Working Papers

Cranks of the 1930s: Marion King Hubbert

Daniel Yergin on Marion King Hubbert, the original peaknik:

Marion King Hubbert was one of the most eminent—and controversial—earth scientists of his time. Born on a ranch in San Saba, Texas in 1903, he did his university education, including his Ph.D., at the University of Chicago. One of his fundamental objectives was to move geology from what he called its “natural history phase” into its “physical science phase,” firmly based in physics, chemistry and, in particular, rigorous mathematics.

In the 1930s, while teaching at Columbia University, Hubbert became active in a movement called Technocracy and served as its educational director. Holding politicians and economists responsible for the debacle of the Great Depression, Technocracy promoted the idea that democracy was a sham and that scientists and engineers should take overthe reins of government and impose rationality on the economy. “I had a boxseat at the Depression,” Hubbert later said. “We had manpower and raw materials. Yet we shut the country down.”

Technocracy envisioned a no-growth society and the elimination of the price system, to be replaced by the wise administration of the Technocrats. Hubbert believed that a “pecuniary” system, guided by the “hieroglyphics” of economists, was the road to ruin.

posted on 18 September 2011 by skirchner in Economics, Oil

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‘That’s an Eternity from Now’: The Day of Reckoning for the Tierney-Simmons Wager

John Tierney collects on his ‘peak oil’ bet with the late Matthew Simmons:

Five years ago, Matthew R. Simmons and I bet $5,000. It was a wager about the future of energy supplies — a Malthusian pessimist versus a Cornucopian optimist — and now the day of reckoning is nigh: Jan. 1, 2011…

When I found a new bettor in 2005, the first person I told was Julian’s widow, Rita Simon, a public affairs professor at American University. She was so happy to see Julian’s tradition continue that she wanted to share the bet with me, so we each ended up each putting $2,500 against Mr. Simmons’s $5,000.

Just as Mr. Simmons predicted, oil prices did soar well beyond $65. With the global economy booming in the summer of 2008, the price of a barrel of oil reached $145. American foreign-policy experts called for policies to secure access to this increasingly scarce resource; environmentalists advocated crash programs to reduce dependence on fossil fuels; companies producing power from wind and other alternative energies rushed to expand capacity.

When the global recession hit in the fall of 2008, the price plummeted below $50, but at the end of that year Mr. Simmons was quoted in The Baltimore Sun sounding confident. When Jay Hancock, a Sun financial columnist, asked if he was having any second thoughts about the wager, Mr. Simmons replied: “God, no. We bet on the average price in 2010. That’s an eternity from now.”

The past year the price has rebounded, but the average for 2010 has been just under $80, which is the equivalent of about $71 in 2005 dollars — a little higher than the $65 at the time of our bet, but far below the $200 threshold set by Mr. Simmons.

What lesson do we draw from this? I’d hoped to let Mr. Simmons give his view, but I’m very sorry to report that he died in August, at the age of 67. The colleagues handling his affairs reviewed the numbers last week and declared that Mr. Simmons’s $5,000 should be awarded to me and to Rita Simon on Jan. 1…

posted on 29 December 2010 by skirchner in Commodity Prices, Economics, Oil

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Peak Oil and the Doomsday Myth

Vaclav Smil has a new book out, Energy Myths and Realities Bringing Science to the Energy Policy Debate. Here is a taste:

There is a finite amount of liquid oil in the Earth’s crust, but estimates of the grand total remain uncertain. Until we explore the entire planet as carefully as we did Oklahoma and Texas, our assessment of global oil reserves will have plenty of room for surprises. Improvements in production also mean that we are now recovering more oil than ever before. And, in addition to our supply of conventional liquid oil, there are vast, untapped reserves of unconventional hydrocarbon fuels, some of which are already being refined for use. A combination of new discoveries, higher recovery rates, and increased use of unconventional resources means that the near-term future of global oil production will not drop off precipitously, as alarmists claim, but will more likely resemble an undulating plateau. Appraisals of the oil future tend to focus on dwindling supply and assume that demand will inexorably grow. But this is not the case. Rising oil prices and economic downturns exert clear downward pressure on demand, and we can reinforce this pressure through more efficient fuel conversions, by promoting sensible alternatives, and, above all, by turning to natural gas. This abundant fuel can do everything oil can, and is already the most important fuel for heating houses and the second most important fuel for generating electricity. The United States already has natural gas reserves sufficient for nearly a century at the current rate of consumption.

posted on 08 September 2010 by skirchner in Economics, Oil

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Julian Simon Still Winning Against Peak Oil

We reported on the five-year Tierney-Simmons oil price wager back in 2005Mark Perry notes that Tierney has all but won his bet against peak oil crankery:

In August of 2005, Houston banking executive Matthew Simmons and New York Times columnist John Tierney each put up $5,000 and made a bet about the price of oil in 2010. 

The wager was based on the price of oil in 2010, specifically on the average daily price for the entire year, adjusted for inflation into 2005 dollars. If the inflation-adjusted oil price this year is $200 or more per barrel, Mr. Simmons wins $10,000 plus interest, and if the average price this year is less than $200, Tierney wins the bet. 

The bet was made public in Tierney’s New York Times column on August 23, 2005 called “The $10,000.00 Question.”

Julian Simon is still winning from beyond the grave:

Julian Simon’s widow put up $2,500 towards Tierney’s $5,000 obligation, to honor the tradition of her husband’s famous wager with Paul Ehrlich.

posted on 08 July 2010 by skirchner in Economics, Oil

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Endless Oil

The technology driving oil production.

posted on 12 January 2010 by skirchner in Economics, Oil

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Oil is Found in the Minds of Men

And ‘peak oil’ is founded on ignorance, argues Peter Foster:

Peak Oil theory represents a combination of economic ignorance and moral rejection of markets as greed-driven and short-sighted. These all-too common attitudes usually go with a profound faith in effective government policy, despite the monumental weight of evidence to the contrary.


posted on 19 September 2009 by skirchner in Commodity Prices, Economics, Financial Markets, Oil

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Mid-Week Linkfest

The strangest bid in the worst of the worst of the US equity market.

How not to fall down the data mine.

Uncertainty and the negative equity risk premium.

How ‘peak oil’ nonsense leads to bad public policy.

Rule of law in the US ‘at the level of China’.

Tony Makin on Keynesian economics.

posted on 26 August 2009 by skirchner in Economics, Financial Markets, Oil

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Does ‘Peak Oil’ Cause Oil Prices or Do Oil Prices Cause ‘Peak Oil’?

‘Peak oil’ is meant to drive a secular increase in oil prices.  But what if the cyclical behaviour of oil prices actually drove belief in peak oil?  Matthew Kahn notes that traffic at the peak oil blog The Oil Drum is closely correlated with oil prices.  The direction of causality is fairly unambiguous:

I don’t believe that the Oil Drum blog causes gas price dynamics. The causality runs from oil price dynamics causing interest or declines in interest in the Oil Drum blog.

posted on 10 January 2009 by skirchner in Economics, Oil

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Blame Oil, Not Housing

Amid the GFC of 2008, it was easy to forget that 2008 also saw a major oil price shock.  In a series of posts, James Hamilton argues that the oil price shock largely accounts for the downturn in the auto sector.  He also presents evidence to suggest that the oil price shock was critical in exacerbating the downturn in the housing sector.

Hamilton concludes that ‘if gasoline prices had stayed at $2.50 a gallon through 2008, the NBER Business Cycle Dating Committee would not have declared that the current recession began in December 2007.’

posted on 04 January 2009 by skirchner in Economics, Oil

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A Beginners Guide to Oil

A review of Vaclav Smil’s new book, Oil:

The list of big-name economists, commentators and forecasters who hung their hats—and their investment plans—on variations of peak oil theory is too big for this page, but some day somebody should post it prominently for all to see.

One of the rare exceptions, a name not on any such list, is Vaclav Smil, perhaps one of Canada’s greatest unsung academics. Let me now sing his praises. Prof. Smil is a distinguished professor in the environment faculty at the University of Manitoba. One of his many books, usually dense and written for scholars, is a new popular Beginners Guide, simply titled Oil (Oneworld Publications, 200 pages, 2008).

Back in June, 2006, Prof. Smil wrote a commentary for FP Comment dismissing the peak oil crowd as a “new catastrophist cult.” In 2000, he warned in a science journal that the experience of long-range forecasting, especially in energy, had been dismal. He predicted more. “There will be no end to naive, and ... incredibly short-sighted or outright ridiculous, predictions.”

Prof. Smil’s new contribution to the absurdity of peak oil theory, Oil, is more than just a critique of the latest crackpot forecasting theories. In 200 pages, he packs everything most people—including most economists and investment advisors—should know about the physics and economics of oil.

As time goes on the world will slowly sever its dependence on fossil fuels, but any such transition is decades away. Peak oil enthusiasts are wrong for scores of reasons. They assume that oil reserves are know with some degree of precision; that reserves are fixed; that demand and supply can be projected with accuracy over long periods of time.

As Prof. Smil wrote on this page in 2006: “Unless we believe, preposterously, that human inventiveness and adaptability will cease the year the world reaches the peak annual output of conventional crude oil, we should see that milestone (whenever it comes) as a challenging opportunity rather than as a reason for cult-like worries and paralyzing concerns.”

posted on 12 December 2008 by skirchner in Economics, Oil

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Foreign Oil is Your Friend

Roger Howard, author of The Oil Hunters, on how foreign oil creates interdependence rather than dependence:

to identify America’s “foreign oil dependency” as a source of vulnerability and weakness is just too neat and easy.

This identification wholly ignores the dependency of foreign oil producers on their consumers, above all on the world’s largest single market—the United States. Despite efforts to diversify their economies, all of the world’s key exporters are highly dependent on oil’s proceeds and have always lived in fear of the moment that has now become real—when global demand slackens and prices fall. The recent, dramatic fall in price per barrel—now standing at around $54, less than four months after peaking at $147—perfectly exemplifies the producers’ predicament.

So even if such a move were possible in today’s global market, no oil exporter is ever in a position to alienate its customers. Supposed threats of embargoes ring hollow because no producer can assume that its own economy will be damaged any less than that of any importing country. What’s more, a supply disruption would always seriously damp global demand. Even in the best of times, a prolonged price spike could easily tip the world into economic recession, prompt consumers to shake off their gasoline dependency, or accelerate a scientific drive to find alternative fuels. Fearful of this “demand destruction” when crude prices soared so spectacularly in the summer, the Saudis pledged to pump their wells at full tilt. It seems that their worst fears were realized: Americans drove 9.6 billion fewer miles in July this year compared with last, according to the Department of Transportation.

Instead, the dependency of foreign oil producers on their customers plays straight into America’s strategic hands.


posted on 29 November 2008 by skirchner in Economics, Oil

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