Can Peak Oil Make You Rich? Does it Matter?

There is no shortage of financial newsletters, blogs, and websites that will tell you quite confidently that we are closing in on world peak oil production and that you can make a lot of money with the right investments. (For a sampling, try this promo for a newsletter called Outstanding Investments, blogs such as The Real Deal and New Era Investor, and websites such as Resource Investor and 321energy.) What this tells me is that these investment-oriented commentators don't quite grasp the issue. The question isn't whether you can make money on peak oil. Somebody will. The question is whether doing so will matter.

No doubt a few market participants will make great fortunes in the ongoing energy bull market. That this particular bull market may or may not be the result of an imminent peak in world oil production doesn't really matter to an investor. Other factors may be sufficient to spawn new speculative fortunes in energy including previous low investment resulting in infrastructure and personnel limitations; war and the threat of war in the Middle East; skyrocketing demand, especially in Asia; and regional natural gas shortages.

Investment advice on peak oil, however, is lost on most of the people in the world because they simply do not have the savings to invest or lack the skills to do so even if they do have the money. For the remaining few, the answer to whether such investing actually matters depends on the time frame. In the short term the answer is probably yes. In the long term, the answer is more than likely to be, "Not as much as many people think."

In the short term climbing energy prices will undermine the standard of living for all the world's energy consumers. A small group who work for energy producing companies and countries will prosper, and shareholders in energy companies are likely to prosper as well. So, from this perspective it may make sense to hedge one's bets by investing some money in the energy markets.

But, peak oil is probably not going to be a one-way street to financial heaven. One of the effects of high energy prices is to depress economic activity. If high prices bring on a recession or even worse, an economic depression, energy prices will fall along with all other prices--maybe not as far, but far enough to put a big dent in any investing profits. The other thing to remember is that investing is a social phenomenon. If everybody who invests "knows" that energy is the place to be, the market is probably topping. The point is that by definition not everyone will reap big profits in the emerging energy bull market. It takes latecomers to make such investing pan out for those who got in early.

Oddly, sites promoting peak oil money-making ideas seem to be assuming that we will somehow return to a business-as-usual world in which lucky investors can spend their new fortunes. But, in the long term, peak oil means we will never go back to business as usual.

Perhaps the world will move on to a miraculous new energy source making any investments in the fossil fuel industry ultimately a big loser. Perhaps the world will be faced with ever decreasing supplies of energy which will result in a chaotic and highly destructive descent into a low-energy society that gives new meaning to the word "post-industrial." Perhaps money and credit as we know it will cease to exist, and life will become intensely local. In such a world the financial riches of a networked, global economy won't have any meaning. Beyond this is the question of timing. Either the optimistic or the pessimistic scenario might unfold quickly or take decades to reach a conclusion.

Given the uncertainties, perhaps the most important investments that any of us can make are in helping to prepare our families, friends and communities for the energy challenges ahead. This might mean spending some of our own treasure for the public good. In this way, at least in the short-term, peak oil investing can provide a benefit, not just to the individuals who do it, but also to the communities in which they live.

If those who profit from rising energy prices come truly to understand our energy predicament, they can help communicate it to others and assist in preparing our communities. But the peak oil investor who succeeds at making money, while failing to grasp the gravity of our situation, may find that his or her new fortune means nothing to a community that has been forced by circumstances to move quickly beyond a world governed by Wall Street wizards and international finance. In such a world, even if you manage to hold on to your investment winnings, from that point onward what you can do will be far more important than what you are worth.

What if Daniel Yergin is wrong?

Daniel Yergin is the oil optimist that peak oil believers love to hate. He is president of Cambridge Energy Research Associates (CERA), perhaps the most well-respected energy consulting firm in the world. He is the Pulitzer Prize-winning author of the best-selling history of oil, The Prize, which was also made into a PBS series. And, he is friendly, upbeat, calmly reassuring, and above all, quotable. Yergin's smiling face stands in stark contrast to the dour visages of the peak oil crowd as they warn of an imminent peak and subsequent collapse in oil production, an event that will shake our civilization to its very foundations.

Not so fast, Yergin says. We have plenty of oil--enough to meet the needs of growing Asian giants such as China and India and the rest of us as well for the next 30 to 40 years. After that oil supplies will reach an "undulating plateau." (The word "peak" seems so downbeat and distasteful that he refuses to utter it.) But, Daniel Yergin knows no more than anyone else about the future, especially the future 30 to 40 years hence. (In the past, much shorter time periods have proven problematic for Yergin and his firm. CERA predicted in 2001 that natural gas supplies in North America would be plentiful for the foreseeable future. That turned out to be woefully off the mark. In itself, it doesn't mean he's wrong about oil--only that he and his firm can make mistakes like the rest of us.)

To repeat: Neither Yergin nor anyone else knows anything for certain about oil supplies 30 to 40 years hence. Yergin is merely assigning a high probability to a peak then. But, implicit in his forecast is this: Since oil is a finite resource which is being continuously depleted and since no one--not even Daniel Yergin--knows exactly how much new oil will be found over the next three to four decades, it follows that the probability of an oil peak grows with each passing year. It is this reality and not the cheerful certainty which Yergin exudes that ought to command our attention.

The obvious question then is this: What if Daniel Yergin is wrong? What if the very low probability he assigns to a nearby peak doesn't stay neatly tucked beneath the tail of the bell curve of probabilities? What if peak oil--however disrespectful and unmannerly it may be--is about to arrive (or has already snuck in the back door and is waiting in the broom closet to surprise us)?

In Daniel Yergin's world, the marketplace will take care of all necessary adjustments. But, no reporter to date has bothered to press him on how this would work if a peak were to occur, say, next year. If he were pressed on this point, I am certain he would say that a peak will not occur next year or the year after that or the one after that. Naturally, he could produce evidence for this belief; but, ultimately he could not by definition prove it--just as none of us can prove anything about the future.

But, implicit in Yergin's insistence on a distant peak is that the marketplace would deal very badly with a nearby one. And, here we should note that Yergin is the author of another famous book called Commanding Heights, a paean to free market ideology. To admit the possibility of a nearby peak would be to admit that the free market has already failed to detect and fix a critically important problem, one that could challenge the very continuity of modern civilization. It would be like saying one's god had failed, the god in this case being the "marketplace." There would be "demand destruction" on a major scale, the kind that destroys a lot of people. There would be no ready oil substitutes and no ready infrastructure if we had them. There would be parlous consequences economically, socially, politically, and probably militarily. There would be serious questions about whether we could produce enough food and whether we could distribute it even if we did.

Let us stop and think for a moment about what would happen if, on the other hand, we began to implement on an emergency basis the recommendations of the dour peak oil crowd. If such a speeded up program succeeded, people everywhere would end up with the following: 1) Splendid public transport including excellent intercity rail; 2) a great increase in the amount of energy produced by nonpolluting, renewable energy sources; 3) increasing amounts of locally grown, organic food--some of it grown in one's own garden; 4) the quick and widespread dissemination of green technology everywhere; and 5) greater participation in the governance of our local communities as they become more sustainable and self-sufficient. Such a response would coincidentally help us make great strides in addressing global warming since global warming results from our use of carbon-based fuels.

But, what if, after all of this, it turned out that the dour peak oil crowd was wrong? The worst that would happen is that we would have prepared ourselves for a peak that would then pass almost unnoticed in the distant future. We would have transformed society from one that is unsustainable into one that is sustainable. The only real criticism that Yergin could make is that this transformation took place earlier than it absolutely had to. Or he might be one of those who would think that such a world--one no longer run by giant multinational corporations and huge centralized bureaucracies--isn't worth living in.

Peak oil pessimists are not very much worried about being wrong on the exact date of a peak. They are trying to provide guidance for policymakers and the public. To that end they regularly update their projections, seemingly without embarrassment, when new information arrives. What worries the pessimists much more than being wrong is that the world will arrive at peak oil unprepared. Can Daniel Yergin say the same?

Behind the Curve: How We've Consistently Underestimated Global Warming

In 1896 Svante Arrhenius, a Swedish chemist, theorized that increasing or reducing the amount of carbon dioxide in the atmosphere might trigger a change in climate worldwide. Cutting the amount in half, he surmised, could lower average temperatures by 5 degrees C and might bring on an ice age. But, was such a big change possible?

A colleague, Arvid Hogbom, had studied the carbon cycle extensively, calculating the amounts of carbon from various sources including those from industrial emissions. Using Hogbom's numbers Arrhenius calculated that a doubling of carbon dioxide would increase global temperature by 5 degrees C, surprisingly close to modern estimates even though he was working under severe handicaps including relatively low calculating power--he used paper and pencil--and limited data.

He also estimated that it would take 2,000 years to get there. (The latest estimates place this event in the middle of the current century.) Of course, Arrhenius shouldn't be blamed for this underestimate given the impossibility of knowing what lay ahead for population growth and industrialization. But, his was the first in what has turned out to be a consistent string of underestimates concerning the pace and severity of global warming.

In 1938 Guy Stewart Callendar, a British engineer and amateur meteorologist, presented data to the Royal Meteorological Society demonstrating the arrival of global warming. He estimated that temperatures would rise by 1 degree C by 2200. Callendar wasn't very concerned about global warming for two reasons. The pace seemed so slow and he believed that increased levels of carbon dioxide would be good for agriculture.

Neither Arrhenius nor Callendar were well received. Climate theory and experimental evidence at the time seemed to demonstrate conclusively that what they were claiming could not happen.

Starting in 1940 the Earth embarked on a long cooling spell that lasted until 1970. This temporary hiatus in global warming led to a debate in the scientific community in the early 1970s about whether the Earth might be headed into a new ice age and not toward any continued warming. (It turned out later that the cooling trend may have been in part due to the huge amount of air pollution produced by the wartime and then postwar industrial boom, pollution which tended to reflect sunlight back into outer space.)

In 1979 the National Academy of Sciences offered an estimate that doubling of carbon dioxide levels in the atmosphere might lead to warming between 1.5 degrees C and 4.5 degrees C. In 2001 the Intergovernmental Panel on Climate Change (IPCC) estimated that the Earth could warm by between 1.4 degrees C and 5.8 degrees C by 2100. But, these estimates now seem too conservative. What we know today about the masking effects of particulate air pollution, our subsequent successful efforts to reduce them, and the rapid melting of polar ice indicates that the top end of the IPCC estimates will likely have to be raised, perhaps to somewhere between 7 degrees C to 11 degrees C.

Scientists are by nature inclined to claim only what their data and their models allow them to claim. When they get more data, they simply modify their models and plug in their new data. What the history of global warming modelling tells us so far is that we should be prepared for more surprises--on the upside.

(Some of the above information was taken from a delightful and lively history of global warming entitled, "The Discovery of Global Warming." Supplemental material regarding the book is available online in searchable form here.)

Can a Wall Street Maverick Tell Us Something About Our Ecological Future?

Models that predict climate change or energy supplies far into the future are routinely trotted out to explain either that we need to act urgently or that there is nothing to worry about. Why should this be so? Aren't models supposed to tell us the odds of a particular outcome and aren't those odds calculable by any objective observer? The answer is that it depends on what you model and how complete your information is.

Wall Street maverick Nassim Nicholas Taleb tackles this problem in the rather arcanely entitled piece "On the Very Unfortunate Problem of Not Observing Probability Distributions." Taleb distinguishes decisions made under risk from decisions made under uncertainty.

For example, the range of results from the roll of a single die is known in advance, i.e., integers one through six inclusive. The result can never be seven or 20 or 0. With this kind of simple system, where all the possible results are known in advance, any guess about any set of rolls of the die are essentially decisions made under risk. But, with almost all real world systems, we cannot know all the possible results in advance. When we run a climate model or a model concerning energy supplies, we are modeling aspects of the world for which many of the variables are unknown (especially those relating to the future) and for which many of the exact relationships of the known variables are not completely understood. If we make policy decisions based on such models, we are making decisions under uncertainty. In short, we do not know anything like the precise odds of our models being "right." They are more scenarios than "results."

It is what we don't know that can hurt us according the Taleb. Taleb is a hedge fund manager and author of an excellent layman's guide to risk entitled "Fooled by Randomness." He skewers Wall Street pitchmen and analysts for their statistical sloppiness and their pretense that risk in the markets can be easily quantified. He points out that because all possible outcomes of any market or investment cannot be known, all investments are made under uncertainty. Wall Street, however, has long considered markets to be rational and well-behaved and therefore amenable to standard bell curve analysis.

Taleb begs to differ. He believes hidden dangers lie in wait that cannot be anticipated or guarded against in the usual ways. He refers to one type of danger as the "black swan." The idea, borrowed from philosopher David Hume, is that no number of observations of white swans can prove that all swans are white. In other words, no number of observations of the past can prove what the future will be like. (In philosophy, this is known as the problem of induction.) In financial markets, Taleb says, financial models act as if "black swan events," that is, completely unexpected, major market moving events, are very, very rare. They are not so rare as Wall Street assumes, he claims, and they make investing much more risky than it appears.

How does this apply to climate models or models of future energy supplies? These models are very much like the incomplete financial models. In fact, both types of models must take into account economic information. Like their counterparts, these energy and climate models assume that patterns discovered in the past can be projected into the future confidently. In practice, few climate scientists will claim that their models provide accurate predictions, only possible scenarios. Unfortunately, many energy analysts, both those who are worried about a nearby peak in world oil production and those who say we have plenty of oil, often portray their models as accurate predictors. When the predicted date of a peak passes without incident, the model is somehow "discredited." But such models are only good for making decisions under uncertainty. There is no clearly known range of possibilities to plug in. Much of the data about future conditions is just conjecture.

Does that mean such models are useless? Not at all. But we must interpret them carefully. Because they are replicas, they do not encompass every possibility. Some possibilities that are unknown may arrive unannounced and result in both positive or negative surprises. The cornucopians are particularly fond of citing how the marketplace and technology have always provided whatever we need in terms of energy and other resources to overcome any presumed environmental limit. In "Fooled by Randomness" Taleb observes, "it does not matter how frequently something succeeds if failure is too costly to bear." The failure to have alternatives to oil in the wake of a nearby oil peak may indeed be "too costly to bear." Cornucopian prognosticators are essentially admitting this by always citing a date far into the future when oil production will peak. The implied message: "We have plenty of time to prepare...but, if I'm wrong, we're screwed."

While those who fear we are headed for major energy shortages or a climate catastrophe in the near future may be premature, they actually offer the kind of advice that Taleb might: "Since the consequences could be so extreme, let's prepare now."

Since no models for climate or energy can possibly be expected to make precise predictions, we should use them to inform us in general terms about what we might face. Taleb says, "In other words, one need not actually compute the alternative histories [or futures] so much as assess their attributes." (Italics are mine.)

And, if one of those alternative futures is the collapse of civilization as we know it, perhaps we should not concern ourselves so much with discovering the precise day it will happen. Perhaps we should take out some insurance now--just in case.

Will Global Warming Create Any Winners?

A thoughtful reader of my previous post, Lobster Boil: The Curious Response to Global Warming's Arrival, emailed a minor objection that some places such as Minnesota (which I mentioned in the piece) are likely to benefit from global warming. He claimed the state will have milder weather and by extension a longer, warmer growing season. Farmers might have to plant different crops, but maybe not.

For Minnesota, alas, not all modellers predict this benign outcome. One model suggests that Minnesota and indeed most of the continental United States will experience increasingly frequent and prolonged droughts. The modelling was the work of David Rind of the Goddard Institute for Space Studies. Rind concluded that climate change models underestimate the intensification of drought because they do not have detailed enough models of land surfaces. His rather troubling conclusions were discussed recently in The New Yorker magazine's "Climate of Man" series.

While global warming is now an accepted fact and human activities, particularly the burning of fossil fuels, are almost certainly the most prominent driver, the future course of that warming remains highly uncertain. Global warming models are exquisitely sensitive to assumptions about future emissions of greenhouse gasses which are, in turn, linked to population growth, economic activity, the use of renewable energy sources, and advances in technology that might mitigate such emissions.

Even more uncertain than the general course of global warming are effects on specific areas. Minnesota may seem more like Missouri and Arkansas by the end of this century, or it may seem more like the Mohave Desert. The issue of water is especially critical in assessing whether there will be any "winners" from global warming. Some places may get more rainfall, but at the wrong time. For instance, snowmelt runoff will decrease in many places significantly as snowfall increasingly turns to rain in winter. That means more runoff in winter and less in the spring and summer when it is more likely to be needed for irrigation and other purposes.

Rind also points to the the problem of adaptation. This is because global warming is a moving target. Minnesota will not suddenly warm to the balmy temperature of St. Louis and stop. Instead, the state will get there in steps with warming every decade that will bring new challenges for adaptation every few years. And, Minnesota and other places won't stop warming at the end of the century. On current projections, the world will keep getting warmer for a long time after that. Here is what Rind told The New Yorker:

“I gave a talk based on these drought indices out in California to water-resource managers,” Rind told me. “And they said, ‘Well, if that happens, forget it.’ There’s just no way they could deal with that.”

He went on, “Obviously, if you get drought indices like these, there’s no adaptation that’s possible. But let’s say it’s not that severe. What adaptation are we talking about? Adaptation in 2020? Adaptation in 2040? Adaptation in 2060? Because the way the models project this, as global warming gets going, once you’ve adapted to one decade you’re going to have to change everything the next decade.

“We may say that we’re more technologically able than earlier societies. But one thing about climate change is it’s potentially geopolitically destabilizing. And we’re not only more technologically able; we’re more technologically able destructively as well. I think it’s impossible to predict what will happen. I guess - though I won’t be around to see it - I wouldn’t be shocked to find out that by 2100 most things were destroyed.” He paused. “That’s sort of an extreme view.”

Rind admits, of course, that his models are not reality, just projections. But, precisely because of the uncertainty in modeling that far into the future, we should be cautious about accepting the notion that we can define future "winners" and "losers" as a result of global warming. Indeed, those who turn out to be "winners" may find themselves inundated by migrants from areas that end up "losers" because of the rise in sea-level (or disasters associated with that rise), droughts and floods, and agricultural devastation.

To further complicate the discussion of "winners" and "losers," James Lovelock, author of the Gaia theory--the theory that states that the Earth acts as if it were a living, self-regulating organism--recently wrote that he now believes that we've passed the point of no return. Global warming has become self-reinforcing and will be so severe that it will destroy human civilization--though not all human beings--by the end of this century. It would be difficult by any standard to label the people remaining on earth at that point as "winners."

Without having to accept Lovelock's fatal diagnosis, one can at least acknowledge that he is reminding us that we are all in this together. To imagine that global warming is a game with "winners" and "losers" may be the surest way to make losers of us all.

Lobster Boil: The Curious Response to Global Warming's Arrival

In southeastern Minnesota where I recently gave a couple of talks, ice fishing shacks normally dot the many lakes this time of year. Cross-country skiing and ice-skating are everyday activities in winter. And, those not inclined to winter sports are normally forced to participate in the universal winter recreation of snow shoveling.

But, this is not a normal winter in Minnesota, nor indeed in the whole upper Midwest. On a lake near where I was staying, only one lone ice fishing shack could be seen just off the shore. My host said the ice was simply too thin for anyone to venture beyond that point.

How curious then that the response of many Minnesotans to the warmest winter in decades was to say how lovely the weather is. There are those like my friend, of course, who are disappointed that all their usual winter activities are curtailed. But even an ice-skating instructor whom I met at a coffee shop complained on the one day it got below freezing that it was too bad the weather had suddenly gotten so cold! This from a Minnesotan for whom 20 degrees can seem like a heat wave in the dead of winter.

The proximate cause of this warm weather has been the failure of the jet stream to dip down from Canada into the United States. But the longer-term cause can no longer be ignored as we have just concluded the warmest year on record. Global warming has arrived in Minnesota, and the consensus opinion is in: It's great!

It is here where the troubling tale of delayed feedbacks enters the story. The global warming we are experiencing today is the result of greenhouse gasses spewed into the atmosphere as of 30 years ago. And, since the rate of release for such gasses has only increased since that time, we can expect some rather nasty results 30 years hence. Perhaps Minnesotans believe that three decades from now they will be celebrating their state's new status as a tropical paradise. More likely, they will wonder about the grain harvest which is so critical to the Minnesota economy, a harvest increasingly likely to be devastated by droughts. They will wonder whether the mild winters are worth the exceedingly hot summers that will regularly take the lives of many who are frail but cannot afford the mandatory air-conditioning. They will wonder whether they should have looked so idly upon the myriad coal trains that passed through the state every day en route to the Midwest's many coal-fired power plants.

We are like the proverbial lobster sitting in cold water in a pot on the stove; the warmth that comes from the flame underneath at first seems welcome. As the temperature rises, the poor lobster moves aimlessly in the pot enjoying the new climate. Finally, gradually, without any announcement, the temperature exceeds the lobster's tolerable range and he or she becomes dinner. Of course, to save the lobster one would only have to turn the burner off before the water reaches the critical temperature. While turning a burner off only takes a second, turning off global warming will not be so easy; it could take a generation or two, and then only if we are very serious about it.

It is we who are now in the pot as the temperature slowly rises across the globe. But our bodies are giving us a deceptive signal. The warm winter weather seems like a gift, rather than a curse, from nature--even to those who accept global warming as real and potentially very dangerous.

It is a gargantuan effort for the mind to contradict the body and tell us that something which seems so pleasant now will be our undoing. But, human beings are uniquely capable of this, and, in truth, that capability is our only hope.

Is a Run on the (Resource) Bank Behind Rising Inequality?

How, then, can society tell if it is in overshoot?...[One symptom is] declining respect for the instruments of collective government as they are used increasingly by the elites to preserve or increase their share of a declining resource base.
    ---Limits to Growth: The 30-Year Update, p. 177

Most people alive today have never experienced a genuine bank run. Today, we are nearly oblivious to such a possibility. Beefy construction workers, college students, elderly men and women, and middle-aged executives all respect each other's place in the teller line, confident that their money will be available when they arrive at the counter.

But, how would this scene look if everyone in line believed there wasn't enough money to go around? Would those who are more powerful--either because of their position or physical strength--force their way to the head of the line? Would the business executive call over the vice president of the bank on whose board he sits and ask that vice president to get his money? Would the construction worker stand idly by as the college student in front of him withdraws the last of the bank's money--money the worker needs to feed his family? (In an ideal world everyone in line might agree to divide up what money is left based on who has the most pressing needs. But I digress.)

Rewind to 1980, the year after the last oil shock. Oil and other commodities had been rising in price for more than a decade. The message of books such as "Limits to Growth" and "The Population Bomb" had entered the popular culture. The perception was that critical natural resources were only going to become more scarce over time. For those aware of the implications a run on the resource bank--the basis for all wealth--seemed imminent.

How did this manifest itself? For the middle class and the poor it meant narrowing life choices and declining living standards (experienced as higher prices without a commensurate rise in income). For the rich it must have seemed a mortal threat to their future power and wealth. To maintain their relative position, they sought to get to front of the line and get what they could before it was too late.

Along came a new president with an ideology that meshed perfectly with this desire. He introduced supply-side economics to the American public and assured them that by giving tax breaks to the wealthy, America would return to its former prosperity as those wealthy people invested and created jobs. What took place, however, was the devastation of the industrial economy and continued high unemployment which did not consistently reach low levels until the late 1990s. But the rich got richer, much richer. Through their powerful alliance with government they were able to get to the front of the line and redirect resources financial and otherwise to themselves.

Long after the fears of scarcity abated, the trend toward greater concentration of wealth continued as the influence of the wealthy over government policy increased. It is all too easy to believe that the dramatic shifts in income distribution in the United States and much of the world over the last 25 years are simply related to free market ideology, supply-side economics, globalization or merely greed. But if we view the evolution of economic and social policy during this period as the long tail of an initial response to natural resource scarcity--a response directed by the wealthy and powerful that put them at the front of the resource line--we can see that the contest over who will benefit from the Earth's remaining natural bounty continues to this day.

The logic in 1980 was that even to maintain one's living standard, one had to secure an increasing share of the world's remaining resources. In other words, henceforth one's own well-being would have to come at the expense of someone else's well-being. That turned out not to be necessarily the case as economies eventually expanded and natural resources ultimately glutted world markets.

But those initial policies and practices have remained and even intensified. In 1980 a new economic ideology, supply-side economics, gave convenient cover to the rich to portray their rush to the front of line as a virtuous and selfless act. That ideology is now more than ever deeply embedded in the minds of policymakers and people worldwide (though it is by no means universally accepted or praised). As we enter a new age of resource scarcity, we are already well into the next run on the resource bank. The most visible manifestations are a global contest over energy resources and a new round of tax cuts in the United States for the wealthy aimed at "stimulating" the economy. (Here I must point out that "stimulating" the economy is really nothing more than increasing the rate of drawdown of finite resources.)

Supply-side ideology promised a rising economic tide that would reduce inequality. While many people throughout the world have indeed been raised into the middle class in the last 25 years, inequality has greatly expanded not only between the rich and the poor, but also between the rich and the middle class.

Now, the renewed scarcity of vital natural resources, especially oil and natural gas, has initiated another scramble to get to the head of the resource line. But unlike 25 years ago the policies that make it easy for the rich and powerful to cut in line and grab an increasing share of the world's wealth are already firmly in place. It is a tragic irony that those policies will provide no solution to resource depletion and will ultimately undermine the social and ecological stability upon which the wealth of the world's most privileged depends.

Demand Destruction: Who Gets Destroyed?

Economists who comment on the possible effects of world peak oil production love to ridicule those who make statements such as "demand at some point will exceed supply." Strictly speaking, those economists are right that supply and demand are always in balance. The variable that changes to make it so is price.

So an economist who accepts the possibility of an oil peak may still believe that the marketplace will allow us to make a relatively smooth transition to a new energy economy as the price encourages the development of alternatives to oil and as demand is destroyed. The latter phrase is often glossed over. But demand destruction is at the core of misconceptions by economists about the likely course of events leading up to and following an oil peak.

A smooth transition away from oil mediated entirely by market prices essentially assumes two things: 1) a very gradual decline in oil supplies after the peak and 2) a recognition in the market price that the peak is coming long before it arrives.

Both assumptions are called into question by Robert Hirsch's study of oil depletion curves in various countries across the globe. Hirsch's study indicates that any world peak is likely to have a sharp crest followed by a swift decline in oil production--anywhere from 3 percent to 13 percent per year if the historical record can be relied upon. Hirsch also notes that "in all cases, it was not obvious that production was about to peak a year prior to the event." This would help explain why the second assumption listed above is likely to turn out to be wrong as well. Market participants are unlikely to see the peak coming. This means that prices will only start to signal that alternatives are needed for oil long after it is too late to prevent tremendous disruptions.

Douglas Reynolds gives a more detailed explanation of how energy and other mineral markets misinterpret price signals as indicative of future supplies. When finite mineral resources are involved, the market typically creates "the appearance of decreasing scarcity," something I've commented on previously in Faith-based economics II: The case of oil's sudden scarcity.

The final argument on which the smooth transition idea rests brings us back to demand destruction. An economist will properly point out that people will stop using oil for some applications and will turn to alternatives where they are available. All that is true enough. But it is worth asking what they mean by "applications." In reality, it is the poor who will stop using oil for "some applications," both in industrialized countries and across the world. If alternatives are not available or are just as expensive, they will simply have to forgo the benefits of those "applications." That will help keep a lid on oil prices, but it won't solve the problem: too little oil for all the activities that power and feed 6 billion people.

With a sudden decline in oil availability it is almost certain that agriculture, which is heavily dependent on oil and oil derivatives, will be less productive; that many marginal factories will close in short order; that tremendous financial turmoil will occur in world markets; that many people will have to do with less heat or without heat at all; that skyrocketing prices for transportation will prevent commodities including food from freely circulating around the world, and so on. In short, there would be no smooth transition.

The heightened price of oil would certainly encourage conservation--i.e., demand destruction--but that conservation might come in the form of terrible hardship for millions and perhaps billions of people and possibly death for many. That would give a rather gruesome connotation to the notion of demand destruction. High prices would also encourage the development of alternative energy sources, but that's assuming that world society does not become so disoriented and chaotic that such efforts cannot actually be effected.

If one assumes that the oil peak is far off and that technology will allow us to make a smooth transition to the next energy economy (and solve other related problems that threaten to annihilate us such as global warming), then there is no need to worry about the effects of sudden demand destruction in the oil markets. But, if the peak arrives soon, say, within the next 10 to 15 years, then no bloodless abstraction such as "demand destruction" will be able to obscure the fact that it is people who are going to get destroyed, and lots of them.

After the Peak: What will become of the Joffrey Ballet?

For those who have begun planning for a low-energy future, the main concerns are rightly food, transportation, heat, health care and local production of goods of all kinds. On a recent trip to Chicago, however, I began thinking about the fate of our great artistic and cultural institutions. In the spirit of the oft-quoted Biblical saying, "Man does not live by bread alone," I wondered whether anyone will conclude that Chicago's world-renown Joffrey Ballet is worth saving as energy supplies become more and more scarce.

Chicagoans of all types nearly filled the auditorium for a recent performance of The Nutcracker which I attended. I found the performance intensely beautiful and occasionally (and intentionally) delightfully amusing. It involved not only the professional Joffrey dancers but also young singers and dancers from the Chicago community. Can we do without such unifying community events? Can we live by bread alone?

Everyone who thinks seriously about a post-peak world will probably agree that the arts need to be an integral part of that world. Yet, we know only too well how easily they are neglected in our current world even though we have been rich in energy for a long time. How much more might the arts be slighted in an energy-deprived world!

While in Chicago I also visited the Shedd Aquarium and wondered how such a place might function in a post-peak world. Both the Art Institute of Chicago and the nearby Field Museum of Natural History seemed much more likely to remain viable since their exhibits are largely static and, of course, inanimate. The Shedd Aquarium, on the other hand, must continuously filter 3 million gallons of water, hold the temperature of that water as low as 38 degrees (for the penguins) and feed an entire underwater zoo of animals daily. The aquarium seems certain to be shuttered even under the most mild assumptions of a post-peak world. Perhaps marking it as an inevitable casualty would allow us to go in search of less energy-intensive ways to teach the public and especially our children about the natural world which lies beneath the sea.

At the other extreme, a local jazz singer I listened to in a hotel bar and a one-man show on the life of George Gershwin both seemed much more likely to survive a peak than any of the other forms of entertainment or cultural attractions I saw. The relatively low energy content of these two performances seem to favor them in an energy-challenged future.

Still, should we close down the more energy-intensive Joffrey Ballet in a post-peak oil world? Should we let all the great theater, opera and ballet companies in the world go defunct? Should we close the museums and aquariums? Should we shutter the world's symphony orchestras? And, what about our libraries? Will we allow these great storehouses of cultural memory and knowledge to fall into disrepair and disuse?

No doubt popular entertainments will survive, kept alive by small groups in every community. And, arts and crafts are likely to flourish in a world where household objects are increasingly the product of local craft work. Folk knowledge will become an important part of our education again. But what about knowledge of the remarkable scientific and cultural achievements of the fossil fuel age? Will that knowledge be lost?

Without planning, decisions about the great artistic, cultural and scientific institutions of our society may end up being afterthoughts. Under the cloud of an emergency we could lose many of the most important parts of our heritage. And, should that happen, we would surely end up testing whether man can live by bread alone.

Coal And The Question No One Is Asking About Carbon Sequestration

The new watchword in the coal mining industry is carbon sequestration. Those who mine coal and those who burn it (primarily electric utilities) are less likely than their counterparts in the oil and gas business to discount the dangers of oil and gas depletion. And, they have an entirely predictable solution: Mine more coal. The natural followup question is: What about global warming? From coal advocates we get another entirely predicable answer: carbon sequestration (i.e., storing the carbon dioxide created by the combustion of coal someplace other than the atmosphere).

These advocates are eager to turn coal into liquid fuel, into slurries for pipeline transport, and into cleaner burning synthetic gas for fuel and chemical feedstocks. In fact, they envision a return to a coal economy as the oil and gas economy declines. They do have one very important fact in their favor: The world still has gigantic reserves of coal, one quadrillion short tons according to the U. S. Energy Information Administration.

Of course, there are questions about the energy content of that remaining coal. Will we reach a point (sooner than we expect) at which the net energy from coal begins to decline precipitously and even turns negative making it an energy sink instead of an energy source? Will we find that as we increase our use of coal, a worldwide peak in production will come much earlier than we thought? And, wouldn't we then face the same challenge all over again of having to move quickly to renewable sources of energy?

But, let us set all these concerns aside for the moment and focus on the question of carbon sequestration. Not too long ago I spoke about oil depletion before a Chamber of Commerce-sponsored gathering. I suggested that we as a world society might decide to return to a coal economy. While that might prove practical in the short run, I explained, it would probably be disastrous in the long run because of the damage it would do to the climate.

Afterwards an engineer who works for a large utility approached me. He explained that his company was already successfully sequestering carbon dioxide underground in a pilot program at a generating plant in Virginia. I asked him how long the company was planning to test its program before expanding it. Would it be five years? 10 years? How long will the company wait to be sure that the carbon dioxide doesn't leak out at a later date, possibly by some process as yet unknown? What if any failure of the company's sequestration method doesn't show up until the 11th year?

He responded, "Well, maybe any leakage will be slow."

Are we really willing to bet the future of human civilization on coal based on that response?