About “Peak Oil”

Back during the summer gas crisis, I mentioned that peak oil was an irrelevent concept because at high gasoline prices, the cost of substitutes approach the cost of gasoline. That is, the higher oil prices go, the relatively cheaper substitues appears, to the point that a rising price of oil increases the effective supply of products just-as-good as gasoline.

Further, some of the rise in oil prices may have been speculation by oil producing countries. As Paul Krugman points out, the higher oil prices go, the more incentives oil-producing countries have not to pump oil.

Venezuela’s ouptut slumped 25% in the run-up to the oil crisis, by the way.

The cratering of oil prices may be a product not only of lower prices themselves (which increase incentives to pump oil), but also rising spending in oil-rich countries. Gulf Cooperation Council states need oil at about $50/barrel to pay for government spending, and a fall in oil prices naturally encourages them to either pump more or to cut back on spending.

We have a deeply warped energy market, and a heavily subsidized transportation market. Those who argue to let ‘the market’ decide our energy policy are short-changing our futures to save some money in the present.

My thanks to Calculated Risk for the excellent piece on oil that provided some of the links for this post, and to Coming Anarchy for a hilarious ad noting how oil has been running out for 30 years.