Tuesday, May 31, 2005

Malthus' philosophical descendants

Will they never learn?

Experts: Petroleum May Be Nearing Peak
Could the petroleum joyride — cheap, abundant oil that has sent the global economy whizzing along with the pedal to the metal and the AC blasting for decades — be coming to an end? Some observers of the oil industry think so. They predict that this year, maybe next — almost certainly by the end of the decade — the world's oil production, having grown exuberantly for more than a century, will peak and begin to decline.

And then it really will be all downhill. The price of oil will increase drastically. Major oil-consuming countries will experience crippling inflation, unemployment and economic instability. Princeton University geologist Kenneth S. Deffeyes predicts "a permanent state of oil shortage."

According to these experts, it will take a decade or more before conservation measures and new technologies can bridge the gap between supply and demand, and even then the situation will be touch and go.
Two centures ago, Thomas Malthus began predicting the starvation of the human race. His reasoning was that population grows geometrically, but agricultural production increases only linearly. His mistake was to discount technological innovation that improves output, perhaps not smoothly, but in surges. Part of the neo-classical economics growth model demonstrates this: there's a spike in growth, then a gradual tapering until the next spike.

Others repeat Malthus' blunder today. "But oil use is growing faster than oil production." A Kuwaiti oil minister said that refineries need upgrading if the cost of oil is to fall, but that's not the basic cost of crude. Well, OPEC has recently said that it must charge high prices because it needs to invest in more oil exploration. That's actually valid, considering the dramatic increases in global demand for petroleum.

Some might think OPEC wants oil prices as high as possible, so that they can make as much money as possible. OPEC, though, doesn't want oil prices to get too high. High oil prices mean that people will seek alternatives, especially those that were once too expensive compared to petroleum. And as our technology improves, who knows what entrepreneurs might create in the future?


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