Thanks so much for your reply. I also discovered Austrian economics after peak oil. I only stop lurking at mises.org when energy is discussed.

I agree the “state as a saviour” ideology is probably the most dangerous element of the potential resource constraints. There is so much waste and wealth we can certainly afford to tighten our belts without starving or freezing to death. You are right this is a battle that can only be won in the free market (because each solution will probably be tailored for your specific locale)

I would also love for said Austro-Thermodynamics book to exist. I also desperately want to be wrong. However I don`t know if either will come to pass in time.

Thanks again for your advise, I spend so much time debating the issue yet I rarely get to take home messages that benefit my understanding of the situation.

Doug

Michael – I’ll be honest, I can’t work out what I think about this, its very complex. But I don’t think the issue is as simple as you seem to be suggesting. As you probably know, Deffeyes and many others argue that the production must start to go down because although there is without question both lots of oil left and unknown technological improvements to come, this won’t make up for the massive EROEI we have had so far and to which our entire structure of production is tightly coupled.

Now, I don’t think any of the people I’ve read making this argument understand real economics – they make the kind of projections which are, for the reasons put forward by Julian Simon, often just absurd. Mainly they don’t give enough weight to the effect rising prices will have on the consumption, generation and investment in the various energy resources. The book “Energy: the Master Resource” (available from LvMI ) has a very good discussion on this topic – and they don’t seem to envisage any energy shortages. But I think their analysis is just a little lacking at times and on balance I would still say that the Peak Oil claim has some merit, but that the consequences are less serious than those put forward by the “we’re all definitely going to die” brigade – any serious problems to come will be a result of politics, not physics.

So, everything you say from “You know and I know that government has interfered in various ways: taxes, tariffs, energy…” to the end I agree with. The problem is that your comment answers a different question – you’re essentially saying that had a free market been in place, we’d have no problem. And I couldn’t agree with you more. But it hasn’t. We have an economy distorted beyond measure by the government involvement in the prices and provision of energy – although it is certainly more expensive in real terms to extract now than it would be in a free market, this is – as Kel pointed out above – true of basically everything due to the massive credit expansion of the last few decades.

My opinion – on which I am happy to be proved wrong – is that government involvement has reduced the direct price of oil (ie. at the pump) relative to other items massively causing a humungous misallocation of resources across the population. (Some more abstract theories push a concept that the cheap oil essentially had temporarily displaced gold as backing for the dollar through the 20th century and this is now collapsing – and I think there is some merit in this viewpoint).

So if true, even if we got a free market tomorrow, a massive adjustment would be required to the “real” price even if we can in fact increase the EROEI through the technological improvement this change brings about, and there is inevitably some delay in this even in the very best circumstances. If you’re saying during this period of readjustment that there will definitely be no reduction of our standard of living because people will adjust to the new circumstances, then this doesn’t make any sense to me – you could argue recessions would never happen on the same basis. The capital structure of the extraction and provision of energy is surely as long and complex as anything else in the economy and a readjustment to rising (ie. untampered with and therefore “correct”) oil prices would expose huge amounts of this structure as malinvestments. The EROEI and cheapness of oil comes from decades of innovation – order of magnitude increases in efficiency of shale oil extraction or nuclear energy might come in 5-10 years, or might take decades? I’m not qualified to even guess on this – but with governments in charge, I’d say the latter not former.

As for thermodynamics, take one concrete example. George Riesman says in his book “Nor is there any fundamental scarcity of energy in the world. More energy is discharged in a single hurricane than mankind produces in an entire year. Nor is the supply of energy in the world reduced in any way by virtue of the energy man captures from nature. Heat from the sun provides a constantly renewed supply that is many millions of times greater than the energy consumed by man. The total quantity of energy in the world remains a constant, for all practical purposes incalculably in excess of what mankind consumes, and will remain so until the sun begins to cool.”

Whilst these statements are basically true, the context in which they are presented and the phrasing suggests there are some limits that GR does not understand. The “amount” of energy is not the point. It seems fairly intuitive even to someone who knows nothing about thermodynamics that you couldn’t power a refrigerator by using the heat coming from the back to power a heat engine and thereby have it run without a power socket. But unless someone understands exactly the theoretical reasons for this (and Riesman’s comments here suggest he does not) then I’m not really interested in their comments on the energy available in the world. If you have a process that has an EROEI of less than 1, then the second law of thermodynamics says that you simply must have another process which makes up this shortfall – and not that there will be consequences if you do it, it is fundamentally impossible. So not everyone can be importing energy, and who is going to use less than they produce? Who, seriously – any guesses?

Moving from a process with an EROEI of around 50 to processes working at one tenth of this means that there are a great deal of things we do now that will, should we have to live on oil from tar sands and shale, are right now impossible and therefore require massive adjustments in our way of living or extremely rapid technological innovations, both of which _could_ result in a drop in our standard of living for some period of time. Would weeding out the present government-generated inefficiencies mean that after the adjustment period we have more energy than before? Maybe – Julian Simon is certain of this, maybe he just understands this better than me. But an adjustment period is still inevitable. And this is best case scenario – in fact, governments will be sticking their oar in and taking it over from the market more and not less. My guess is at least some problems from this over the next 10-20 years.