Toil and Trouble: Is Crude Oil a Good Hedge Against Inflation?

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Yesterday, the price of oil rose to its highest level ever, $115 per barrel. I've been meaning to link to an interesting analysis of the oil price spiral by the Cato Institute's Jerry Taylor in which he asks, "Is There an Oil Price Bubble?"

http://blog.kir.com/archives/oil_well19.jpg

Taylor professes agnosticism on the question of a "bubble," but does cite oil economist Philip Verleger on why money is flowing into commodities right now. According to Taylor:

The best argument against "speculation" in the subsequent price spiral is offered by oil economist Phil Verleger, a fellow I think quite highly of. Verleger believes that, whatever truth there might be to the simple "supply-and-demand" story I offered above, those price increases were greatly exacerbated by a huge move of dollars into commodity futures. That influx of cash was not driven by speculation (classically defined). According to Verleger, it was driven instead by the market recognition of the fact that, historically speaking, (i) commodities provided better returns over long periods of time than provided by equities, and (ii) returns on commodity investments are negatively correlated with returns on equities.

Hence, market actors thought they found an investment vehicle that provided a hedge against volatility in stock markets while also promising excellent long-term returns to boot. Even more interesting for our purposes, however, is the fact that this huge flow of cash into commodity futures (with a very large share of that investment going to oil and gas) came primarily from large institutional investors such as pension funds, university endowments, and the like. Those investments tended to be fully collateralized (that is, institutional investors were not borrowing to invest) and they are buy-and-hold investments for the long term. Neither of those two investment strategies is consistent with the popular vision of what constitutes "speculation."

The most recent Fed actions to combat the deteriorating state of the macroeconomy added even more fuel to the oil price fire. With market actors increasingly convinced that the Fed is willing to entertain inflation in the course of injecting liquidity into the market, investors are looking for investments to hedge against inflation. And what do you know? Returns on commodities have historically been better during inflationary periods than during non-inflationary periods. Ben Bernanke thus sent another strong infusion of cash into commodity futures – again, largely into oil and gas futures.

The increased demand for oil futures drives spot prices because it diverts oil from immediate use into inventories. The stepped-up infusion of oil into public inventories (the Strategic Petroleum Reserve and the emerging state inventory maintained by the Chinese government, for instance) has also contributed to the diversion of oil from immediate use and thus, has further increased prices. Federal mandates for low-sulfur fuel hasn't helped either.

For what it's worth, Verleger does not believe that this infusion of cash into oil futures is sustainable. Returns have been modest and there are simply not enough profits available to support these investments over the long haul. "Speculators" – classically understood – have reacted and will continue to react by leaving the market when returns prove disappointing.

Taylor concludes:

Verleger goes so far as to put the "bubble" tag on oil markets, but again, he does not attribute that bubble to simple speculation. Nevertheless, he predicts a (big-time) crash, but does not predict when that crash will occur. I am less certain about the "bubble" tag (see my introductory paragraph), but I wouldn't bet against it. I think Verleger's narrative regarding the root causes of the oil price boom is better than any other I've run across.

My thoughts on the oil price bubble here. In addition, some musings on the possibility of "political peak oil" here.

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  1. …why money is flowing into commodtieis right now.

    It’s apparently flowing into commodities too 🙂

  2. Meanwhile, Washington State just spent $160,000 in a study that found that nothing illegal is happening with local gas prices. Conclusion: It’s economics.

    “Competition can be particularly influenced by the number of hypermarketers, which are large retailers such as Costco, Wal-Mart and Safeway, that sell gas in the market area,” the study found. “Other contributing factors include wages paid to station attendants, property values and the number of vehicles per station.”

    The study, the second of two parts commissioned by the AG’s office, focused on retail and wholesale gas-price data and included comments generated in a series of public meetings. It found that Washington drivers have cut their gas use over the past five years.

    “We’re importing higher-priced refined gasoline to meet consumer demand, which raises average prices at the pump,” Attorney General Rob McKenna said in a prepared statement Thursday. “Any glitches in the supply system can cause significant price spikes. Meanwhile, crude oil costs nearly four times as much as it did five years ago.”

    […]

    The report said its consistently higher prices may be due to its proximity to Canada, which has much higher gas prices. Canadian drivers are crossing the border to fill up.

    And, as McKenna pointed out, “It’s not illegal to make a profit.”

    […]

    ? Washington has the highest gas tax in the nation. The combined federal and state tax is 54.4 cents a gallon. Unlike most states, Washington depends almost exclusively on the gas tax, as opposed to general tax revenue, to fund state highway maintenance and construction.

  3. whether or not you call it speculation doesn’t seem to matter. What matters is the volume of investment overall. Speculators inflate market prices, which increases returns, which brings more investors, and you get a feedback loop. If large scale investors are entering commodities markets because of the recent failures of other sectors, and their buying up futures inflates the market, which brings more large scale investors…
    who care if it’s ‘classical speculation’ or not; a bubble’s a bubble.

  4. There is no oil price bubble. The price of oil may fluctuate, but it will go up and up for years, even after the global recession due to Peak Oil impacts. For a complete explanation, see: http://www.peakoilassociates.com/POAnalysis.html

  5. Oil is a safe bet right now because there’s no risk of anyone dumping oil onto the market right now. Even a small release from the SPR would hurt enough people to keep them from gambling on oil for a long time. To be effective, you don’t even have to tap the SPR, just the threat of it will puncture the market. Of course, W ain’t gonna to do that, so the party will keep rolling until at least January.

  6. Are we supposed to be conserving oil because it will be much more valuable in the future? Is that what Greenpiece is trying to tell us?

  7. commodities aren’t experiencing a bubble. The dollar is just worth absolutely jack shit which is what oil is priced in world wide.

    in 1964, the last year quarters where made from silver, a gallon of gas cost about a quarter. Now that 1964 quarter is worth about 3.31 because of its silver value. You can still buy a gallon of gas with a 1964 quarter!!!

  8. at 115, oil is about double what it was in 1975 after adjusting for inflation. But, how much of that increase in price is a direct result of the plummeting value of the dollar?

    Or am I shinnying up the wrong tree here?

  9. It’s a bubble as soon as everybody thinks that oil is a good investment. So, as soon as your local trust union starts advertising commodity baskets it’s time to get out.

  10. The price of oil may fluctuate, but it will go up and up for years, even after the global recession due to Peak Oil impacts.

    Oh, this is going to be good.

    *grabs popcorn*

  11. Meanwhile, Washington State just spent $160,000 in a study that found that nothing illegal is happening with local gas prices.

    I don’t care what there dam study says, it is price gouging, plain and simple. That is the reason that gas is expensive. Watch, the price will fall just prior to elections to make the politicians happy, then it will go back up. The only way to bring donw prices is to put a windfall tax on the oil companies because they are making too much money.

  12. at 115, oil is about double what it was in 1975 after adjusting for inflation. But, how much of that increase in price is a direct result of the plummeting value of the dollar?

    Decreased value of the dollar in respect to other currencies is going to be a part of it, but the main part is the simple difference between supply of the refined product and demand.

  13. I don’t care what there dam study says, it is price gouging, plain and simple. That is the reason that gas is expensive. Watch, the price will fall just prior to elections to make the politicians happy, then it will go back up. The only way to bring donw prices is to put a windfall tax on the oil companies because they are making too much money.

    The role of [insert Dem. candidate] is being played by Fred today.

  14. Fred,

    are you serious or just messing with us??

  15. Taktix?,

    When I read “global recession due to Peak Oil impacts,” I thought that maybe I was seeing an exception to the Peak Oil doomsayers: some semblance of rationality.

    But then I followed the link… Gloom, doom, destruction, and doom. And gloom.

    Recession? Ha! You’ll be lucky if coyotes don’t eat your children.

  16. MikeP,

    Recession? Ha! You’ll be lucky if coyotes don’t eat your children.

    Or the neighbors from that Ted Turner prophesy.

  17. It has to be gouging, how else did the price go up 4X in 7 years. Also, the oil companies all charge about the same amount for gas, that means there is collusion going on. We need a windfall tax because it is wrong the amount of money they are making, there has to be a limit.

  18. Its all!

    $117 today – due to the dollar crisis, deficits, peak oil, Mexican shortfalls, BRIC demand, and the Bush War premium.

    If you have money in the markets and you’re not long oil you are not too bright.

  19. MikeP,

    When I see serious people talk about it, they talk about declining or finite resources and energy stores.

    Alarmists use unscientific buzz words like “Peak Oil.”

    Also, I agree with you.

  20. Also, the oil companies all charge about the same amount for gas, that means there is collusion going on. We need a windfall tax because it is wrong the amount of money they are making, there has to be a limit.

    Great stuff. Fred is making a run at being funnier than Neil.

  21. Fred,

    Please figure out how much salary it would take to house you and your family in a minimally furnished 2 room flat and to feed yourselves 2000 calories per person on rice and beans plus some vitamins for good measure.

    Then ask your employer to pay you that much and no more.

    Or do you think gouging is okay for you, just not for someone else?

  22. Peak Oil is a fact, unless you claim that oil “spontaneously generates” – which puts you in the Young Earth Creationist nut sub-class. (the GOP would have sufficed)…..

    Its just a matter of “when”.

  23. Anyone notice the farm sector is seeing 20% growth right now?

    A lot of the oil price hike is attributable to the drop in exchange rates, which isn’t good for consumers but is wonderful for exporters and domestic producers.


  24. Or do you think gouging is okay for you, just not for someone else?

    I’m not gouging, but the 10’s of billions the big oil companies make per quarter is. There is technology for a 100 mpg car, but the oil companies threaten anyone and buy the patents, this has been going on since the seventies. In the seventies we had gas lines, it was fixed with a windfall tax.

  25. Its just a matter of “when”.

    It’s also a matter of “what” and “how much.”

    While $5/bbl oil is running out, there’s lots and lots of shale oil and tar sand oil that becomes economically viable at $70-80/bbl.

  26. Americans need to drive, we need to drill anywhere and everywhere to get more cheap oil. We need cheap oil, but the oil companies wont allow it.

  27. Peak Oil is a fact…

    No… peak oil is a fact.

    Peak Oil is a wildly inaccurate prophesy founded on a phenomenally poor understanding of resource economics.

  28. Shrike, yes, given the fact that oil is not a renewable resource, there will someday be a peak in production. It is just a matter of when. But that ‘when’ is a very big factor in how alarmed one should be. the problem with ‘peak oil’ theory is that the alarm is based on the assertion that the peak will coincide with the midpoint of depletion of the resource. There is absolutely no data to back up this assertion.

  29. Scientists in the seventies found technology in a UFO to make a car that ran on water. The oild companies use radio waves to keep us from thinking about it.

  30. If you have money in the markets and you’re not long oil you are not too bright.

    I remember my family’s broker telling us the same about Internet stocks in 1999. My dad was retiring and I insisted he put his retirement in muni bonds instead.

    Dad has since forgiven me for everything bad I ever did.

  31. Let’s put it this way, MikeP.

    Cheap Oil is a relic.

  32. Fred,

    In what way are you not gouging? You didn’t complain about my example, which means you are employed and making something more than the half of minimum wage that would pay your basic costs of living.

    That means you are charging your employer a market price for your employment rather than the cost of your employment.

    If that’s not gouging, what is? That’s what you are accusing the oil companies of.

  33. The oil companies are secretly developing a virus that will make people need to drink a barrel of oil every day. Then when we die, they will drill into the cemeteries and sell the oil again.

  34. “I remember my family’s broker telling us the same about Internet stocks in 1999. My dad was retiring and I insisted he put his retirement in muni bonds instead.” – TallDave

    Copying technology requires a $200 PC.

    Energy alternatives are a different matter.

    Complete strawhorse.

  35. Anyways, let’s all hope cellulosic ethanol pans out soon. I’m seeing a lot of encouraging news in that regard; there are at least 3 large processing plants being built.

  36. Energy alternatives are a different matter.

    Yep, I remember how the Internet was “different” too.

  37. Cheap Oil is a relic.

    I don’t deny that. I do deny that “oil depletion will result in global economic collapse and population decline” or that “multiple crises will cripple the nation in a gridlock of ever-worsening problems. Within a few decades, the U.S. will lack car, truck, air, and rail transportation, as well as mechanized farming, adequate food and water supplies, electric power, sanitation, home heating, hospital care, and government services” as the Peak Oil analysis cited above foretells.

  38. Pinette,

    I never said that we passed the high point of PRODUCTION. I don’t think we have.

    But the demand curve is rising much faster than the production curve.

    Simple economics -thus the price rise.

  39. shrike, yeah but now you are no longer describing ‘peak oil’

  40. But the demand curve is rising much faster than the production curve.

    And how will producers respond?

  41. Pinette.

    Oil production will struggle along at +/- 10% of capicity.

    Demand is only going up!

    I am not a “dieoff” guy – I am an investor.

    Bush shitting on the dollar, war x 2, and demand means that crude is headed higher.

  42. Anyone who remembers cheap oil (or gold and silver backed currency) is a relic too.

    http://www.youtube.com/watch?v=pIkbgIb940k
    cut and paste or click on my name

    Call me a relic, call me what you will
    Say I’m old fashioned, say I’m over the hill…

    However, as I get older I’m finding it harder to remember a time when the constitution wasn’t worth the parchment it is written on.

  43. I hate to give you even more bad news, shrike, but if you plot out trend lines from 1895, you can plainly see that we are in the midst of a crippling shortage of whale blubber. It’s simply unsustainable. If you’re smart, you’ll find a way to profit from the barrels full of horse manure that will be piling up in the streets of New York City. That’s where the smart money is.

  44. “And how will producers respond?” – TallDave

    Bribing Cheney?

    I don’t know. You are the GOP lapdog. You tell me.

  45. Shrike,
    All true, except for the part about production struggling at 10% capacity.
    none of which has anything to do with Peak Oil.

  46. Sorry shrike, you fail Econ 101.

  47. pinette,

    I don’t think we disagree. I know that PetroBas is kicking ass in South America.

    The Saudis, Canada, Mexico, and Norway are struggling to meet demand while the iron is hot.

    This is NOT a speculative bubble – like the tulip or stamps.com – as much as GOP-types would like to make it.

    Of the $117 from $20 in 1997…

    $20 Bush war premium
    $30 Bush deficits
    $47 demand

    = $97.

    I know – the Bushpigs don’t like that – it hits the “elites” like Obama hardest – but they are fucking liars anyway.

  48. You not only fail Econ 101, you are sent to the principal’s office for a spanking.

  49. “Sorry shrike, you fail Econ 101” – TallDave.

    That coming from a GOP lapdog?

    You’re a fucking idiot.

  50. If you’re smart, you’ll find a way to profit from the barrels full of horse manure that will be piling up in the streets of New York City.

    Oh, I think he’s cornered the manure market already.

  51. Ahem. When did “Peak Oil” become a proper noun?

  52. “The only way to bring donw prices is to put a windfall tax on the oil companies because they are making too much money.”

    Uh Huh – because increasing the oil companies expenses is a really good way to get them to lower their prices.

    No doubt that strategy works well on planet Bizzaro but here on earth the results are somewhat different.

  53. Ahem. When did “Peak Oil” become a proper noun?

    I am still wondering when Spokane became America’s heartland…good luck on getting an answer to yours.

  54. Re: Fred @ 4:14pm

    That settles it. Fred is a parody. Nobody with the brains that God gave a goose would spew such foolishness.

  55. “Of the $117 from $20 in 1997…

    $20 Bush war premium
    $30 Bush deficits
    $47 demand

    = $97.”

    Really.

    Since you are “smart” enough to divine all driving compenent factors of the current price of crude, I presume you were also smart enough to invest heavily in the related commodity futures contracts to fully reap the benefit of all that run up in price since 1997.

    I rather doubt that’s the case.

    LOL

  56. No, Gilbert, I think he’s really onto something here.

    I’ve noticed Google is making a lot of money, while various things on the Internet are expensive. If we tax Google, the Internet will be cheaper!

    And with a tax on Porsche, soon we could all be driving luxury sports cars (which will be cheap to fuel thanks to the oil campany tax).

    It all seems so obvious in retrospect. The only reason we’re not all living like kings is that there aren’t enough taxes!

  57. “That settles it. Fred is a parody. Nobody with the brains that God gave a goose would spew such foolishness.”

    On the other hand, I think he might be on to something with his 4:17 and 4:21 posts. Although I’m not sure he’s seeing the big picture, namely that this oil-guzzling virus is almost certainly of alien origin.

  58. The price of gas isn’t that high:

    This makes one think, and also puts things into perspective:

    * Diet Snapple, 16 oz, $1.29 … $10.32 per gallon

    *Lipton Ice Tea, 16 oz, $1.19 … $9.52 per gallon

    * Gatorade, 20 oz, $1.59 ….. $10.17 per gallon

    * Ocean Spray, 16 oz, $1.25 . $10.00 per gallon

    * Brake Fluid, 12 oz, $3.15 …. $33.60 per gallon

    * Vick’s Nyquil, 6 oz, $8.35 … $178.13 per gallon

    * Pepto Bismol,4 oz, $3.85 . $123.20 per gallon

    * Whiteout, 7 oz, $1.39 ……… $25.42 per gallon

    * Scope, 1.5 oz, $0.99 ….$84.48 per gallon

    And this is a REAL KICKER…

    * Evian water, 9 oz, $1.49 .. $21.19 per gallon! That’s $21.19 for a gallon of WATER!! And buyers don’t even know the source (Evian spelled backwards is Naive.)

    LAST, (but not least):

    Ever wonder why computer printers are so cheap? So they can rip you off for the ink refill cartridges!!? Someone calculated the cost of a gallon of ink in all those refills at.

    $5,200 a gallon .

    That’s right…$5,200 A GALLON.

    So, the next time you’re at a fuel pump, be glad your car doesn’t run on water, Scope, Whiteout, Pepto Bismol, Nyquil or, (God forbid), Printer Ink.

  59. “It all seems so obvious in retrospect. The only reason we’re not all living like kings is that there aren’t enough taxes!”

    Congratulations.

    Your keen insight now qualifies you to be a top tax policy advisor to Barak Obama.

  60. TallDave and Gilbert Martin,

    Your posts indicate that you maintain that $117 oil is some sort of “crazy accident” or “speculative bubble”.

    Like the market for the most IN DEMAND fungible commodity in the world is suspect to gigantic manipulation? You two are shills for the GOP.

    You both won’t own up to the facts – that the disaster in Iraq, the Bush deficits, the repeated gaffes in foreign policy, the refusal to confirm basic economic principles – all lead to rampant inflation and GOP losses.

    You are deniers/liars of the worst sort – not even fit to lick the semen off the floor of Cheney’s flophouse for minimum wage. At least he profits from his servitude. You two have been gypped.

  61. Ever wonder why computer printers are so cheap? So they can rip you off for the ink refill cartridges!!?

    To be fair to printer companies, this pricing model allows them to discriminate among their customers to glean more of the consumer surplus. The effective price you pay for printing is proportional to your quantity of printing. This is not so much a rip off as a democratization of printing, as even people who do very little printing can now afford it.

  62. The oil companies are making us pay too much for printer ink in order to make oil seem cheap. This is because they got laws passed so printer ink is made from aborted fetuses. Every time you print something, their tiny souls scream in agony (that’s the high-pitched sound you hear).

  63. Your posts indicate that you maintain that $117 oil is some sort of “crazy accident” or “speculative bubble”.

    No, just the result of huge demand from China coupled with a slow cycle-up time for production and a fall in the dollar. The deficits are small as a % of GDP, and the wars have little to do with oil prices (Iraq is producing more oil now than in 2003).

    basic economic principles

    Which you clearly do not have slightest grasp of.

    And I haven’t licked any Cheney flophouse semen, but I hear it’s delicious this time of year.

  64. “The oil companies are making us pay too much for printer ink in order to make oil seem cheap. This is because they got laws passed so printer ink is made from aborted fetuses. Every time you print something, their tiny souls scream in agony (that’s the high-pitched sound you hear).”

    Funny! Fred got the Aborto-Shit, Oil, and an appeal to the heartland into one comment.

    Fox News is waiting, pal.

  65. Bill, I appreciate your intent, but comparing prices of oil to other liquid commodities and products is, well … ludicrous.
    It’s like saying paying $50,000 for a four-cylinder sedan is no big deal because, “Look at what the moon rover cost!”

  66. Thank you shrike. It’s too bad everyone in this thread isn’t smart like you and me.

    They will get theirs when Xenu arrives.

  67. “Your posts indicate that you maintain that $117 oil is some sort of “crazy accident” or “speculative bubble”.

    No, my post indicates that I maintain that your dollar cost “itemization” of the “causes” of the current price of crude is merely some bullshit that you just made up and you aren’t the least bit capable of proving one bit of it.

    But that’s not surprising. You are obviously some sort of leftist, so you’re operating with a severe mental handicap from the get go.

  68. With that Peak Oil Associates report and 75 cents, you could get yourself a cup of coffee.

  69. @Jaime Kelly

    Actually I was comparing the price of a gallon of gasoline with a gallon of other liquid commodities routinely purchased by consumers.

  70. That settles it. Fred is a parody. Nobody with the brains that God gave a goose would spew such foolishness.

    to bad you did not pick that up before this:

    Fred | April 18, 2008, 4:17pm | #
    Scientists in the seventies found technology in a UFO to make a car that ran on water. The oild companies use radio waves to keep us from thinking about it.

  71. “No, my post indicates that I maintain that your dollar cost “itemization” of the “causes” of the current price of crude is merely some bullshit that you just made up and you aren’t the least bit capable of proving one bit of it.” – Gilbert

    But – there is a cause. What the hell is it?

    I supplied a plausible answer.

    You did not.

    Go on believing a market correction is in order that will take us back to $20 crude.

    You are a GOPer – hell you believe in Creationism. You have proved irrational.

  72. mobile-
    Welcome to 2008. I’ll get you some gasoline and banana peels for your DeLorean.

  73. I’d like to point out the dearth of gas riots in America. Maybe we’re really not so stupid after all and we actually get economics and capitalism. Or we’re apathetic. Either way, peace is good. I was shocked a year ago when it took $30 to fill my car. Now it takes over $40. I swipe the card, shrug and scratch myself. Receipt? Yes, please. What shall I cook for dinner?

  74. Also, the oil companies all charge about the same amount for gas, that means there is collusion going on.

    It’s a commodity. The price gold kind of does the same thing. Funny how that works.

  75. “I supplied a plausible answer.”

    No you didn’t. You just made some shit up.

    “Go on believing a market correction is in order that will take us back to $20 crude.”

    More bullshit. I never said anything about oil going back to $20.00 – or made any price prediction at all.

  76. I’d like to point out the dearth of gas riots in America

    I don’t like the price of gas any more than anybody else. But I’m old enough to remember when you couldn’t get any gas (cue The Kinks–Gallon of Gas) unless the day of the week matched your license number, and then you could sit in a line around the block for your ration of five gallons.

    But the price was good.

    Like the old story about the woman complaining to the butcher about how much more his pork chops were than the shop down the block. When asked why she didn’t buy from the guy down the street she said…..

    Because he doesn’t have any pork chops.

    Cheap gas is worthless if there ain’t any. And the 1970’s were an excellent illustration of just how that works.

  77. Actually, I think I will cue up the Kinks, acoustic version with the killer blues solo. Thanks to someone pretty cool for turning me on to it.

    Here’s the regular one.

    Can’t afford the gas for my brand new limo regards, TWC

  78. More bullshit.

    Like I pointed out earlier, he’s cornered that market.

  79. Favorite phrase I hear in oil price discussions: “All of the oil companies charge the same price for oil” or “Country X is charging too much for oil”.

    Side splitting stuff! Just like all those people on eBay “charging too much” for their stuff!

    Where is the call to go beat up the rich people and take their stuff? I must have scrolled past that one, it has to be in here someplace.

  80. And how will producers respond?

    I imagine that they will produce more, offer less oil at a given price, or some combination of both.

  81. Are we supposed to be conserving oil because it will be much more valuable in the future? Is that what Greenpiece is trying to tell us?

    No, that is what prices are telling us.

  82. The only way to bring donw prices is to put a windfall tax on the oil companies because they are making too much money.

    Raising the costs of producing oil is going to lower prices?

  83. We need a windfall tax because it is wrong the amount of money they are making, there has to be a limit.

    Do we also need a windfall tax on the money celebrities make by starring in movies?

    Or are they somehow special?

  84. There is technology for a 100 mpg car, but the oil companies threaten anyone and buy the patents,

    If they bought patents back in the ’70’s, then the patents would have expired by now.

    So why is there no mass production of these 100 mpg cars that are now in the public domain?

  85. No… peak oil is a fact.

    Peak Oil is a wildly inaccurate prophesy founded on a phenomenally poor understanding of resource economics.

    Explain the difference between peak oil and Peak Oil.

  86. peak oil: The notion that oil is a limited resource and that therefore one day in the near or far future less oil will be produced than the day before.

    Peak Oil: The notion that peak oil will bring about the end of civilization as we know it.

  87. What can we expect from peak oil?

    How does Peak Oil conflict with what is observed with economics and society?

  88. What can we expect from peak oil?

    A higher price. Should we expect anything else? Certainly there is nothing particularly remarkable about a peak in production or consumption. As one example, the amount of gasoline consumed in California has been declining for two years running. What does that mean in any larger sense? Not much.

    How does Peak Oil conflict with what is observed with economics and society?

    Peak Oil hysteria violates pretty much every economic precept you can name. Its most grievous error is in failing to understand that effects happen at the margins. The thought that a production peak would raise prices enough to collapse the entire economy depends on the fallacy that everyone will respond to a shock identically and equally. But — barring idiotic government action that forces everyone into such lockstep behavior — the reality is far different. Peak oil production means that oil production will decline in the future: It does not mean that it will instantaneously end. In actuality as prices rise, those at the high margin will move toward alternate sources of transportation energy, and those at the low margin will find alternatives to transportation. Those in the middle will suffer a higher price for oil, but will not suffer shortages.

    How does Peak Oil conflict with what is observed in society? Well, societies prefer not to collapse. Peak Oil effectively counts on them to collapse.

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