Dissecting a piece of Wall Street Journal tripe

I found a very interesting article in the Wall Street Journal which assures us that we are not running out of oil and that this is just a classic bubble scenario that will be cured by the operations of the free market. I have printed the article below and inserted my own comments in boldface throughout. The article is mostly wishful thinking probably designed deliberately to calm the market so as to quell any precipitous further rise in oil prices. As such it may well go under the rubric of a "noble lie". The rational consumer in me wants these lies to be told so that I may not suffer the burden of higher gas prices so soon. The truth-seeking philosopher in me must criticize these lies because they are an affront to what the best evidence suggests and they lead to further inaction and delay of what is necessary should we desire a moderate transition in the coming years.


OpinionJournal
WSJ Online

October 17, 20055:14pm EDT


HOT TOPICThe Oil Bubble Seventy dollars a barrel? Relax, it'll come down. Saturday, October 8, 2005 12:01 a.m. EDT
We keep hearing the word "bubble" to describe industries with rapid and unsustainable rising prices. Hence, the Internet bubble, the telecom bubble, stock market bubble, and now, some analysts believe, a housing bubble. Yet for some mysterious reason no one speaks of the oil bubble--though prices have tripled in two years to as high as $70 a barrel.
Reviewing the history of oil-market boom and bust confirms that we are in the midst of a classic oil bubble and that prices will eventually fall, perhaps dramatically. (Why should we look to the "history of oil-market boom and bust" scenarios? That is totally irrelevant to what the future holds. There is no reason why the future has to resemble the past. Prudent analysis will stick to the known facts--proven discoveries and reserves and rates of decline of oil fields. Oil is not a renewable resource like other commodities, so looking to past scenarios of boom and bust is entirely irrelevant here.) Despite apocalyptic warnings, the world is not running out of oil and the pumps are not going to run dry in our lifetimes--or ever. (Really? Ever? What evidence other than wishful thinking do you have to make this assertion? None...as I thought) What's more, the mechanism that will surely prevent any long-term catastrophic shortages in energy is precisely the free-market incentive to make profits that many politicians in Washington seem to regard as an evil pursuit and wish to short circuit. (Ah, those damned liberals in Congress just getting in the way of the Free Market which will solve this problem yet again. More wishful thinking not based in fact)

The best evidence for an oil bubble comes from the lessons of America's last six energy crises, dating back to the late 19th century, when there was a great scare about the industrial age grinding to a halt because of impending shortages of coal. (The best evidence does not come from the past but from the present conditions as they are scientifically understood. Past regularities mean nothing here.) (Today coal is superabundant, with about 500 years of supply.) (False statement. At best we have 300 years of coal at current levels of consumption--levels which will change dramatically if coal becomes called upon to fill the gap left by peaking oil and natural gas supplies)Each one of these crises has run almost an identical course.
First, the crisis begins with a spike in energy prices as a result of a short-term supply shock. Next, higher prices bring doomsday claims of energy shortages, which in turn prompts government to intervene ineffectually into the marketplace. In the end, the advent of new technologies and new energy discoveries--all inspired by the profit motive--brings the crisis to an abrupt end, enabling oil and electricity markets to resume their virtuous long-term downward price trend. (Ah, again, the free market will take care of us here. This analysis is getting so pathetic it hurts. The method is to draw some rudimentary and highly questionable and overly general and false "pattern" of history and to postulate that it will hold true of the future. Tripe, tripe, tripe!)
The limits-to-growth crowd has predicted the end of oil since the days when this black gold was first discovered as an energy source in the mid-19th century. In the 1860s the U.S. Geological Survey forecast that there was "little or no chance" that oil would be found in Texas or California. In 1914 the Interior Department forecast that there was only a 10-year supply of oil left; in 1939 it calculated there was only a 13-year supply left, and in 1951 Interior warned that by the mid-1960s the oil wells would certainly run dry. In the 1970s, Jimmy Carter somberly told the nation that "we could use up all of the proven reserves of oil in the entire world by the end of the next decade." (ah, yes, because some isolated forecasts in the past have been wrong we can safely conclude that all forecasts--especially "doom and gloom" forecasts are wrong. Technically this fallacy of inference is called "hasty conclusion" by logicians and I think should be known by the staff writer for the wall street journal.)
We can ridicule these doom-and-gloom predictions today, but at the time they were taken seriously by scholars and politicians, just as the energy alarmists are gaining intellectual traction today. But as the late economist Julian Simon taught, by any meaningful measure oil (and all natural resources) has gotten steadily cheaper and far more bountiful in supply over time, despite periodic and even wild fluctuations in the market. (ah, as the late Julian Simon taught...yes he must be right. Perhaps over the measurable period that Simon worked on this generalization was true. The staff writer commits the fallacy of appeal to authority in order to bolster his point.)

If gasoline cost today what it cost a family in 1900 (relative to income), we would be paying not $3 but $10 a gallon at the pump. Or consider that in 1860 oil sold for $4 a barrel, or the equivalent of about $400 a barrel in today's wage-adjusted prices. The first of a continuous series of innovations, in this case the invention of modern drilling techniques in 1869, cut the price by more than 90%--to 35 cents a barrel. (This point is totally irrelevant. Ours is a culture that is entirely predicated upon cheap oil, unlike the culture of the turn of the nineteenth century in which thirty percent of the population were dedicated agronomists. Today less that 1 percent fill that role. Ours is a culture that will be severely affected by fluctuations associated with peak oil. We have very little insulation from these fluctuations, unlike a stable rural agrarian society)
Fifty years ago people would have laughed out loud at the idea of drilling for oil at the bottom of the ocean or getting fuel from sand, both of which were technologically infeasible. The first deep-sea oil rig went on line in 1965 and drilled 500 feet down. Now these rigs drill two miles into the ground--and miraculously, the price of extracting oil from 10,000 feet deep in the sea bed today is approaching the cost of drilling 100 feet down from the richest fields in Texas or Saudi Arabia 40 years ago.
This spectacular pace of technological progress explains why over time the amount of recoverable reserves of oil has increased, not fallen. Between 1980 and 2002 the amount of known global oil reserves increased by 300 billion barrels, according to a survey by British Petroleum. Rather than the oil fields running dry, just the opposite has been happening. In 1970 Saudi Arabia had 88 billion barrels of known oil. Thirty-five years later, nearly 100 billion barrels have been extracted and yet the latest forecast is that there are still 264 billion barrels left--although the Saudis have never allowed independent auditors to verify these numbers. (There are good reasons why Saudi Arabia understated its reserves and as for its present reserves the numbers are vague and mysterious causing considerable concern. For the best analysis of these see Matt Simmons Twilight in the Desert)

In this industry, alas, bad news tends to crowd out the good. When Shell announced earlier this year that its oil and gas reserves were down by 30%, there was a global outcry. But when Canada announced in 2004 that it has more recoverable oil from tar sands than there is oil in Saudi Arabia, the world yawned. There is estimated to be about as much oil recoverable from the shale rocks in Colorado and other western states as in all the oil fields of OPEC nations. Yes, the cost of getting that oil is still prohibitively expensive, but the combination of today's high fuel prices and improved extraction techniques means that the break-even point for exploiting it is getting ever closer. (yeah, well, there is something called EROEI: energy returned over energy invested. Shale oil and tar sands have an exceedingly low EROEI (on the order of 1.5 btu/1 btu) unlike crude oil (about 60 btu/1 btu). It just doesn't make sense to tap these fields and, if we did, the cost of gasoline and oil from these sources would be astronomically high--higher than our society can really afford)
The energy Malthusians counter that China, India and other nations will satisfy their growing appetite for oil by driving demand and prices ever higher. In the short term, yes. But over the longer term, as the Chinese become more prosperous through free markets, China will become vastly more fuel efficient and also help discover new sources of energy. Get real, dude.
America produces twice as much output per unit of energy consumed as it did 50 years ago. Liberals who say we need government to intervene in the energy markets, to patch the alleged failings of the free market, fail to comprehend that the command-and-control economies of the last 50 years have been far and away the biggest wasters of energy (and the biggest polluters). South Korea produces about three times as much output per kilowatt of electricity as North Korea does. (How about rationing in wartime? Was that irrational when the U.S. did this in WWII? Should we have just let the market take care of itself? What do you think would happen to the poor and middle class under that scenario? I'll tell you: famine, poverty, death and, as a consequence of that, looting and revolution culminating in the murder and pillage of the rich. Look out, fucker, if you don't place price caps on oil its going to be your head that will roll)
This is no call for complacency or inaction in the face of very high energy prices; it's a call for realism. Higher prices for gas and fuel for home heating have cost the average U.S. family about $1,500 to $2,000 a year. (Thankfully the Bush tax cuts have given back about precisely that amount in lower tax payments to the IRS.) Bullshit again. The average middle class family had a tax cut of about 300 dollars. It only becomes 1500-2000 dollars when you average in to the median income the upper 1 percent. The tax on the American economy from higher oil prices has reached $300 million a day and has chopped nearly a percentage point off GDP growth.

Our point is that the constraints on our ability to find and extract new oil are not geologic or scientific. The real constraints on oil production are barriers created by government. Myron Ebell, an environmental analyst at the Competitive Enterprise Institute, notes that roughly 90% of the oil on the planet rests under government-owned land and these resources are abysmally managed.
In the U.S., environmentalists have erected myriad barriers to drilling for new sources of oil. The American Petroleum Institute estimates that there are at least 100 billion barrels that are fairly easily recoverable in Alaska and offshore that oil companies are not permitted to exploit. Once, we could afford the luxury of not drilling there. Now, thanks to a witch's brew of unforeseen circumstances--political turmoil in the oil producing countries, China's surge in demand, and hurricanes that have knocked out Gulf refineries--it's an economic and national security imperative that we do.
Here's one simple idea to increase the domestic supply of oil: Have Uncle Sam share its oil-drilling royalties with the California government. If Californians realized they could go a long way to solving their deficit and overtaxation problems by raising billions of these petro-dollars, the aversion on the left coast toward offshore drilling might well begin to subside. Ah, the prerogative of the rich: let them eat cake. You stupid, myopic fuck!
We will assess at another time the many dreadful ideas--price controls and "windfall profit" taxes--that Congress is considering to deal with the energy crisis. But for today it is sufficient to note that the free market will deliver oil, electricity and other forms of energy at declining prices in the future, if only the government will let the market's benign and productive forces work their magic. Unwarranted conclusion, wishful thinking, pathetic.