Oil? We're Swimming in the Stuff!

Oil industry analyst predicts a return to $1.15 a gallon gas.

Ron Bailey analyzed the not-so-frightening future of the oil economy in our May issue.

Comments

[joe]

In other words, we cannot depend on high oil prices to save us from global warming, air pollution, petro-dollar funded terrorism, and the host of other ills that we suffer from being addicted to a Gilded Era energy technology.

[independent worm]

"OK guys, you had your fun; hope you enjoy the extra billions, and of course, I expect to see some of that in my campaign coffers. Now we have some mid-term elections coming up, so the party's over. Well, just for a couple months anyway, right?!?!!?! Ahahahahahahahahahahaaaaaaaaaaaa!!!"

-- Unnamed GOP Stormtrooper

[Edger Padila]

Sucks, don't it?

[Brian]

Volatility, ie oil going down and up and down $10 in the space of a few months, is supposed to be a tell for the arrival of Peak Oil.

I dunno. My theory is Cheney got the Saudis, Boone Pickens and dem on the phone and said "Listen guys, we've done you a lot of favors. Could you cut it out for a couple months?"

[kebko]

Yeah, because markets that are controlled by monopolists & collusionists are always volatile & unpredictable. Just look at how Microsoft is always suddenly tripling the cost of Windows just to scam a few extra bucks off of everyone, then bringing the price back down at election time.

Yep, those oil company executives know EXACTLY what they're doing.

[pigwiggle]

Well joe, I don't want to speak for other folks here, but I don't see any problem with using the government to regulate pollutants. For things we all have to share, say the air for example, it isn't so far fetched that we all get together and hammer out a reasonable use policy. Unless I suppose someone comes up with a way to keep their polluted air from mixing with my breathing air. And if you can convince me that global warming is anthropogenic then I don't see a problem with commensurate regulation of 'greenhouse gasses' in the same fashion. But a handful of toy computer models is a long way from convincing me of manmade GW. Oil fueling terrorism? In my estimation crappy foreign policy is fueling anti-American terrorism.

[kebko]

Yeah, because markets that are controlled by monopolists & collusionists are always volatile & unpredictable. Just look at how Microsoft is always suddenly tripling the cost of Windows just to scam a few extra bucks off of everyone, then bringing the price back down at election time.

Yep, those oil company executives know EXACTLY what they're doing.

[Anvilwyrm]

So, if oil prices go up it is Bush helping his cronies in the oil industry, and if they go down it is the oil industry helping Bush.

Excellent, and totally non-falsifiable! I love it when all possibilities lead you to the same conclusion! It saves ever so much thinking

[Russ 2000]

As long as there are still government madates forcing ethanol and whatnot into the refined fuels, the price at the pump isn't going to fall at the same rate as the price of a barrel of oil falls. So $1.15 gas ain't never gonna happen.

[Brian]

There's the outside chance that might have been a joke.

Put your whole net worth in the stock market and see how long it takes you to develop a healthy sense of paranoia.

Commodity markets are very small. They're a fraction of the size of stock markets which are a fraction of a size of bond markets. Who knows what traders and governments and offshore hedgefunds and the Supercomputers of Doom in Goldman Sach's basement are up to. Doesn't take a lot of firepower to make things move one way or the other.

[citizengnat]

If anyone has any evidence that prices have been manipulated lately to go down I would be very interested. The Saudis could theoretically lower the price by increasing production. I'm sure their are other methods for such a controlled market to be manipukated for political purposes, but until I at least hear a method I'll consider it a crank conspiracy theory.

Also, I find it sad that so many would change their vote in response to gasoline prices.

[C-3PO]

Thank the maker! This oil bath is going to feel so good.

[joe]

pigwiggle,

Don't you think an economy full of non-polluting energy sources, which don't require intensive emissions regulation, would be better than the constant fighting between regulators and the people burning fossil fuels that we have now? I "don't have a problem with regulating pollution," either, but I don't think that's the ideal.

Especially with greenhouse gases - if we have to meet predicted energy demands with fossil fuels and reduce greenhouse gas emissions to the extent necessary to avoid catastrophic global warming, it's just not going to happen. It's just not a sustainable plan.

"Oil fueling terrorism? In my estimation crappy foreign policy is fueling anti-American terrorism." 1. I said "funded terrorism." 2. You don't think oil has anything to do with our crappy foreign policy?

[stuartl]

So if I follow the Seatle Times article, likely future supply went down, and prices went up. Now, likely future supply is going up, and prices are going down. Amazing!

Joe, it looks like you need to start a war in the mideast to save the world. That supply and demand stuff is getting in the way.

[sage +P]

I will agree with joe on this: oil has pretty much everything to do with our crappy foreign policy. Oh, and the war on drugs.

[John]

Smart analysist have been saying for months that at least $20 of the price in oil was the result of the falling dollar and inflation hedging. That was of course drown out by the "peak oil" sky is falling crowd. The fall in the price of oil, which is priced in dollars, may say as much about the returning stregth of the dollar and reduced inflationary expectations than it does about the supply and demand of oil. It is probably a combination of the price reaching such a level that no one was willing to speculate anymore on it going higher and increased supply and reduced demand that result from high prices. Markets tend to work like that. People for some reason seem to have to relearn that lesson over and over.

[MUTT]

Ah, yes......who can explain the mystical designs of the Invisible Hand.......

[pigwiggle]

joe-

"Don't you think an economy full of non-polluting energy sources, ..."

No one is going to use current alternatives when oil is cheaper. The true cost of oil can be adjusted through regulation allowing the market to find the viable alternatives, or create some.

If US foreign policy had always been just about trade we wouldn't need the military to subsidize oil prices. The problem is the grand mess US policy has made in those places we would like to do business. If the idea was to secure US energy supplies it hasn't worked out well.

[Andrew Carnegie]

Joe,

Come on, the Gilded Age wasn't so bad!

[Andrew Carnegie]

Joe,

Come on, the Gilded Age wasn't so bad!

[Ed]

People usually believe what they want to believe.. and Bailey obviously wants to believe that peak oil won't occur for another 30 years or so. Maybe he's right, but I doubt it. Like every other article on this subject he's written he picks and chooses information he's gleaned from government/industry reports that supports his pie-in-the-sky beliefs and ignores/discounts the actual data and anyone who disagrees with him. He highlights the word "proven" in "proven reserves" as if that means something. (It's PROVEN! SEE! Proven! so it must be there!) Proven reserves are far from being "proven". There's no standard for "proven" reserves. Kuwait had been stating their proven reserves as 99 billion barrels then suddenly said (in a report taht wasn't supposed to get out), oops-we actually only have half that much. Governments/industry have a vested interest in maintaining the belief that they have a lot more oil than they actually do.

To really see what's going on, ignore all the rhetoric from analysts, govt agencies, politicians, Reason contributors (and blog post commentors), etc. - and focus on *actual* production data... and see how that compares to all the projections. For a great site that does just this and conducts indepth analysis and data-driven discussions on oil, I suggest you read "The Oil Drum" blog. They take all the data/projections and analyze them in an almost obsessive way and let you be the judge. The commentors are intelligent, informed and open-minded. Just check out the current lead post and you'll see what I mean. http://www.theoildrum.com
This is by far the best site on this subject, and a haven for "peak-oil moderates" like me.

Not to beat up on Bailey too much, I do wholeheartedly agree with his closing statement:

"One day, the oil age will end. As with all resources, there is ultimately a finite supply of oil. So it is not yet clear how the world will power itself for the bulk of the coming century. But we have at least another three decades to find alternatives to petroleum. ?Trusting markets is the only way we can assure energy abundance in the future,? notes the University of Houston?s Economides. ?It?s also the only way that we will ever transition to something other than oil and gas.""

[MikeP]

Brian,

Commodity markets may be smaller than stock markets or bond markets, but their value is far more reality based than that of the latter two.

First, their value relies on real material and not on much harder to determine factors such as human, institutional, or regional capital.

And second, you can see commodities. As the article says, there is anecdotal evidence that oil companies are looking to charter tankers for storage. You can be sure that the interested investor will be turning the anecdotes into data rather rapidly in order to protect his wealth. And if he doesn't get that transparency...? That's how markets really crash.

[Bohemund of Antioch]

Andrew,

I feel yah, buddy, but I'm just glad they aren't hating on the Crusades again.

[joe]

pigwiggle,

"The true cost of oil can be adjusted through regulation allowing the market to find the viable alternatives, or create some." Yep. On the other side, the value of developing alternatives can be increased through public policy as well.

[Bohemund of Antioch]

Andrew,

I feel yah, buddy, but I'm just glad they aren't hating on the Crusades again.

[sam]

Do you people really believe that the Republicans and the Oil companies manipulate the global market like this? Have you ever worked for a large company? It is impossible to curtail production from the CEO's seat without issuing orders saying ?stop making so much money?. There are many layers of national VP's, basin managers, ect. who are trying to maximize production. This would be a massive criminal conspiracy involving thousands of people. I worked for Chevron for the past 2 years (not anymore) and I can tell you we worked as hard as we could and spent tons of money to make more oil. I heard someone call it PROFIT MOTIVE. Guess it worked since they discovered the elephant field in the deepwater gulf.

If oil does get down to $10 a barrel I am going to have to sell my kids.

[John]

"On the other side, the value of developing alternatives can be increased through public policy as well."

Translation, the value of developing alternatives can be increased through giveaways and pork barrel projects to the politically connected. In theory that might make sense Joe. In reality, any program like that will just turn into a boondoggle and another excuse for the politically connected to steal money from the rest of us. If we truly are running out of oil, the price will rise and the alternatives will become viable on their own. Even the worst peak oil scenario doesn't envision oil running out over night. As the supply gradually declines, the alternatives will become more and more competitive and cheaper as the technology advances and economies of scale kick in. The worst thing government could do is interfere with that process.

[Davebo]

With all due respect to Mr. Verleger, if he honestly believes oil will drop to $15.00 a barrel he's nuts.

If he honestly believes that oil will drop to $30.00 a barrel ever again, he's only slightly less nuts.

I'd say $45.00 a barrel will be the lowest we could possibly see and even that's a long shot.

[John]

Davebo,

You are either the smartest commodity trader on earth, oil is unlike any other commodity in history, or you are talking out of your ass. No one knows what the price floor for oil is and if they did, they would be acting on it and getting rich.

[R C Dean]

we cannot depend on high oil prices to save us from global warming, air pollution, petro-dollar funded terrorism, and the host of other ills that we suffer from being addicted to a Gilded Era energy technology.

Dang! It looks like we'll have to solve our problems the old-fashioned way. Fortunately, help is already on the way:

Global warming: not within our ability to control, regardless of oil prices. Next!

Air pollution: the wealthier a country is, the cleaner its air. The solution to dirty air is a thriving economy. Oil is actually cleaner to burn than the really low-tech stuff (plants, coal) that the really poor people burn. Next!

Petro-dollar funded terrorism: sounds to me like reducing the price of oil will reduce the number of petro-dollars going into the Mideast, as will discovering new, non-Middle Eastern oil fields. If only the price of oil would come down, and new fields would be discovered. Oh, wait . . .

I'm curious what the "host of other ills" might be. Personally, I think you'd have to be nuts to think that any people has ever had it any better than the Western(ized) world has it right now.

[MikeP]

This is by far the best site on this subject, and a haven for "peak-oil moderates" like me.

I just spent some time looking at theoildrum.com. "Data-driven" is right.

Reading that blog is like watching Ptolemy fine tune his epicycles...

"But Ptolemy," you say, "Isaac Newton has put together a model I really think you should look at it. Rather than plotting the past and trying to fit curves to it, he's got some natural laws that not only predict the motions of the planets, but explain them!"

"Bah!" says Ptolemy.

I must say, though... At least the comments I read at theoildrum.com do not portend economic or social collapse: They simply claim to predict the impending peak of oil production and a subsequent decline that can be coped with. That position is a lot harder to argue against than that of the more often quoted Peak Oil doomsayers.

[Ken Shultz]

In other words, we cannot depend on high oil prices to save us from global warming, air pollution, petro-dollar funded terrorism, and the host of other ills that we suffer from being addicted to a Gilded Era energy technology.

If not, then I suppose we can depend on the high price of global warming, air pollution, petro-dollar funded terrorism and a host of other ills. ...oh, and we can console ourselves with the realization that government proposals to address those problems will be more expensive and less effective than market alternatives.

[James Anderson Merritt]

Over at http://www.teslamotors.com, their (admittedly self-serving) analysis shows that their all-electric sports car gets an EPA equivalent of 135 miles per gallon, and can cost a nickel or less to operate. I guess we'll see the proof of that pudding next year. If so, all they need to do is come out with a model that is more affordable than the $100K Roadster they'll sell at first, to attract quite a few people onto the "low/no" emissions bandwagon. With gas at $3 or more per gallon into the future, I calculated that the cost of ownership for even the pricey Roadster would equal that of a Toyota Camry class vehicle in between 15 and 20 years (not very long to own a cool sports car). Lower-cost gasoline or a lower-cost EV would change the breakeven point, of course, but regardless: it seems to me that, before long, people may have the option of being nice to the environment in a way that makes good economic sense, whatever one's financial means may be, and however low the price of a gallon of gasoline may fall. By the time gasoline falls to between $1 and $2 per gallon, I and many others may just not care at all.

[John]

It is interesting that people blame global warming on oil. Yet, 15% of the world's (that is right world's not just the U.S.) greenhouse emissions come from U.S. coal fired electric plants. Instead of beating up on oil, how about replacing all of those plants with nuclear plants and cutting world greenhouse emissions by 20% at the cost of a few billion dollars and in also get years of cheap efficient electricity in the process as well as losing a lot of other air pollutants as well? Of course doing that would not allow the smug to look down their noses at evil Americans with their giant SUVs, suburbs and big box retailers, so it is pretty much a non-starter.

[ed]

A drop in price to $2 a gallon will save me only about $12 a week, but I will happily buy more booze with it and drink alone instead of going to pricy bars and being successful and wealthy with all the tall people.

[pigwiggle]

"...oh, and we can console ourselves with the realization that government proposals to address those problems will be more expensive and less effective than market alternatives."

Lord knows why anyone would expect some tin-eared politician distracted with securing set asides for their constituency to be a desirable arbiter of viable energy sources. The Clean Air Act seemed to be reasonably effective. I wonder where we would be now if instead of caps legislators tried to spur clean technology through investment in research?

[kebko]

"They simply claim to predict the impending peak of oil production and a subsequent decline that can be coped with."

Even that is incorrect, in my view. The idea that last year there were 50 years of known reserves in the ground, and this year there are only 49.5 years left would have little effect on the market. In all likelihood, we will still have decades worth of oil in still in the ground, even after fossil fuels have gone the way of whale blubber. If you have access to found oil that you can sell at a profit, the smartest thing you can possibly do is sell it today for that profit. This motive pushes the price of oil (over the mid-long term) down to the marginal cost of extracting another barrel, which is MUCH lower than today's price.

I predict that oil will settle in at prices much below today's price, and it will never spend very much time above today's price before it is largely replaced by alternatives, and when that happens, there will be billions of barrels in the ground that nobody will bother to drill because better alternatives will be available.

It astounds me that this prediction seems contrarian. And, I do invest in the market based on that notion. Apparently, there aren't enough folks like me to put the price where I think it should be. Seems like taking candy from babies to me.

[TrickyVic]

Make all vehicles flex-fuel.
Repeal laws against making moonshine.

I'll brew my own fuel.

Like that would ever happen.

[Isaac Bartram]

I'll brew my own fuel.

What kind of fuel will you use to heat the mash?

[joe]

RC, do you get your information about Global Warming from the same place you got your information about Iraqi WMDs? Next!

"Air pollution: the wealthier a country is, the cleaner its air." Yes, wealthier countries adopt emissions controls. Good point.

"The solution to dirty air is a thriving economy. Oil is actually cleaner to burn than the really low-tech stuff (plants, coal) that the really poor people burn." And other methods are cleaner than burning oil. My point, we need to move onto those, now that we're wealthy enough. Next!

"sounds to me like reducing the price of oil will reduce the number of petro-dollars going into the Mideast" Not dramatically, not over the long term (since it certainly won't always stay low, and since lower unit prices would just increase consumption), and not enough to spur change among the oil sheiks.

"Personally, I think you'd have to be nuts to think that any people has ever had it any better than the Western(ized) world has it right now." What a shallow argument. You, as a Westerner in the 21st century, are probably safer than a member of any other society at any other time in world history. I guess that means we don't have to do anything about terrorism.

[John]

Kebko,

If you really think oil is running out and you own a bunch of it, the smart thing to do is hoard it and wait until the price gets really high to sell it. If the peak oil predictions were true, the rational thing for oil companies to do would be to stop producing oil and wait to sell until the price goes through the roof as the world runs out of the stuff. Impending scarcity encourages hoarding not selling off. No one seems to be hoarding oil, which tells me that that people who are in a position to actually know, don't buy the peak oil scare tactics.

[joe]

Ken, "If not, then I suppose we can depend on the high price of global warming, air pollution, petro-dollar funded terrorism and a host of other ills." Since these are public harms, with their damage broadly dispersed such that no discreet economic entity will realize enough benefit to justify the cost of fixing them, it is impossible for market actions to correct them.

[Gilbert Martin]

It seems to me that those who keep claiming we're running out of oil (and people have been doing it for decades - and they've all been wrong) aren't taking into account the continual increase in technology that allows us to find and drill for oil in places where we couldn't before.

I seriously doubt that actual total amount of oil trapped upder the total earth's surface is anywhere close to being exhausted. 75% of the earth's surface is covered by water and most of the ocean floor has not been explored for oil.

Chevron just made a major new find in the Gulf of Mexico (my liberal local newspaper printed an editorial actually lamenting this fact as bad news!).

I have no doubt there's additional enormous quantities out there that will be found in the future.

[John]

Gilbert,

I think the oil companies agree with you, which is why they are drilling and selling instead of hoarding, which is the rational thing to do if you think a commodity is about to become very scarce.

[Russ 2000]

I'm still waiting for the Ford Nucleon. Then the terrorists won't have any advantage as every single person will be able to have a dirty bomb.

But since I live in america, the land of the coerced and home of the chicken-shit, I'm sure the Chinese, Japanese, and Indians will be getting one before me.

[Gilbert Martin]

John, indeed so.

The only party doing any significant hoarding is the U.S. government - in the strategic petroleum reserve.

[TrickyVic]

"""I'll brew my own fuel.

What kind of fuel will you use to heat the mash?"""

Dried hemp stalks.

[Isaac Bartram]

TrickyVic

Oh, I see.

My hemp advocate friends tell me that the hemp plant also yields an extremely high grade oil, ideal for lubricating high speed machinery.

Hence you have all bases covered. Mind you the CO2 from burning al those stalks won't help the GW thing, though.

[Isaac Bartram]

TrickyVic

Oh, I see.

My hemp advocate friends tell me that the hemp plant also yields an extremely high grade oil, ideal for lubricating high speed machinery.

Hence, you have all bases covered. Mind you the CO2 from burning al those stalks won't help the GW thing, though.

[kebko]

John - I think you misread my post. I'm saying we'll never get close to a point where hoarding would be rational for producers.

[John]

Kebko,

I don't think it will get to the point of hoarding either. My point was that since there is no hoarding going on right now, people do not believe in the peak oil scenerios.

[Lost_In_Translation]

IMO, oil prices dropping would be a swing effect until stockpiles diminish and then prices would slowly rise to equalize with real growing demand. China and India are real and consuming and Saudi Arabia hasn't drilled any new wells lately so prices are not likely to stay at $1/gal. I believe long term wise $2/gal is still likely.

[Ken Shultz]

Since these are public harms, with their damage broadly dispersed such that no discreet economic entity will realize enough benefit to justify the cost of fixing them, it is impossible for market actions to correct them.

I don't think that stands up to scrutiny. Should we compare the government's response to Katrina to private substitutes? Doesn't the reinsurance market count for anything? Doesn't it do a much better job than government?

...and let's not get started on the piss poor pathetic flailings of government in response to finding gasoline substitutes. Hydrogen vehicles? Ha! If there were more than a handful in existence, how far would they go on a tank of hydrogen? ...and what a joke hybrid vehicles are (supposedly a result of government interference). To what extent do hybrid vehicles solve the problem? ...and, no, gasoline from corn doesn't solve the problem either--dead ends predicated on boosting your poll numbers in Iowa don't help.

[MUTT]

As far as I know, the only hydrogen vehicle in regular, real world use is a muninciple bus (or mayve busses) in Iceland.
The beast had a range of 180 odd miles to a tank. The fuel tank wieghs 2.5 tons.
Put that in your Pinto......

[joe]

Ken,

That was certainly a reaction to my comment, but not really a response. You threw a bunch of crap at me, but you really didn't address the point.

When the harm is large but dispersed, it isn't in anyone's self-interest to take on a large cost to remedy that harm, even if that cost is less than the aggregate cost of the harm.

Do you have anything to say in response to this rather obvious failure of market utopian theory?

[MUTT]

As far as I know, the only hydrogen vehicle in regular, real world use is a muninciple bus (or mayve busses) in Iceland.
The beast had a range of 180 odd miles to a tank. The fuel tank wieghs 2.5 tons.
Put that in your Pinto......
but I would suggest that maybe hydrogen powered stationary power plants are useful. Depends on how much energy goes in to makin the hydrogen, no?

[kebko]

"IMO, oil prices dropping would be a swing effect until stockpiles diminish and then prices would slowly rise to equalize with real growing demand."

Oil is a commodity. In the long term, the price will approximate the marginal cost of production. And, that cost has not tripled in the past 3 years. Mismanaged dictatorships, war, and speculation have caused supply issues. But, there is plenty of oil in the free world that is there waiting to be extracted at costs well below today's price. To the extent that oil companies are willing to drill for it, considering the marketplace risk of having a bunch of irrational dictatorships adding or subtracting from supply based on internal politics, the price will trend toward that cost. Demand has very little to do with the price. Away from current political dislocations in the market, producers will foresee the rising demand & keep selling oil at the marginal cost in a race to increase market share at reasonable profit.

If oil is at $60/barrel & a landowner finds $30 oil on his land, he will get producers there immediately & they will be jumping over each other to get to it. The risk premium may keep prices slightly higher, because so much of the world's oil is now in the hands of unpredictable & inefficient national producers, but if the price keeps at $70, every barrel of $30 oil will be pumped ASAP. But oil won't stay at $70.

[Mark B.]

A couple of notes -

Most of the ocean floor has not been explored for oil, and will probably never be explored because 1)the crustal composition is completely wrong for oil deposition and entrapment, and 2)maintaining drill strings in mid-ocean through 10,000 - 15,000 ft of water is a bitch. The continental shelves remain the best target for oil drillng, and they comprise a far lower percentage of total oceanic cover.

Oil is a commodity, but so is the US dollar, and rapturous predictions of $1.15/gallon gasoline seem to presume that the US will somehow be able to suck up most of the $20 trillion in liquidity it has flooded the world with in the last 7 or 8 years. There may be more oil coming onstream, but it'll be a race to see if the rigs can pump out crude faster than the Fed prints currency and the GSE's leverage debt.

[John P]

If you really think the price of oil is going to sink, then put your money where your mouth is. Is Mr. Bailey shorting oil and energy stocks? Are any of the posters who agree with Bailey shorting energy stocks? With the money you make, you can throw a really groovy party at a coffee shop in Amsterdam. 🙂

[pigwiggle]

?Do you have anything to say in response to this rather obvious failure of market utopian theory??

I don?t see the market failure. I just don?t have a mechanism to charge you for shitting up my air with your car. If there were regulation commensurate with the environmental cost the market would take care of it. That is, if the true cost was as great as the advocates of the anthropogenic theory of GW claim.

But lets talk about your ?public policy utopia?. Do you honestly believe legislators can identify even a reasonable solution, forget the best solution, for clean energy delivery replacements?

[pigwiggle]

And I?ll point out our legislator?s best solution so far is to link the horribly volatile energy market to our food markets. Brilliant.

[Ken Shultz]

When the harm is large but dispersed, it isn't in anyone's self-interest to take on a large cost to remedy that harm, even if that cost is less than the aggregate cost of the harm.

We're not talking about any single entity taking on those costs--we're talking about a bunch of individuals. Hurricanes are a big dispersed problem--and a bunch of individuals paying someone else to take some of the risk is by far the best way to mitigate that big dispersed problem. ...when the government gets involved, we end up with moral hazard (people living where they shouldn't) and in the aftermath we end up with people living in FEMA trailers years after the hurricane blew through.

I think the burden is on you to show why global warming of all things somehow finally trumps the laws of economics. In the past, government has not been effective at managing big dispersed problems like this. ...why is it different this time?

[MikeP]

I think the burden is on you to show why global warming of all things somehow finally trumps the laws of economics.

The worst case scenario of global warming does not trump the laws of economics. It fits perfectly within the laws of economics as a public goods issue: Individuals all acting voluntarily in their own perceived interests create a situation that none of them prefer when compared to a situation that a different ruleset could create. That is the very definition of market failure and is fully compatible with the laws of economics.

In reality it's not so clear cut: global warming will create both winners and losers. But the problem of coordinating the winners and the losers so the former can compensate the latter for their costs is even more complicated than a pure public goods problem.

Katrina is different because it is a private goods problem. It is entirely in the residents' interests to not drown, to insure themselves against losses they can't afford, and to recover their lives after the disaster. The actions they take toward achieving these goals produce benefits that accrue almost completely to themselves while having no negative collateral impact to speak of.

I agree with you that government will do a terrible job at handling either hurricanes or global warming. But at least there is valid economic theory behind its trying to handle the public goods problem. There is a better condition than that produced by market forces alone that the government can try to reach. joe is indeed right that, if global warming has severe consequences, it does represent a market failure.

Nonetheless, government should do precious little about global warming with what it knows at this time, not least because no market is more prone to market failure than the political market.