I agree, and I think we can leave it at that for the time being. Thanks for the fun discussion

The best summary of peak oil is Life after the oil crash. It has lots of links to other sources. I also subscribe to the Energy Bulletin and ASPO international blogs for regular news about peak oil. The story from these sites and others is grim.

There is uncertainty about when and how quickly oil production will fall. There is even more uncertainty about how the economy will respond. People talk about all sorts of different scenarios. The only real conclusion I can draw from what I have read is that there is a big problem brewing.

The range between my best and worst case scenarios is correspondingly wide. If something like cold fusion is invented in the next couple of years, the problem may disappear. I don’t think we can count on a major breakthrough of this magnitude. The worst case scenario is all out war over scarce resources that culminates in the use of nuclear bombs.

It’s anybody’s guess what the future will hold. Nothing can be proven. The best we can do is make educated guesses. I believe that the rate that we can extract fossil fuels is going to fall soon. I believe that our current economic system is dependent on abundant fossil fuels. I have limited faith in our ability to find new energy sources that can be tapped at the scale we are using oil today. Economics aside, we have a big problem. People are going to starve if we can’t find a replacement energy source.

I have a masters degree in Economics, not that I put much stock in what I learned. I do, however, believe enough of it to know that if the supply of a key resource like energy decreases, prices will go up. If the energy problem can’t be solved through innovation, there’s little to slow the upwards spiral in energy prices.

Adam, I don’t think we differ in how we understand economics. I think we differ in our beliefs about peak oil.

Short term fluctuations happen all the time. What has not ever happened is a doubling in the price of oil that stuck for more than a few months.

A large part of that volatility comes precisely from attempting to predict the future; traders in oils futures bid up the price of oil today to hold and sell at a time when they believe it will be in shorter supply. When their speculation is accurate, it has two effects: first, it smooths out the price between the future moment of scarcity and the present (by bidding up today and bidding down at the time they bring it back to market). Second, it forces producers and consumers to respond to future shortages today rather than in the future, by increasing the price today. In other words, it encourages cost minimizing, either by changing behavior (driving less or slower as you say), finding substitutes, innovation, whatever.

When a lot of speculators get it wrong, for whatever reason, this can lead to a dramatic spike followed by a dramatic plummet, as we saw. They would overbid on resources today and end up with a level of supply in the future that is unprofitable. There is a sort of teeter-totter effect in this respect.

My real question for you is: what are you basing this “best case scenario” or “worst case scenario” on? Where does it come from other than your mind? I understand that empirical generalizations are very limited, but I would think that simple mental constructions are even more so, as they bear an even weaker connection to the outside world.

I don’t believe prices will shoot up this high over-night. It might take 2 or 3 years. In terms of how long it takes to revamp our infrastructure, though, a few years is “sudden”.

I can’t prove that prices will shoot up. If we wallow in this recession for a long time, prices may stay low because demand is low. What I am certain of, though, is that if demand for oil starts bumping up against physical constraints to produce it, its price is going to get very high, at least for a number of years while alternatives are developed.

My best case scenario is peak oil causing high energy prices and economic chaos for a decade or so while we move to a new energy system. My worst case scenario is that there is no adequate alternative energy system. In this case, the economy never recovers.

I too am a fan of Taleb’s but invoking the Black Swan is sort of a cop-out. The point of it was that there we don’t know much about rare events one way or the other; just saying that Peak Oil will be a rare and unpredictable event by its nature is a self-defeating argument. How on Earth do you hope to predict an unpredictable event?

Your story about “digging deeper and deeper into fossil sources of energy” doesn’t quite cut it when they are different fossil sources that were being used at a given time.

And you seem to ignore the fact that many substitutes do exist. You don’t have to use oil in power plants; you can use nuclear or any number of others. There is a gigantic abundance of natural gas around the border with Mexico; it’s merely a matter of transporting it affordably. As I stated previously, synthetic oils can actually be made artificially; it’s just that right now there’s enough oil in the ground that it’s cheap to get it that way. The substitutes are here. The only reason they haven’t come to they haven’t been put “in place” is because right now oil isn’t all that expensive, relative to its alternatives. If it begins to consistently increase in price, and they continue to decrease or even stay the same, eventually the switch will happen, I assure you.

And it won’t be a complete substitution; as with Coal (which still provides about a third of the electricity in our country, if I remember correctly) it will gradually be taken out of those areas where the cheapest and most effective substitutes already exist.

You still haven’t really provided any logical, much less empirical, reason why this supposed shortage should occur very suddenly.

While the past contains many lessons, it is not necessarily a good predictor of the future. Talab’s book, The Black Swan has a beautiful example of the turkey who figures his life is pretty good. A farmer gives him food every day and he doesn’t have to do anything. Of course, the day before Thanksgiving, the turkey gets a rude surprise.

Our success over the last two hundred years comes from digging ever deeper into fossil sources of energy. There is no precedent for the energy shortage that is going to hit us. When energy starts to become scarce, we will be in new territory. It may not be quite as dramatic as what happened to the turkey. It will, however, likely be quite unpleasant.

If you believe that human ingenuity is unlimited and can solve all problems, there isn’t much that I can say that will change your mind. What I, and the rest of the peak oil folk, see is an economic system that is dependent on a resource that will run out one day and doesn’t have a replacement. I’ll only stop worrying about peak oil when we have a replacement energy source in place.

There is no reason to believe that oil prices will suddenly “skyrocket” out of the blue. In the history of every finite resource that we have used from the Industrial Revolution on, when we started really consuming this stuff in large quantities–there has never been a sudden and sustained (as in, long term) skyrocketing of the price of a commodity other than the periodic short term shock. In fact, if you read your Julian Simon, you will find that the price of every single input, including energy inputs like coal, oil, and natural gas, has been declining steadily over time.

So you’ll need something other than the fact that Peak Oil seems intuitively attractive as a theory to demonstrate that we’re on the precipice of a sudden skyrocketing of oil prices. If we were on the verge of a shortage, you would expect oil prices to be going up over time, not down.

In fact, the adjustments you say “may” occur are already occurring. Our technology is already much more efficient at using energy–in the past thirty years things like fuel injectors have become prevalent, for example–and energy consumption as a fraction of GDP has actually been decreasing.

Advocates of Peak Oil theory rest on nothing other than the logic of “it’s finite so eventually it will run out.” But the burden is on them to find historic examples of similarly finite resources that ran out, and to describe how it played out in practice, then. Otherwise it is only one of many theories that exist purely in the abstract.

Peak oil:
You make good points. We may find more oil. There may be new technologies. We may discover brand new energy sources. The risk is that alternatives will not be developed fast enough. There is an immense infrastructure in place to use oil. It will take years to replace once we know what the new energy source is. And we don’t yet know of anything that can take oil’s place for sure. A lot of things have to go right for us to sidestep the peak oil issue.

As for the price signals, skyrocketing oil prices would send the economy into a tailspin. While it would encourage innovation, it wouldn’t guarantee that a solution would be found. If the economy is in a deep recession, people will be looking for quick fixes. I think it is unlikely that good long-term solutions will materialize as a result of high oil prices.

Government:
I agree with your assessment that government can’t impose arbitrary rules. If there isn’t popular support for a law, it isn’t going to be easy to enact or enforce. At present, there isn’t a snowball’s chance in hell of a low speed limit being enforced. This could change in the future if energy becomes VERY expensive. The point of my argument is that there are alternatives to moving back to using horse and buggies.

This assumes that we can just mechanistically continue consuming it. The fact of the matter is that the scarcer it becomes, the higher its price gets. The higher the price, the less people will be willing/able to afford it, but also the more lucrative it will be for people to:

1. Find more of it
2. Provide alternatives that wouldn’t be profitable if oil were more affordable (shale oil for instance, and there are several methods of creating artificial oil that are usually too pricey to be worth it but the processes could be refined)
3. Find innovative new ways to drive down the prices of its substitutes or invent completely new ones.

We have been using Coal for centuries now. We have not run out of it, nor are we in any danger because other substitutes like Oil have come to dominate the energy scene, and because the technology that uses coal has become more productive at being able to do more with less.

Don’t underestimate the ability of the price system to force people to economize on scarce resources.

Government can set the speed limit to whatever level it wants. It can also enforce it to whatever degree it wants.

Unfortunately government isn’t an “it” nor does it “want” anything. Government is as cohesive a body as the market it; which is to say, it is just a bunch of individuals coordinating their activities within particular institutions. The fact that some of those individuals find it in their interest to have a posted speed limit of 55 doesn’t mean that the individuals in charge of enforcing it will find it in their interest to ticket anyone for anything less than 65.

You can’t legislate away the world’s problems. Economic, social, and legal systems are not designed by smart people who have the answers; they emerge over time in response to particular pressures, to strike a balance between the many trade-offs that people will always have to face.

I don’t know for sure how much energy would be saved by lowering speed limits. I know that air friction typically increases as the square of the velocity. If you drop the speed limit from 100km/h to 40 km/h this would drop air friction to 1/(2.5)^2 = 1/6.25. That’s a savings of 84 per cent. It’s harder to quantify the benefits of building lighter cars. A lighter car would be more of a benefit in the city with stop and go traffic. My guess is reduced weight would allow another 50 per cent drop in fuel use.

Overall, I’d think we could cut energy usage by about 90 per cent with a 40 km/h speed limit. Along with reducing demand for oil, this would make alternative power sources for vehicles, such as batteries, more viable.