“To act in accord with a myth is the distinctive characteristic of all living things”.
─Nicolas Georgescu-Roegen
Introduction
This paper is an upgrading of some observations in my forthcoming book ENERGY AND ECONOMIC THEORY (2015), and earlier in a talk at the Australian National University. That book should have been available a few years ago, but on the basis of what is going on in the energy economics world at the present time, I have a desperate urge to say a few things as soon as possible.
However before beginning I want to mention the late Professor Georgescu-Roegen, who provided the quotation just under the title of this contribution. If the economics section of the Nobel committee were composed of scholars instead of sycophants, Nicholas Georgescu-Roegen would have been certain to receive a prize. Occasionally described as “one of the most remarkable and profound thinkers in economics”, his profundity – like that of many other potential recipients of a ‘Nobel’ – was almost certainly an affront to the gentlemen who select the economics laureates.
I am also willing to believe that present day committee members are so badly educated that they neither know nor care who Professor Georgescu-Roegen was. Among other reasons, this might have been why the physics superstar Murray Gell-Mann once said that winners of the economics ‘Nobel’ should not be allowed to sit with the other laureates at the awards ceremony, although I will leave it to readers to propose where the new economics laureates should have been seated before receiving their accolades from the hand of His Majesty, the Swedish king..
A serious theoretical myth
Many years ago I gave a very short course in energy economics at Griffith University (Brisbane, Australia), during which I had a rather remarkable experience. I put a fairly complicated mathematical expression on the blackboard, performed some operations, and obtained a well known result. Then I put a fairly simple relationship on the board, and easily derived the same equation. The problem was that while pausing for a few seconds before formulating some sarcastic remark about these two outcomes, I unexpectedly found myself thinking that the theoretical background of academic energy economics (at that time) was seriously overvalued, and the same could be said about some of the things I had taught my students on several occasions during the previous 2 or 3 years, or earlier.
Fortunately, my students at Griffith had some acquaintance with the conventional literature, and so it was possible for me to discuss various meaningless analytical results at some length without drawing any protests. As some of you may have guessed, when it comes to meaningless results the first name in my mouth is usually that of Harold Hotelling, a brilliant American economist, who as far as I am concerned went off the rails with his theory of how the price of exhaustible resources was determined.
That must have been about 20 years ago, maybe longer, but the astonishing thing is that on at least a half dozen occasions in 2014, I opened some sort of publication to find myself once again staring at Professor Hotelling’s famous equation, which suggests that the price of oil cannot rise until the same thing happens with the rate of interest. Simply mentioning this state of affairs causes me to think once more of a useful adage from the American navy: “On every ship there is someone who doesn’t get the message”, only in this war the persons who haven’t gotten the message are on the bridge, directing operations and editing ‘scientific’ publications, and some of them are doing everything they can to make sure that the good ship ‘energy economics’ is not on a voyage of discovery.
The situation is worse than not getting a message. I gave a talk on oil in the Danish parliament about 15 years ago, and during a coffee break had a conversation with a man whose work I had mentioned in my book on natural gas. I told him that I was going to return to mathematical economics or finance because I had become completely and totally dissatisfied with a large part of the theoretical literature of energy economics, and it had become almost painful for me to teach that subject. He replied by saying that if he didn’t teach his students the conventional wisdom, by which he meant the conventional nonsense, then it might turn out to be even more painful for him, because unfortunately there was nothing else available to give them.
I’m pleased to report that much of the irrationality in the exhaustible resources literature has disappeared, though far from all of it, and in any case it has become possible for teachers like myself to enter a class or seminar room with a smile on my face, knowing that I will not be asked to explain extremely relevant concepts with equations that belong in a comic book or a movie magazine. On the other hand, we still have to confront some elephantine myths about virtually every topic in energy economics.
A new day for oil?
Take for example oil. The issue is no longer some trivial and useless mathematics, but the strange behaviour that has been launched by the movers and shakers in OPEC. Having come to appreciate the supreme importance of oil, how it functions as a benchmark for the world’s energy systems, and PERHAPS – PERHAPS – the ulterior significance of shale oil, OPEC has informed the oil importing countries that in the future they will turn the setting of the oil price over to the market.
That sounds beautiful – perhaps like something you heard in economics 101 OR 201 lectures at the University of Chicago when Milton Friedman was dispensing what he thought was the one and only truth, which included claiming that OPEC was a lost cause, and the oil price was on its way to five dollars a barrel. Accordingly, this is the place to declare that the aggregate of OPEC producers have no intention of allowing the market to determine anything important about oil if they can help it, and eventually this might be true about natural gas. Why should they? Would you if you were in their place?
When the oil price touched $147/b in 2008, OPEC supported the myth that it was due to speculation (i.e. gambling) and not fundamentals (i.e. supply and demand) that was the villain. That allegation suited the fancy of a finance professional named Michael Masters, who appeared before a sub-committee of the United States Congress, and assured those ladies and gentlemen that it was speculation and not buying and selling on the physical oil market that was ruining the lives of American motorists. A star of Fox News star, Mr Bill O’Reilly, also took a part in this discussion, informing his many admirers that it was “little guys in Las Vegas” who created the problem.
If you don’t believe anything else in this exposition, please believe that neither Mr O’Reilly nor the persons he breaks bread with on a daily or annual basis had the slightest idea about the functioning of the world oil market at that time. That price – $147/b – was due to the demand for physical oil outrunning the supply, and was sufficient to initiate the most severe economic and financial meltdown since the great depression. Moreover, while it was not clear to many observers, it was clear to me that if the oil price villains had been in Las Vegas, or the financial district of New York, President Bush could have taken the morning train or a Greyhound Bus to Wall Street, or jetted to Las Vegas, and using the very great powers of his office, put things right before lunch was served.
Instead he climbed into Air Force One and flew to Saudi Arabia, where he asked the Saudi King to produce more oil, and preferably sooner rather than later. That ‘hat-in-hand’ episode was concluded very shortly after the delivery of the president’s request, with King Abdullah thanking him for his concern, and wishing him a safe trip home.
The oil price soon began to decline, but unfortunately this failed to restore the health of the international macro-economy. Some non-thinkers and self- appointed experts said that it was headed for five or ten dollars a barrel, but in reality it was headed for $32/b, at which point OPEC stepped in with a reduction in output the price began to climb again. IT WAS THIS BEHAVIOR THAT SHOWED THE POWER OF OPEC, and that power still exists. It exists and for that reason the decision to commence the export of (light) American oil – although the U.S. is still an importer of oil and natural gas – does not make the slightest economic sense.
Output in that country peaked at the end of l970 at a value of about 9.5 mb/d – which is approximately the present output of Saudi Arabia and Russia (and the U.S.). When that peaking took place there was still an enormous amount of oil in the United States, or directly offshore, but even so production dropped to 7.5 mb/d! When the giant Prudhoe Bay field in Alaska came on line, the total output in the U.S. turned up, but unfortunately the previous peak was not attained, and eventually production began to decline again. Fortunately though shale oil entered the picture, and now U.S. oil production is in the same category as that of Saudi Arabia and Russia.
The question then becomes, where will U.S. production go in the future? After examining the statistics for reserves, reading about the rapid depreciation/decline of shale deposits, and looking at the ‘flattening’ of some shale production curves, I have decided to believe that before this decade is over, or shortly after, the U.S. shale ‘boom/revolution’ could be history.
Conclusion
The final question today is what is this short paper all about. It is about myths that some people are happy to listen to, believe and circulate. For example myths about the advantages to be gained from the export of oil from the U.S. When we look at the mistaken pronouncements about the amount of oil in that country made by people who should know better, it seems clear that somebody – or a lot of somebodies – do not get the message. Given future natural resource requirements by the already overpopulated U.S., the question is not whether oil should be exported, but also everything necessary should be done to limit or prevent the export of other natural reserves, to probably include some non-fuel minerals.
References
Banks, Ferdinand E. (2015). Energy Economics: A Modern First Course. (In process.) (2015).
Energy and Economic Theory. London and Singapore: World Scientific (2007).
The Political Economy of World Energy: An Introductory Textbook. London and Singapore: World Scientific. Cooke, Ronald R. (2009). ‘The clean
energy act is not going anywhere’. 321 Energy (July). Huber, Peter W. (2009).
‘Bound to burn’. City’ Journal (Spring). Hutzler, Mary J. (2009).
‘The Pickens plan: is it the answer to our needs?’ IAEE Energy Forum. Lounsbury, John (2009).
‘Natural gas: another great thing from a lobby near you.’Seeking Alpha (August 02). Moller, Jorgen Orstrom (2008).
‘The return of Malthus: scarcity and international Order’. The American Interest (July/August).
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