Be Wary of the Gloom and Doom Predicted by Energy 'Models'

A grossly incorrect analysis of natural gas by the Carter administration shows the problems with depending entirely on models for energy policy.

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Michael Lynch is the president and director of global petroleum service at Strategic Energy & Economic Research.

The debate about energy policy and technology (or fuel) choice often involves well-meaning, fresh-faced young analysts who don't notice how old-timers like myself wince when they cite "models" and "analysis" as supporting a position. I actually worked on a model of the world oil market written on a mainframe computer, and remember when, in the 1970s, economic models were treated with near-godlike awe. There was even a rubber stamp made that (facetiously, presumably) said, "This came from a computer and is not to be questioned or disbelieved. "

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

In my library, there is a copy of September 1977 report from President Jimmy Carter to the Congress in which he stated, "Natural gas has become the nation's scarcest and most desired fuel." The report supported a near-5,000 mile pipeline to the west coast and Midwest that would bring Prudhoe Bay's gas to market for a mere $25 billion dollars (adjusted for inflation). This would provide economic benefits to the country, because the expert analysis projected that natural gas prices in the lower 48 would increase by 2 percent per year above inflation.

In fact, in the intervening three and a half decades, natural gas has largely been in surplus and nearly always below the projected prices; at present, prices are about one-fifth the level that the Carter administration projected. The gas is still on the North Slope and does not appear economically competitive any time in the near future, which shows how badly wrong even extensive analysis can be.

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Two mistakes were at fault behind these incorrect projections. The first, still common, is a Malthusian belief in scarcity based on an inability to foresee the precise source of future supplies, and the idea that since resources are finite, they must be running out right now and therefore prices should rise consistently. Yet, as M.I.T. resource economist M. A. Adelman noted, "Diminishing returns are opposed by increasing knowledge, both of the Earth's crust and of methods of extraction and use. The price of oil, like that of any mineral, is the uncertain fluctuating result of the conflict." 

Additionally, the natural gas scarcity which occurred in the 1970s was the result of federal price controls on natural gas. These discouraged drilling and left supplies short when soaring oil prices increased demand for what had become a much cheaper fuel. Yet most analysts misinterpreted these shortages as signs of long-term resource scarcity, rather than policy intervention, a problem that is still with us during the current debate.

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