Peaks and spikes

The Economist has a refreshing sensible post on Daniel Yergin's latest criticism of peak oil (having slowly modified his wildly inaccurate positions over time to "we're facing a plateau" - no doubt his views will eventually swing around to reality once no other credible options remain) - Peaks and spikes.

OVER the weekend, energy expert Daniel Yergin took to the pages of the Wall Street Journal to argue that "peak oil" is a phony concept, a "specter" that's unlikely ever to materialise. The concept of peak oil, for the unitiated, is that humanity is close to reaching peak production of the world's finite supply of oil. Most of the extractable oil has now been brought out of the ground and used, and henceforth new discoveries are unlikely to replace falling output from old fields, leading to a steady decline in supply. Mr Yergin argues that people have been warning of a looming oil crisis for over a century and have never yet been right.

Economist James Hamilton has a measured and wise reply to the piece, in which he points out that supply growth has been worryingly slow of late. He concludes:

I submit that meeting the growing global demand for crude oil over the last five years has posed significant challenges for the world economy. And those who worry that the next 5-10 years might be like the last should not be dismissed as crackpots.

I'd just note that the phenomenon of peak oil is unlikely to manifest itself as a sudden sharp decline in supply. What you're more likely to see in a climate of more or less steady demand growth is supply that first tracks demand, then lags demand as the peak approaches while still growing. If oil demand were elastic, demand growth would ease with supply while prices rose moderately with the cost of producing the marginal barrel of oil. If oil demand is inelastic, however, then supply shortfalls will generate price spikes, producing recessions and a volatile cycle of rising and falling demand. The pain of occasional spikes and the economic damage of price swings is likely to drive investment in alternatives, by consumers and governments, leading to a substitution away from oil in key sectors long before people are ever caught standing at dry petrol stations. Electric car technology and infrastructure is improving rapidly; given enough pain, societies will make the switch, drastically reducing oil demand in the process.

Of course, it isn't easy to define "enough pain"; it might well take a decade of these gyrations to facilitate a meaningful switch away from petrol. The prospect of this kind of difficult transition ought to be enough to get governments to take the issue seriously, whether or not actual peak oil output is imminent.