Monbiot’s Mistake

July 3, 2012

George Monbiot has today announced his discovery of economics. Well, that’s perhaps not precisely what he meant, but it’s certainly what this means:

“The constraints on oil supply over the past 10 years appear to have had more to do with money than geology. The low prices before 2003 had discouraged investors from developing difficult fields. The high prices of the past few years have changed that.”

You see, there’s no such thing as supply-and-demand as discrete quantities. What there is is ‘demand-at-a-price’ and ‘supply-at-a-price’. Until oil passed the $70/barrel price – and looked to remain there for the long term – there was no additional supply, because there was no demand for oil at $70/barrel. Now the market price is reaching over $100/barrel, there certainly is.

Monbiot is interpreting this to mean that peak oil, which he seems to conceive of as actually running out of the stuff, is not going to happen. However, this isn’t what peak oil actually is. Rather, ‘peak oil’ is a price of oil so high that other commodities fulfilling a similar role become cheaper by comparison. This includes, for example, renewable sources of electricity, hydrogen or electric cars, and non-oil based plastics and lubricants. In economics, these are known as ‘substitute goods’.

The increasing supply of oil from non-traditional sources spurred on by the high oil price is beginning to foster a market in substitute goods. For example, the US firm Metabolix has been in the business of producing plant-based plastics for several years now, and is the brainchild of ex-oil and pharmaceutical types. This stands outwith any Government subsidy programme, although I’m sure significant amounts of subsidy for corn in the US helped. We can expect this to continue as the price of oil rises.

As a result of this, there will not be one ‘peak’ for oil – there will be multiple plateaus and transitions in the price, as one substitute good replaces demand for oil from a particular sector. Eventually, our economy will no longer be dependent on it, as the price rises so high that we substitute it entirely. This will be long before it actually runs out; as has been said, the stone age did not end because we ran out of stones.

The above is not an argument against environmental activism, or leaving everything to the market – far from it. ‘Peak Oil’ will not come soon enough to prevent dangerous climate change, and so activism, both for subsidies for cleantech which bring forward the date at which they’re cheap enough to be a substitute good and against oil production fromthe likes of the tar sands, which increases the cost of gaining permits and so on, makes a difference. This fundamentally economic difference made by environmental activists may yet be the difference between dangerous climate change and climate change we can just about adapt to.

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