Why Will Peak Oil Be Different?

I’ve seen quite a lot on Peak Oil lately, and not a lot of it is edifying. Many Peak Oil enthusiasts (and I call them that because they seem to salivate at the possibility–perhaps it’s the thrill of fear with the smugness of feeling they know more than the lemmings) seem to want to replace market democracies with a techocratic version of the Soviet Union. There seems to be a lot of overlap with Paul Erlich-style overshoot theorists.

I can’t help thinking about Y2K. This is the last time that people told us our reliance on a given technology was going to be the doom of us all and end civilization as we know it™. But even more than that, I can’t help thinking about peat coal and whale blubber. Production of both peaked somewhere in the 1700s or early 1800s but command-and-control political systems didn’t arrive until a hundred years later or more. So how did we survive? No technology at the time was as cost-effective as whaling for whale oil for lamps. Somehow, the end of civilization failed to happen.

What I have failed to see explained adequately by Peak Oil enthusiasts is why this time, everything will be different than the rest of human history.

A typical economist response to the Peak Oil enthusiasts is Steven Levitt’s, he of Freakonomics fame.

What most of these doomsday scenarios have gotten wrong is the fundamental idea of economics: people respond to incentives. If the price of a good goes up, people demand less of it, the companies that make it figure out how to make more of it, and everyone tries to figure out how to produce substitutes for it. Add to that the march of technological innovation (like the green revolution, birth control, etc.). The end result: markets figure out how to deal with problems of supply and demand.

Note that nowhere in there does he claim that an oil-based economy will be what your children or your grandchildren know. He simply claims that as supplies dwindle, prices rise (actually, they rise even before supplies dwindle), and people either reduce, substitute, or innovate. Solar power is not cost-effective now, but what about when oil is $120 a barrel? Nuclear is not cost-effective now, but compared to $200/barrel oil, it might look pretty good.

That is not to say that any transition is painless. Lots of New England whaling communities hit hard times after Peak Whale Oil. But if you believe that the entire world is simply going to keep consuming oil at its current pace until it hits a brick wall, you’re not a keen observer of your own life.

For example, my car, while very efficient compared to all but the smallest SUVs (I get 30MPG on the highway, 20 in the city), requires premium gas. Right now it’s $3.00 a gallon down the street. It is a very hot day today, but I went ahead and walked to old town to buy a pair of sandals. Why? Because it saves gas while giving me exercise. I walk to work even when I’m going to be a bit sweaty.

So my personal demand for oil has dropped a bit. If it goes up higher, I’ll drive even less. My demand will fall. The SUV driver will probably drive even less than I will, and when it comes time to replace the car, tons of women will discover that 3-foot-high kids fit as well into an Echo as they do an Escalade. Obesity rates will fall as people walk more. The air will be cleaner as people put fewer emissions into it.

Balanced against those good things, however, will be the gas station attendants who are let go. Amazon.com will probably suffer some as shipping becomes more expensive. Home prices in exurbia may fall, causing some overleveraged yuppies to lose their preppy shirts. The poor, as always, who buy used cars, will be screwed the most: they’ll have to pay more for gas for the used SUV. Car ownership among the poor may decrease. Several airlines will go under. Lots of hotels will close, and tourism-based communities will suffer.

It’s true that the broken-windows fallacy holds true here. The adjustment in the economy will be a net drain that will have to be compensated by innovation. But ignoring the history of resource use and transitions in an effort to score some ideological point against markets, claiming that a non-market mechanism is going to be better at allocating scarce resources, is a level of hubris and chutzpah that I just don’t have.

I will bet that it’s not going to be radically unlike every other time this has occurred in history. Some will lose, some will lose big, but others will win and life will go on with a good share of pleasant and unpleasant occurances.

But yes, the current style of production will no doubt peak–it’s just that it happened to peat-bog coal and whale oil, too.