Has the 'Peak Oil' Tipping Point Arrived?

The concern with peak oil may be overblown, but there are still ways to prepare for it.

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Robert Hahn is director of economics at Oxford's Smith School, chief economist at the Legatum Institute, and a senior fellow at the Georgetown Center for Business and Public Policy. Peter Passell is a senior fellow at the Milken Institute in Santa Monica and the editor of its quarterly economic policy journal, The Milken Institute Review. They co-founded Regulation2point0.org, a web portal on economic regulation.

"Peak oil" is one of those ideas that used to be the province of commodity speculators and zanier environmentalists, but is now entering the mainstream of the energy policy debate. The idea is simple on its face: For one reason or another (which one does it matter), we are approaching a limit to global oil production; thereafter, it must fall. Does this magic moment/number matter? Yes, if, as many suggest, the post-peak era is bound to be one of sharply higher energy prices that disrupt the global economy or, at very least, reduce the potential for economic growth just when the globe's have-nots seem to have a chance of joining the middle-class.

Like many other economists, we think the concern with peak oil is overblown. (For a lucid explanation, check out this jargon-light article by Oxford University's Dieter Helm.) But to cut to the chase, the explanation is straightforward: Markets generally adjust to supply and demand changes in ways that facilitate adaptation. We'll concede, though, that a smooth adjustment is not guaranteed—that the revelation of peak oil could lead to price spikes that generate significant economic pain.

[See a collection of political cartoons on gas prices.]

Which brings us to the real subject of this column: a recent insightful paper in the prestigious journal Nature, in which very senior scientists James Murray and David King suggest that the day of reckoning really is approaching—that "oil's tipping point has passed." (For the record, Murray and King are colleagues of Hahn's). They argue that we are running out of oil accessible at low cost, and that other fuels may not fill the gap left between energy supply and demand at acceptable prices. The solution, they conclude, is to get serious fast about energy efficiency, alternatives to fossil fuels, and the containment of climate change.

Their description of the problem is first rate, but their policy analysis is less developed, likely because Nature imposes tight word constraints on authors. Murray and King suggest a bevy of policies for dealing with peak oil. Among them: oil taxes, energy conservation mandates, the promotion of nuclear power, lower speed limits, tax credits for renewables, and… you get the idea.

[Check out the U.S. News energy blog.]

While their concerns are justified, we think they may conflate two very different problems—and in the confusion, risk both waste and overkill. If climate change is the issue, the simplest, most efficient fix is to tax carbon emissions. If excessive energy use is the problem, the way out is to tax energy use. No muss, no fuss (in theory, anyway); just set taxes equal to the negative spillovers created by the harmful behavior.

If a sudden jump in the price of energy is the concern, then the solution is more complicated. Still, something less than a regulatory war on energy use would be called for. One approach would be to expand buffer stocks of fuel, like the U.S. Strategic Petroleum Reserve. Another is to deepen the futures markets for energy, making it easier for enterprises (public and private) to hedge against the risk of a price spike. In any event, the bottom line is the same: policymakers should choose the right tool for the right problem, carefully weighing the potential benefits against the likely costs.

[See a collection of political cartoons on energy policy.]

We assume that the authors prefer a smorgasbord of fixes because they are all too aware that the world of public policy is not as straightforward as economists would like it to be. (King would know: He served as Prime Minister Tony Blair's chief science adviser). But throwing a bunch of proposals at the ceiling and seeing which ones stick seems to us a recipe for waste. Somewhere along the line, somebody has to set priorities—preferably on the basis of what delivers the most bang for the buck/pound/euro.

There is, by the way, another element to the peak-oil story that deserved more attention in the Nature piece. If we are running out of fossil fuels faster than we thought, carbon dioxide emissions may be lower than some climate models suggest and climate change may be a less immediate danger. Perhaps there is a small silver lining in this latest limits-to-growth scenario after all.

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