that doesn’t mean that one day we’ll say, “Oh my God! We just ran out of oil!” and watch civilization collapse into “Mad Max” anarchy.

But rich countries will face steady pressure on their economies from rising resource prices, making it harder to raise their standard of living. And some poor countries will find themselves living dangerously close to the edge — or over it.

Don’t look now, but the good times may have just stopped rolling.

Comments

[Joe]

The dismal science.

[cm]

Certainly, it looks like the current economic paradigm, and especially the grotesque volume of waste it engenders (not just in terms of garbage but generally inefficient resource use), is not sustainable in in this form.

However, there are a lot of "low hanging fruits" that have not even been attempted at scale in the "developed" world, most notably the US.

A few things that immediately come to mind is cutting down on plastic/foam/paper dishes, cups, and utensils (may require retrofitting of sanitary infrastructure, but probably not major construction); shutting off office lights and equipment overnight (building office buildings with windows and natural ventilation instead of HVAC is probably not "low hanging"); and creating legal and economic frameworks encouraging employers to install shuttle buses for popular commute routes (a number of bay area companies are doing that, and some are even pooling resources, e.g. having shuttle lines serving a whole business park).

I know a number of people who would conform to a schedule and the carless inflexibility to gain the opportunity of e.g. reading instead of watching the road and getting aggravated in traffic.

That's perhaps not going to make a major dent, but I don't even see the relatively simple or even symbolic things attempted.

[Andrew]

We are looking at very real resource issues with agriculture, but they are hardly comparable to other commodities, particularly oil.

Intellectually, Peak Oil = Laffer Curve. It makes a certain amount of intuitive sense, but there isn't much in the way of evidence to support the theory. And much as Laffer is a supply-side shill, Hubbert worked for Shell Oil.

So long as we can be convinced that the world is in imminent danger of running out of oil, the prices soar.
Year after year, discovered reserves increase. Skyrocketing oil prices are a reflection of increased demand and cartel action, not limited supply.

(Addendum: just because I believe we have plenty of oil, does not mean I endorse using it.)

[cm]

Until the environmental and resource cost is reflected in measurable (macro and micro) economic indicators, and as cost units on balance sheets, not much is probably going to happen, unless by legal fiat ("red tape").

[Cyrille]

Er, peak oil is a mathematical certainty as long as we consume more than is regenerated in any given year (well, yes, organisms do decompose even now).

As long as that premise is there, there WILL be a point where production reaches its maximum. Because stock depletion at an increased pace cannot last forever, no matter how big the stock is to start with.

So, to claim that there is not a lot of evidence for peak oil is equivalent to claiming that there is not a lot of evidence that more oil is burnt in any year than is produced via decomposition of organisms.

And that claim is completely nuts. We burn WAY more.

says...

Cyrille,

It depends on how you would like to frame the issue.

If peak oil means we will eventually run out of oil, then of course you are correct.

If one is trying to suggest we are at some particular point on the Hubbert curve, then there isn't a whole lot of evidence to support the notion.

[Ahmed]

It's looking scary, without a doubt.

And I'm sure it's looking scariest for those that can't really see what's coming. The poor around the world are suffering and suffering hard. I'm not sure what's going to happen, but I'm hoping for the best, and expecting the worst.

[hari]

It depends on whether you think the glass is half-full or half-empty....

First, China and India have the domestic capacity to invest in commodities of basic demand including edible oil and meat products, including renewable energy resources.

Second, Africa may actually benefit from global demand for basic commodities - if they can get their political act together (not like what's going on in the bread basket of Zimbabwe). However the situation can reverse quickly too....

Third, crude oil supply will not dry up any time soon. Prices likely to go thru the roof...and finally come down.

There is a cycylical momentum in commodities and right now my guess is that global monetary policy may be driving it. DOn't ask me to expand on it. Speculative markets are like that when emerging markets, for first time, determine the global supply/demand.

To what extend are hedge funds moving into commodities with all their leverage and speculations?

[reason]

Andrew...
as someone who has occasionally visited the oil drum, I wonder why you think there is not much evidence for peak oil? There is heaps of it, and it is looking more convincing all the time, as many of those "reserves" are looking more fanciful (or harder to exploit) all the time. I notice the press failed to highlight that the huge new find off Brasil is at a depth that has never before been successfully exploited.

But in general I agree with cm. Solutions are possible in the intermediate term. The very short term though is scary.

The problem is rationing - in distinguishing between necessarity and mere preference. Occasionally I have put up reductio ad absurdum arguments about billionaires cornering grain markets, or people starving because of the amount of land devoted to golf courses. (As counters to naive libertarians). Those scenarios are looking more realistic by the day.

[reason]

Hari,
please comment on PK comments about stocks. Speculation driving up the price will be visible in terms of rising stock levels. I expect there will be some of it, but any excesses will quickly burn the hands of the speculators. Stocks of commodities cost the speculators, they don't return an income.

[reason]

One thing here, PK does not seem to me to be really a believer in theory. He uses theory quite flexibly, as a way to illustrate possible explainations (parables if you like) of observed reality. For which he has a very good feel. Some economists seem to be like is sometimes said of the French, "it is all very well in practice, but does it work in theory".

[BJ Feng]

I don't think there is as much to worry about. We already have the technology to replace oil, but oil is still the cheapest and most efficient source of energy for much of our needs. As prices rise, so does investment in "alternative" energies and efficiency increases as a result of this R&D. We could be approaching peak oil, but we'll adjust and switch over to other forms of energy, and they should become very efficient over time as our technology gets better. I think we will be able to produce energy in a form as efficient as oil someday. The catalyst is the high price of oil, if oil were still at $40, there would be no need for investment in alternatives.

We could see some strain from the switch, a lot of old systems will have to be replaced by completely new ones. Like the way we fuel our cars, the gas station network, all that will have to be replaced by something new. What that will be has yet to be determined, we're just at the beginning stages.

This is exactly what environmentalists have been praying for, but now that the time is near, all I hear are complaints about the high cost of oil. Well what else is going to get us away from oil? This is why I think the left does nothing but complain, isn't this what you asked for? There is very little need for government to "push" for alternative energies once the cost becomes competitive with the cost of producing oil. We see a lot of investment now because of the market dynamics, not because some dumbass bureaucrat in Washington thought it would be a great idea to come up with another source. If anything, they need to stop interfering and allow the best alternative to emerge. Corn based ethanol clearly is not the best alternative, but thanks to all the subsidies and import tariffs, that's the way we're headed. We don't want to lock ourselves into an inferior alternative. Thankfully, we're still in the beginning stages and the clear winner hasn't emerged yet.

[ndd]

Isn't the allegation (forgot where I saw the charts) that he hit "Peak oil" in ~2005? So we had peak oil in 2005, in 2006, in 2007, and in 2008. And yet the price of oil has tripled over that time period. Exactly what facts about "peak oil" have changed in that 3 year period? None, as far as I can tell. So why is oil 3 times more expensive than under the exact same conditions in 2005?

This is reminding me more and more of the Mississippi Land bubble. The french investors in the 1700s were regaled with stories about how the fertile Mississippi river basin would change the entire food production equation for the planet. As we know now, those stories were 100% correct. Didn't stop a disastrous investment bubble from forming at the time though.

[BJ Feng]

Rationing is enforced through price. A human being "needs" very little to survive, just a bare minimum of food, water, and perhaps shelter, so how could anyone decide what is "needed" and what is not? This computer and blog isn't "needed" and consumes energy to keep up. From my labor, I produce for society, and I should be able to get back what I want. If driving around listening to music makes me happy, then I should be able to spend my wages that way, what will prevent me from doing so would be very high oil prices. I would then have to choose between driving and perhaps buying new clothes.

And what's wrong with golf courses? If people want to spend their labor earnings on a pristine golf course in the middle of the desert (the ones in Nevada are beautiful why shouldn't someone spend the money and resources to build one? Resources are only wasted if it is used on something no one wants. They cannot be wasted providing people with what they demand and with what makes them happy.

[reason]

ndd...
Rising demand and relative (short-term) price inflexibility.

[reason]

bjf
(What he meant to say was...)
Resources are only wasted if it is used on something no one with money wants.

[reason]

bjf
Do you have to become a parody of yourself?

[OhNoNotAgain]

BJ,

Your post was fine up until this point:

"This is exactly what environmentalists have been praying for, but now that the time is near, all I hear are complaints about the high cost of oil."

You just can't seem to pass up an opportunity to put up straw men. Where are these environmentalists that are complaining about high oil prices ? As for Ethanol, who was the major proponent of this recently ? Bush and his ilk, the Republicans. They're the same jackasses that keep talking about coal and other extremely dirty sources of energy. I don't know too many left-leaning people that are proponents of Ethanol. Generally speaking, left-leaning folks like myself are against burning our food (ethanol) and valuable products (plastics) for unnecessary transportation.

[anne]

"This is exactly what environmentalists have been praying for, but now that the time is near, all I hear are complaints about the high cost of oil. Well what else is going to get us away from oil? This is why I think the left does nothing but complain, isn't this what you asked for?"

Simply notice the language, notice the slander for the sake of slander, notice the viciousness for the sake of viciousness.

[OhNoNotAgain]

"Resources are only wasted if it is used on something no one wants. They cannot be wasted providing people with what they demand and with what makes them happy."

Perhaps in the view of a child, this is the case. In the adult world, we have to actually plan for the future. And that involves making sure that we don't consume resources on frivolous things that we will later regret having consumed.

Someone who isn't a free market zealot would realize that there are severe limits to what the short-term oriented markets can do for us, especially in terms of long-term planning.

[BJ Feng]

Hahaha, hey how come everyone else can take shots at broad groups (Republicans, oil men, the rich, etc.) but I can't? And who else is complaining about the high cost of oil but the same folks in Washington that complained about our heavy use of it?

Maybe the media didn't report it, but I didn't see much dissent from environmentalists when the ethanol push began. All I saw was praise that finally we're moving towards "green" energy, nevermind that ethanol has to be transported by rail or truck, not pipelines, and that it gets lower mileage than oil. I concede it could've just been the talking heads on TV hyping it up, they sure seemed very enthusiastic about it, along with most of the leftist members of Congress. Remember, this was a bi-partisan project! No criticism at all from Pelosi, Reed, and the usuals.

[BJ Feng]

Thank you but I think I can plan for my future better than you can. I wouldn't presume to plan for yours. Ever heard of different strokes for different folks? That's why during Christmas, it's hard to receive a gift you really wanted, unless you specifically asked for it, or it's personalized.

A friend of mine recently bought a Prius, it made him happy, who am I to say it was a waste of his money? Do you really need to be spending valuable energy reading this? Do you know the amount of resources that were exploited to produce the energy you are consuming now? And for what, it's just mere entertainment! There are starving people in Africa! The money you spent on your computer could feed them for months! Do you really "need" to read this blog? Should I go on?

[save_the_rustbelt]

The only real shortage is in leadership, both public and private.

And we will need some mechanism to rein in speculators, who are apparently manipulating the food market for profit, and have been manipulating oil markets for decades.

[kharris]

The peak oil argument was first formulated regarding US production. In that limited context, Hubbert was not only right in theory, but got the timing just about as close as one could imagine, given the uncertainties involved. Impuning his work because he drew his paycheck from an oil company rather misses the point that he did what good predictive scientists do, and came through with a win. He made a falsifiable prediction of considerable precision, and the prediction proved true.

As to the question of why oil would be 3 times as expensive now as in 2005 if the peak had arrived in 2005, that seems rather a red herring. US reserves are a narrower matter than global reserves. The USGS did a pretty good job of getting its hands on data in the US that is often not readily available on a global scale. Hubbert pulled a coup in getting the peak in US output very nearly do the year, but that is an unreasonable standard for global production. In addition to insisting on a more accurate forecast of a global peak than is likely on a global scale, the question also misunderstands the market mechanisms that would work to drive up prices at the global production peak. There is sufficient uncertainty in global capacity that we are unlikely to recognize the global peak when it comes. Prices cannot adjust to knowledge that doesn't exist. We might also want to consider that a sharp rise in demand is at work boosting prices, and that would mask the effects of peak production on prices. So would speculative demand.

I don't mean to argue that the peak in global production has arrived, but rather to point out that the question ndd has asked is not a useful one. Prices are probably not a useful guide to global peak production in the short term - the period of a single economic cycle. We have fairly good estimates of output, and output is the issue at hand. Why not start there?

cm has made a very important point, to which I would add only that policy could make a big difference. As long as we elect leaders who scoff at conservation (freezing in the dark) and allow vastly wealthy firms to mount wildly dishonest propoganda campaigns ("junk science") without consequence, there is little chance of avoiding a resource crunch. We will never know if better policy could lead to a sustainable high level of material welfare, because the richest society on earth is actively avoiding efforts to find out. Cuts into profits, don'tcha know

[bakho]

The bad news is that the US has done next to nothing with energy conservation and alternative energy during the past 27 years of Big Oil funded and Republican dominated energy policies.

The good news is that we have a lot of energy inefficiency that can be fixed to get us out of this mess. The PK editorial fails to recognize that short term structural and political barriers have more to do with our current situation than long term limitations. We do have an asset bubble in oil because BigOil Bush stalled any and all policies that would have prevented it and created some new ones (Iraq War) that have only exacerbated it.

[OhNoNotAgain]

"Hahaha, hey how come everyone else can take shots at broad groups (Republicans, oil men, the rich, etc.) but I can't?"

Because the Republicans and their ilk are *actually responsible* for the mess that we're in.

"I concede it could've just been the talking heads on TV hyping it up"

If the Bush administration was for it, then that is a good hypothesis.

"No criticism at all from Pelosi, Reed, and the usuals."

And are they environmentalists ? No.

http://www.sierraclub.org/sierra/200701/decoder.asp

I think you'll have a hard time finding any environmentalist that likes an energy source that isn't renewable.

[OhNoNotAgain]

"Thank you but I think I can plan for my future better than you can."

Really ? You can individually plan how this country is going to produce and consume energy over the next 25-30 years ?

Do you really believe that if we just let everyone do what they want, that we'll get the optimal outcome ? That collectively this won't result in the wrong choice for our entire economy ? We let everyone do what they want in the housing market over the last 6-8 years, and the outcome was a disaster. I think that some planning in the form of regulation to curb possible excesses and to direct the activity in a positive direction would have been beneficial and prevented most of the damage. But, what do I know, I'm just some left-wing, socialist, loon.

[baileyman]

It's likely to be a bad time not to be a capitalist in the USA.

[OhNoNotAgain]

"Prices cannot adjust to knowledge that doesn't exist."

Very good point. With Saudi Arabia and others giving out questionable figures for reserves, it would seem to me that anyone claiming that we aren't at peak oil worldwide would be just as subject to the same criticisms as someone that says that we are. The problem is that we don't know, so to me that says that the prudent course of action for the US is to assume the worst case scenario and proceed from there. The benefits are so great and numerous, that there aren't really any downsides to moving away from oil as our primary energy source. So what if oil comes back down - that just means that the remaining areas where we use it (military, plastics, etc.) will become much cheaper.

[Decline and Fall of the Middle Class]

PK..."...making it harder to raise their standard of living..."

If the middle class standard of living could not be significantly raised during the good years, what chance is there during an era of declining resources?

[ndd]

reason:
Re price inflexibility, how long does the "short term" last in this case?

Re rising global demand, energy consumption has declined in the US in the last couple of quarters. Anyone know what is actually happening in China by way of cold hard facts vs. speculation?

Weren't the two points you raise already known in 2005? Why not reflected in the price then?

The same applies to Krugman's graph re metal reserves vs. prices. Why did the reserves lead rather than lag the market? I see metal reserves equal now on Krugman's graph to where they were several times a couple of years ago when metal prices were 1/3 and 2/3 of what they are now.

Bubbles are usually based on a real story: the Mississippi river valley/cars/internet changes everything!!! And maybe it does but something else is going on when a price doubles or triples in a year or two.

[Cyrille]

ndd, I'm getting the impression that you think that peak oil mean peak PRICE of oil.

How could it be surprising that a little while after reaching peak production, with demand having kept rising (and being very price-inelastic), prices have shot up?

[reason]

ndd...
Short term price inelasticity...
The US drop in demand is not just a reflection of the price. And low price inelasticity does not imply no fall in demand, if price rises are large enough. The medium term is determined by how long it takes to replace the stock of cars, heaters etc.

Weren't the two points you raise already known in 2005? Why not reflected in the price then?

Maybe people were of the opinion that supply could continue to rise?

[reason]

ndd.
Why did the reserves lead rather than lag the market?

Surely, this is what you would expect if supply was unexpectedly unable to keep up with demand growth?

[reason]

(And the opposite of what you would expect if speculators rather than final demand were driving the market.)

[ndd]

reason:
Actually, the hypothesis that oil prices spiked in 2005 because "Surely, this is what you would expect if supply was unexpectedly unable to keep up with demand growth?" can be checked by looking at 2004 news stories. Here's a few:

http://www.energybulletin.net/3272.html

http://www.feasta.org/documents/energy/oilpricetrends.pdf

http://www.stls.frb.org/publications/re/2005/a/pages/oil_prices.html (Note: This is a Federal Reverve Bank of St. Louis article).

I don't see any surprise anywhere.

So again I ask, if what is known now, was known 3 1/2 years ago, why have oil prices doubled in the last year? More importantly, do people really think the world economy, including places like China and India, are really going to take prices of $150 - $200 a barrel for oil without a deep, deep global recession. In short, how much longer do people really think this can go on?

To answer my own question, I suspect the "short term" will end - shortly.

[Cyrille]

"More importantly, do people really think the world economy, including places like China and India, are really going to take prices of $150 - $200 a barrel for oil without a deep, deep global recession."

Well I don't know, it seems that it will mean stagnant prices of about €65, the way things are going...

[Elvis]

Andrew said:
Intellectually, Peak Oil = Laffer Curve.
Actually, Laffer Curve = less (taxes) is more (revenue)
Peak Oil = more (production) is less (reserves).

[ndd]

Cyrille: Touche!

Econbrowser has a blog entry to similar effect. That suggests the main story is not global supply/demand, but rather oil as an alternative "reserve currency."

[paine]

peak nonsense is near good people of earth

an intellectual three winters in a row

the global economy is growing like may weeds

wild free and toxic
but the transformation is staggering

enter parson malthus....

limits limits limits

natural limits
and natural scarcity
and natural hierarchy

look up the facts as my positivist friends might suggest
trends in resource intensivity
shift back and forth now
in this 3 century old age of
resource use and productivity innovation

----what's three centuries out of 50 ???
enough to define a qualitative change
in the joint human project -------

seems to be cyclical ?????

its certainly re active
todays pinch is not about to become a strangle

watch the vast raw imput economizing
china and india lead
over the next twenty years...

a global contraction ???

sure why not
knock yourself out thinking over that one ...

but but but
from systemic not natural limits

[anne]

http://krugman.blogs.nytimes.com/2008/04/21/irrelevant-america/

April 21, 2008

Irrelevant America
Edited by Paul Krugman

Emerging Market Oil Use Exceeds U.S. as Prices Rise: *

Traffic jams in Beijing and humming air conditioners in Dubai are replacing U.S. highways and suburbs as the driver of global oil prices.

China, India, Russia and the Middle East for the first time will consume more crude oil than the U.S., burning 20.67 million barrels a day this year....

"Does the U.S. matter anymore?" said Mike Wittner, head of oil research at Societe Generale SA in London. "Has the U.S. mattered for the last few years? It is debatable. As far as the oil market is concerned, demand growth is going to be continued to be driven by China and the Middle East."

* http://www.bloomberg.com/apps/news?pid=20601109&sid=a_YCEx7do3LQ&refer=home

[reason]

ndd..
A few selected documents doesn't cover the uncertainty that existed in 2004 about the future supply outlook. Some influential people have been forecasting supply continuing to grow (at least 10-30% increase until 2030). That no increases have eventuated was certainly not the consensus opinion.

[reason]

paine...
I would like you to more precise on this one. Yes the world can become more efficient (in fact MUCH more efficient) with the use of resources. But as we have seen with fisheries for instance, eventually you do run up against limits. There are three times as many of us now as when I was I born, and we keep using more resources per head. What can't go on, won't.

[Cynthia]

Another bubble in the making comes to mind as I see commodities soar across the board. But if soaring commodities are driven by short supply (and not merely over-speculation), then a commodity's bubble might grow to become filled with actual substance, instead of just hot air -- thus making the housing bubble look like a cakewalk!

[reason]

p.s. Paine

I agree if a global contraction is coming in the near future it won't be because of resource shortages, which in the intermediate term will probably be a good thing (because it will increase the average income in a good number of poorish countries). However, the real income of the US (as a whole) will fall, as the terms of trade move dramatically against it. I make no predictions about what will happen to income distribution, that is a political question.

[paine]

as to the krug krieg on the spec explanation

i submit
he only reveals the paucity of formal
realizations of price makers behaviour

his simple simon model
yields only two supply side explanations

hoarding
or
production constraint

if its hoarding
then as the late m pillor might say

"where's the hoard "

if its production constraint

"where's the slack "

but what if commodity price making
has no simple smoothly operating
pseudo mechanical
balance beam operating at its heart ???

what if the trans nat oligogues
are posting up prices ..cause they both can
and want to
what if its all a levitation
a defiance of models
a playing hob with sectoral prices
because demand re actions are short run helpless

what if periodically
for reasons obscure even to themselves as individual deciders
the sector by sector hand full
of trans nat whole sale spot price makers
are flocking into flight
boldly as in the 70's
daring the earth's credit policy lords
to come on make our day
volckerize us ..
and samson like the policy types
collapse the whole global gig ????

tell me i can rely on marshall and walras
to prevent this from happening
before my very eyes

[reason]

Cynthia,
I don't understand the logic here. A commodities bubble is something completely different from a housing bubble. You see land supply is fixed (although the supply of housing on it isn't) and most of the bubble is on the price of that land. But commodity production, can and will change in the intermediate term in response to increased prices. The problem in the short term, is that some people will suffer severely in the mean time. There may also be limits on how much production can be increased (and increased production may have other effects), but there will certainly be some response (Europe for instance has paid farmers not to produce. This will almost certainly soon be reversed. Maybe one positive effect of food price increases will be the end of the CAP - one can hope.)

[reason]

P.S. I don't think oil production (or wild fish) can be increased much. But certainly some other minerals and food production can be.

[Gil]

Technically speaking Peak Oil = Law of Diminishing Returns = more and more effort required to get less and less oil such that it's not worth it. Well I s'pose it'd be obvious that the system will cope with Peak Oil one way or the other. And, quite frankly, I'd guess rich countries would despise a 'Mad Max' scenario more so than poor countries - the poor countries are poor already and we have further to fall (ouchies!). I'll put my vote to hoping next-gen technology are electric vehicles powered by really good batteries or ultra-capacitors.

[paine]

"What can't go on, won't."

both prophecy and answer

fish gone..
we eat slime ..i guess
substitution effects are strong
when it comes to starvation threats

suffering ahead massive hideous avoidable suffering ??

yes ..these are human class socities
we're talking about

they have a solid reliable
50 century plus history
of fucking themselves brutally...
in the lower quarters
from time to time

[paine]

reason:

the rise of commodity prices
if it actually produces a period of relative prosperity
for households stuck in traditional agrarian production hoorah

but if its merely a pass back or pass forward
to the rent suckers
well positioned
at both ends of that traditional system then ....

[Cynthia]

Reason,

I wasn't trying to be logical here; I was merely playing with the word "bubble": a bubble containing actual substance as opposing to just hot air.

[paine]

"paine...
I would like you to be more precise on this one"

i'm too old and lazy
to be precise
let alone quantitative

besides
the social contract unfolding today
has too many undisclosed codicils

[reason]

As I see it we are coming to the end of period of world growth of about 5% - about 2.5% increase in resource extraction and 2.5% increase in efficiency of resource use (just looking at the often sadly neglected) side of the global production function. That 2.5% increase in resource is about to come to an uneven halt. Either total growth will fall to 2.5% or we will find a way to increase the efficiency of resource use at a faster rate. My hope is that the rent extraction from both resource use (land) and intellectual property (the resource efficiency gains) we be seen to be too inequitable to be sustainable in a world approaching its upper sustainable carrying limit.

Whatever happens we are in for a change in paradigm and it is likely to be rough for some.

[paine]

"Speculation driving up the price will be visible in terms of rising stock levels"

if demand and supply are both
inelastic ...enough
this may not happen

"the user " just pays
"the higher" price
and "the supplier "
pockets the additional revenue
as he would any " extra rent payments "

the paradox is how can a supplier
suddenly induce a spot market price shift
without any supply side quantity changes
on that market

and if she can induce
this miraculous spot market price increase
and by voluntary act alone
and this means more rent
then why now
and not yesterday ???

what in hell mystical monads
not dreamed of
in adam S's philosphy
are at play here ??

[reason]

I'd like to everyone to know that before PK picked up on this theme, I'd chided Mark Thoma in emails for avoiding this theme. I really think he didn't want to think about it. I'd be interested to hear his own views on this general topic.

[Bruce Wilder]

ndd: "something else is going on when a price doubles or triples in a year or two."

I do suspect that the Collapse of Empire has something to do with it.

Denominated in Euro, the trends are still the trends, but they are not quite so dramatic.

[ndd]

BTW, reason, despite our differing takes, I think this is a great discussion.

Bruce Wilder: It is instructive, I think, to compare this post with Tim Duy's just below. Either the yield curve or "Peak Oil!" is likely to be shown to have been spectacularly off as a predictor of the economy by the end of this year.

[hari]

I was just browsing thru India's Business news -

Govt has authorized 4 States (big states!) to *buy* wheat on the world market (at going prices) and *subsidy* will be provided by Central Gov. (guarantee system).

Paul is not very serious in his present analysis (as some of you noticed). If you know his trade policy work, you know he's capable of much more better analaysis...My guess is that he's simply *flying* some assumptions to checkout the general reaction...

Recall, before this credit cruch started (last Aug), we had a hi fi market (liquidity) chasing very few stocks and whatnots. Oil was still not at this current level...So what's going on? What's changed?

My hunch is Fed actions blunted the leveraged futures market and investment banks and hedge funds retreated with their cash ---and went leveraging their positions (based on high volume) on future crude supply and other basic commodities (they've been doing it for some time before but apparently recent climate changes in Aust, mainland China and India's north-west provided timely opportunity to speculate, I guess).

Today's action by Central Govt in New Delhi further reinforces the argument perhaps the futures market is impacted by climate and environmental factors for the time being..../

[Alex Tolley]

"Peak Oil" is of concern only in the short term. Long term, we have to massively reduce fossil fuel combustion to prevent the problems of global climate change. At that point, fossil carbon deposits will not be burnt, but used almost purely as a input for chemical and plastics manufacture.

Short term, we are facing limits to food production, from the diminishing returns of higher efficiency and higher energy inputs, soil degradation and shortages of water. Some more worrying trends are resistant pets and diseases, especially now that the higher productivity gains have come about through greater use of very narrow varieties. Bananas are in the news of course, A new wheat rust has also appeared. Couple that with the disappearing bee problem, and you have the makings of some potentially large crop failures.

More locally, California is facing water shortages, especially in the southern part of the state. GW will exacerbate the problem due to smaller Sierra winter snowpacks. Realistically, water conservation, recycling and maybe desalinization will be needed, rather than trying to acquire more water.

I've no doubt that we can be highly innovative, but not all materials, can be substituted. Rare metals are a case in point, unless we can mine the solar system. Helium is another, current shortages indicating potential longer term problems.

As for high oil prices today, that is not a bad thing at all. As I write this, NPR had a news item about huge growth in hybrid vehicle sales, surely in response to high oil prices. Good to hear that the negative incentives are working.

[Andrew]

The peak oil argument was first formulated regarding US production.

Half true. The paper was written with regard to both US and world production. As far as his predictions about world production were concerned, he offered 1250 billion barrels before the entire world's oil reserves were exhausted. The present known reserves in Saudi Arabia alone is 262 gigabarrels.

[reason]

Andrew...
surely you realise that most people think the quoted "reserves" of OPEC countries are a joke (because their allocated quotas were proportional to their claimed reserves).

[Jas Jain]

--
But we have NOT "Run Out of" of People "to Exploit." Right here in the US of A, let alone the poorer countries!

Bankrupters and Fraudsters of New York City (BFNYC) will see to it that they suck the financial blood out of 30,000,000 American households by having constructed Debt Concentration Camps with the help of the Fed and the USG. The American econo-political system has been turned into...

A system of the Crooks, by the Crooks, and for the Crooks.

It is nice to read the saucy details of the workings of the system, especially, from econ-meisters. Yes, economists are front-line soldiers of the Crooks with their policy prescriptions and justifications for the machinations of the Crooks.

Jas

[Jas Jain]

--
Alex Tolley: "More locally, California is facing water shortages, especially in the southern part of the state."

I live there. You should see the waste of water by many in SoCal. I wouldn't be surprised if the water is rationed by imposing penalty rate above a per person quota. We got too many born-and-bred dopes who only behave when they are forced to. Proper functioning of free market requires high degree of ethics and discipline in the population, something that likes of Hayek took as given. What ethics?!

Jas

[Bruce Wilder]

ndd: "Either the yield curve or "Peak Oil!" is likely to be shown to have been spectacularly off as a predictor . . ."

I greatly admire Tim Duy's instructive, well-reasoned narrative analyses -- the one below is particularly good.

I have argued that the yield curve is not "a predictor" but a fundamental mechanism of the economy.

That said, I think the dichotomy is between a mild U-shaped recession, which is consistent with the successful postponement of the day of reckoning, and an L-shaped recession, where a real recovery is a long-time coming.

The difference is not "peak oil" per se, but the re-orientation of the American economy, away from the profligacy of decadent Empire and toward (I hope) massive investment in a feasible future.

My own prediction is that the stimulus will prove a partial bust, and the recession will take the shape of a long, lazy W, or UL. In other words, the postponement will mostly just prolong. Structural weaknesses, and the pressure for massive reallocation of resources, will undermine the effect of a normal yield curve. Personal consumption has to adjust downward, pretty significantly. The banking sector is too corrupt, autos too weak, retail and therefore CRE too fragile, suburban paradise looks too obsolete, for a normal yield curve to have its full, expected effect. The country will have to find a new paradigm, a new way forward, before a normal pace of growth and investment can resume.

The "peak oil" armageddon is an unlikely fantasy. Whereever the actual "peak" of oil production turns out to be, historically, we are clearly on the high plateau, and will be on the high plateau for quite while. I suspect, perhaps as Paine does, that the equilibrium price of oil could lodge anywhere in a broad range: an Edgeworth box the size of a football field. Aggressive American conservation efforts, withdrawal from Iraq and detente with the Iranians, massive hikes in corporate and high-income taxation (maybe even a wealth tax to erase the Bush deficits from the national debt) would change the terms of trade on oil, and therefore the dollar price, quite dramatically.

At some point, in ten or twenty years -- I have no idea -- the plateau period will pass, and the vast infrastructure of oil -- the ships and pipelines, refineries and gas stations and fuel distributors -- will, for the first time since Rockefeller stabilized crude prices, be underutilized. Inventories will be vast lakes; maintenance of this dangerous infrastructure will be spotty; the least developed nations (not China I think, but maybe India, and certainly Africa) will be tempted to tap into it, endangering the, by then, obviously fragile climate. That will be the paradoxical shape of our future -- not a world desperately short of expensive oil, but a world dangerously awash in cheap oil. That's the world far-sighted statesman must plan now to contain.

[Bruce Wilder]

Alex Tolley: "More locally, California is facing water shortages, especially in the southern part of the state."

I live in southern California, too, and I would say that southern California is a good example of how good planning and massive effort can make the future work. Southern California is the one parched, overpopulated corner of the planet that has the institutions and infrastructure to manage water properly. There has been no appreciable growth in water consumption in southern California for more than a generation, despite significant economic and population growth, and there's still plenty of room for additional conservation.

[ndd]

Bruce Wilder: FWIW I am in the "long lazy W" camp. This first, mild but concentrated downturn, followed by a tepid recovery going into 2009. After that the crystal ball ends, but it is hard too see the day of reckoning being put off much further. Elsewhere I have described the idea as a "slow motion bust."

[ken melvin]

Flying dervishes and cats chasing their tails are a couple of images that come to mind when people say that we must conserve so that we can continue to grow as grow we must.

[dissent]

For those of you who are arguing against peak, where's the beef.

Clearly the 'easy to get' stuff is running out. New fields are smaller and more expensive to exploit.

My concern for this country is that we don't have the social cohesiveness to manage this decline in a manner that is both wise and fair. Our democracy is deeply wounded, our working class in a downward spiral, and our elites corrupted and disengaged from the wider polity.

says...

--
reason: "A commodities bubble is something completely different from a housing bubble. You see land supply is fixed (although the supply of housing on it isn't) and most of the bubble is on the price of that land. But commodity production, can and will change in the intermediate term in response to increased prices."

And the housing "production" in California didn't “change in response to increased prices?"

Amazing un-reason! The Great American Propaganda Machine has succeeded beyond the goals set to breed economics and politics dopes (so that they are easy to control). What an achievement.

Jas

[Jas Jain]

--
"My concern for this country is that we don't have the social cohesiveness to manage this decline in a manner that is both wise and fair."

Curse of a heterogeneous "diversity" society! A diverse society with very high correlation between income and wealth inequality and ethnicity? Who men the Wall Street and who men the military? All a result of free market or could it be a result of “natural” tribalism?

During the coming depression "diversity" would prove deadly. America’s problems are far deeper than economic.

Jas

[Bruce Wilder]

dissent: "My concern for this country is that we don't have the social cohesiveness to manage this decline in a manner that is both wise and fair. Our democracy is deeply wounded, our working class in a downward spiral, and our elites corrupted and disengaged from the wider polity."

Well, that just fired me up to face my day. Not.

[Jas Jain]

--
The players in the American economy can be best understood as Manipulators (few) and the Manipulated (overwhelming majority)! Democracy, in its final stages, at its best!!

We know whose interests most economists, especially, economists on FOMC serve. Professional class is all too willing to serve the ruling class, be it Nazis or any other, because that is where rewards are to be gotten.

Jas

[piglet]

"Will increasing world demand for limited resource supplies pose a threat to world economic growth"?

What an absurd question to ask. As if the (impossible) continuation of economic "growth" was our main concern.

[piglet]

Feng: "I don't think there is as much to worry about."

Precious. Is that a GW Bush quote or did you write that all by yourself? ;-)

[John]

"Intellectually, Peak Oil = Laffer Curve. It makes a certain amount of intuitive sense, but there isn't much in the way of evidence to support the theory. And much as Laffer is a supply-side shill, Hubbert worked for Shell Oil."

Peak Oil is fundamentally based on the laws of physics. The amount of oil in the ground is finite. We get the easiest first, and as time progresses, the remaining becomes progressively harder to extract. At some point, production is going to reach a limit and then fall from there.

In the fifties, Hubbert predicted that US oil production would peak around 1970, based on geological information that he had. US oil production peaked in 1971.

I think that Paul Krugman has a sense of the laws of physics -- he was at MIT for a while, after all. But too many economists seem oblivious, even to basic math -- population growth, for example. I think that economists should have as part of their training a grounding in both fundamental science and ecology. Real-world economics is much more like ecology than many seem to see.

[Cynthia]

Hopefully I'll no longer feel so peaked just knowing that some of you here -- namely Bruce and Paine -- aren't feeling so peaked...

[ndd]

John:
What you and others say about "peak oil" makes sense to me. That (for me at least) isn't the argument. The argument is, does peak oil mean that the move to $117 and counting for a barrel of oil is a one-way trip, or might we see an equilibrium price for oil over the next 10 years average at, say, $80 a barrel? That depends in large part in how much of the current price of oil is set by speculation. Where "Peak Oil!" (one-way increasing oil prices) crashes into the yield curve which is (as per Tim Duy's post below) forecasting an economic recovery in the latter part of this year, is that it is hard to imagine any such recovery if consumers are paying $4 or $5 a gallon for gas. One or the other would seem likely to reverse dramatically in the next 4-6 months.

In that regard, the parabolic real price increase for a bushel of wheat (are we at "Peak Wheat!" too?), which coincidentally also took place eginning in 2007, argues that speculation is playing a large part in the setting of prices.

[RG]

What a paradox. You walk into just about any elevator here in the United States and there is usually a sign clearly marking the capacity of how many people you can fit safely fit in, yet there is no such thought given to the planet Earth. How hilarious. Clearly the petri-dish culture is just about at an overflow state.

All of you here talk about shortages. Food, water and oil to name a few, yet none bring up the fact that if there are less people, there is less demand. The poor third-world nations reproduce and kick out the infants at an incredible rate. The UN and the Hollywood set talk of sending millions in aid for food, but nobody talks about sending millions of condoms to control their rampant growth.

The third-world population here in California can be seen nearly everywhere you go. Young couples with four and five children each and their service jobs nowhere near come close to paying for the burden they place on the taxpayer. But it's very non-PC to tell people that they don't have the right to procreate. That's not far off.

Within five years, watch and see.

[anne]

"The poor third-world nations reproduce and kick out the infants at an incredible rate."

A sickening comment, evidently for the sake of showing what prejudice amounts to.

[anne]

"The third-world population here in California can be seen nearly everywhere you go."

This is what definitive rotten prejudice amount to.

[RG]

Anne,

As a lurker, I've got your flavor nailed. "The hug-everybody and let's throw money and idealism at every problem, so that we can pretend to fix it, whether it works or not". People like you have gotten so use to lying to themselves that they now believe it as truth. Amazing.

So let's talk about the third world. Obviously, Eritrea and Ethiopa value their humans mightily. The ten year war they fought as famine wreaked havoc on the land. The government of Zimbabwe has that third-world attitude nailed. Lessee, let's take over the white people's farms and give them away to our cronies. A year later, we don't have the wherewithal to run these farms and now have a famine. But it's not their fault, is it? Must be our fault.

And let's not even go into Mexico or Latin America, where an elite few run long corrupt goverments and the majority of the poor live in squalor and reproduce lustily at the behest of the Pope, esp John Paul who stated in an LA Times article in a visit to Mexico, that the more children they had, the closer to God they would be.

So what does the Third World contribute besides the exploitation of it's minerals and cheap labor? Count out agriculture as you can see with the rice and wheat shortages. Wouldn't it make sense if there was less of them, there'd be less problems? Is that so difficult to understand? Or do you want to saturate every square inch of this planet with human suffering? Are we really all that special in the big scheme of things? The human race is becoming a cancer to this planet. Aren't the effects obvious?

The pollution, the overcrowding? The decimation of our oceans and forests? Do the math. X amount of people and X amount of space, energy and resources. Math doesn't lie. The effects are obvious.

[anne]

"The third-world population here in California can be seen nearly everywhere you go."

Prejudiced sickening lying, for the sake of fostering sickening prejudice.

[anne]

"And let's not even go into ------ or ----- -------, where an elite few run long corrupt goverments and the majority of the poor live in squalor and reproduce lustily at the behest of the ----, esp ---- ---- who stated in an LA Times article in a visit to ------, that the more children they had, the closer to God they would be."

Sickeningly vile profane prejudiced lying, always for the point of fostering hatred.

[anne]

What is typical about such definitive prejudice is there are no bounds whatsever, so hatred beyond spreading everywhere and consuming the profane hating self..

[anne]

Correcting, to show my disdain:

What is typical about such definitive prejudice is there are no bounds whatsoever, so hatred spreading everywhere and consuming the profane hating self.

[Cyrille]

ndd:
"it is hard to imagine any such recovery if consumers are paying $4 or $5 a gallon for gas"

I live in France. Gas is around $11 a gallon here. Yet no one seriously thinks we are in for a recession.

Gas is unrealistically CHEAP in the US. Because externalities are not priced in, because it is subsidised in so many ways (one of them called the US army). It is more likely to lead to a balanced growing economy if it goes up rather than down.

[paine]

growing relative scarcity

"Helium is another"

not the op ed kind unfortunately

[paine]

anne save your index finger

rg
is really mark T
trying to spice up his site
with a few masked BIG FOOT piltdown type folks

he's no more a real person
then
my hero daffy duck

[paine]

"an Edgeworth box the size of a football field "

ahhh bw
my secret bourg idol's best trick

his magic box

good for sawing the arch of any robust contract curve
in half

[ndd]

Cyrille, I do not think France has an automobile based economy the way the US has. France long ago made its adjustment to expensive fuel. The US has been in a 25 year long state of denial. Already US consumers are cutting back on restaurants and other discretionary spending in order to purchase gasoline (and food). That is only going to get worse to the extent gas prices increase.

[piglet]

"I live in France. Gas is around $11 a gallon here."

I think it's more around $8 a gallon. You have to multiply the Euro price by 6 to get the equivalent $/gal price. The point you are making is of course correct but US consumers are feeling rising crude prices much more than Europeans. I just checked German prices at the pump since 2002 at this site. German prices have increased less than 50% over 6 years, while US prices have more than tripled over that period. US consumers are more vulnerable precisely because of lower taxes (and a sinking dollar). It would be even more enlightening to compare the per capita fuel spending in Europe and US but I don't know where to find those figures.

[BJ Feng]

"What an absurd question to ask. As if the (impossible) continuation of economic "growth" was our main concern."

Piglet, I'm willing to make a large bet that economic growth will continue over the long term as it has done for all of human history. And of course it is our main concern, that is how we rise out of poverty and increase our living standards. Would you want to live in the conditions of London circa 1780? Or even a pristine environment such as, oh, Central Africa circa 500,000 B.C.?

Population growth rates have been shown to slow with rising wealth. In fact, population rates are negative for some developed countries such as Italy and Japan, and would be negative if not for immigration for many others. Why? At a certain point, a child becomes a net economic cost, rather than benefit. The cost of educating and raising a child in the developed world outweigh the ECONOMIC gains to the parents, while in undeveloped countries, the child provides free labor and requires little investment. So as the world becomes richer, the growth rate slows.

Besides, we are not even close to maximum capacity. Look at all the green lawns in California, all the golf courses in Arizona and Nevada, imagine if we wanted to grow food instead of grass or palm trees. World population can AT LEAST triple, though because of resources, perhaps living standards might have to fall.

Regarding oil, we don't know if we've hit a peak in production just yet. Remember the late 1990's was a period of chaos for oil producers, with oil prices falling into the low 10's. I remember getting gas for $.70 a gallon, and that with gas taxes included! Just about all exploration stopped. Well it takes a while for oil companies to revamp up exploration and to get results. That takes years. Recently, Brazil announced a huge find, and there was another large find elsewhere. We won't know if these are just the exceptions to a dry spell, or if more large discoveries are going to be found, for another few years. Peak oil is still up in the air.

[RG]

Anne,

Gotta love your energetic and poised elitist language "Sickeningly vile profane prejudiced lying, always for the point of fostering hatred".

Obviously you must live in some ivory tower, as you've obviously never been around the unwashed masses. I grew up in Downtown Los Angeles, between Echo Park and Wilshire Blvd and I know it well. You'd last about ten minutes in an environment like that. You'd better have some serious street cred and not flutter your hands uselessly. In fact, I'm not prejudiced and I love anyone trying their best to fit into what it takes to be American, like actually being part of this country, speaking the language and embracing what (at least what it used to be) its values.

I'm an immigrant from Quebec in the early 60's and I didn't speak the language, but I sure learned fast, and no, there weren't any french-to-english Second Language classes either. Now that's not necessary any longer. Now we accomodate the ever-growing Hispanic population by catering to their needs, so they don't have to adapt to our country any longer.

I should protest too, at the lack of French Canadians on network TV or that there's not enough representation of my ancestors contributions to America's history (remember Anne, there were French Canadian fur trappers plugging away their trade decades before Lewis and Clark ever showed up), but I'm not complaining, I'm just watching America fade away under the ugly banner of lies called PC and witnessing the dumbing down by the main stream media and our crummy school system.

Believe what you want to believe, but you've got to wonder what Thoreau would think about all this. The middle class is getting pretty fed up, I'll grant you that. The County of Los Angeles had a RFP (that's Request For Proposal) for the Department of Public Social Services, to find a contractor to provide a legal team to represent people on GR or "General Relief", CAPI "Cash Assistance Program for Immigrants" and the CalWorks program so that they can dig even more money out of the tax payer, by being adequately prepared to pull SSI benefits from the system by appearing before an Administrative Law Judge utilizing the SSI Appeals Representation Service.

Here's the link, enjoy, but it's a 317 page PDF

http://dpss.lacounty.gov/dpss/contracts/rfp/SSIAP/SSIAP%20RFP%2012-26-07.pdf

Your taxpayer dollars at work. I personally don't care if anybody wants to have kids, but not on my nickel.

[BJ Feng]

What is there to deny? Gas prices were cheap and the US consumer used gas based on the cheapness. Now that gas prices are higher, the US consumer will adjust. What was wrong with lower gas prices in the past? Should we all have suffered like the European, in his little 100 horsepower car? At least the American was able to enjoy driving alone in his massive Hummer or super-sized SUV, content that he could transport an army squad or basketball team if he wanted to, but settling for the two bags of groceries he bought from the Supermarket two blocks away. American luxury is unmatched.

[BJ Feng]

RG, you have to excuse Anne, she's at Harvard.

[BJ Feng]

At least she can write, though I wish she would use a greater diversity of adjectives and adverbs to describe her discontent, I'm sure she's up to the task.

[anne]

"And let's not even go into ------ or ----- -------, where an elite few run long corrupt goverments and the majority of the poor live in squalor and reproduce lustily at the behest of the ----, esp ---- ---- who stated in an LA Times article in a visit to ------, that the more children they had, the closer to God they would be."

Sickeningly vile profane prejudiced lying, always for the point of fostering hatred, religious hatred, racial hatred, hatred of women.

[Cynthia]

Paine, thanks for the laugh -- the helium laugh, that is! And even though Einstein disproved the aether, it's still alive and well in op-eds.

[Patricia Shannon]

rich countries will face steady pressure on their economies from rising resource prices, making it harder to raise their standard of living.

Why in the world do rich countries need "to raise their standard of living" on average? We have plenty of resources at this time to raise the standard of living for the poor, w/o depriving others of anything they need for a comfortable life.