“I switched from defense policy to petroleum economics and forecasting because the latter produced a track record that could be judged. And my track record is quite good over the four decades, especially where I have done intensive, data-driven research (as opposed to short-term oil price forecasts, where my record is more mixed).”
“Trying to convince governments, especially oil producing governments, not to expect ever-higher revenues from rising prices has been somewhere close to impossible. Although some officials might want to restrain their fellows, the politicians usually convinced themselves that the goose would never stop laying golden eggs in ever-increasing numbers.”
Q. First, congratulations on the publication of your new book, The “Peak Oil” Scare and the Coming Oil Flood (Praeger). It is a tome, a real takedown, of the fixity-depletion view of petroleum and the activist movement behind it.
A. Thank you. It took about ten years to write—I was busy on many other things too—and culminates a lot of what I have been thinking and published for the last 30 years.
Q. But before we get to your current work, tell us how you became interested in energy.
A. I began working on energy in 1977 as a graduate student at MIT. A professor, Nazli Choucri, had a computer model of the world oil market. She found out I knew the programming language and hired me to help her.
My first encounter with the depletion question, which has occupied me ever since, was when Dr. Choucri returned from the Energy Modeling Forum #6 (1980) at Stanford. The other modelers told her that our prediction of market weakening, of prices going down, was wrong because “oil is different.”
Q. How did you react? Did you know about Morry Adelman or Julian Simon at the time? Or were you just a neutral thinker?
A. I was a neutral thinker, having done little work on resources, but I read Adelman’s The World Petroleum Market (1972) as background for the computer model. But not long after, I met and began working with Adelman. I never had the pleasure of meeting Julian Simon, but came to know his work eventually.
Q. Virtually everyone believed that oil prices had to go up, that increasing depletion meant higher costs and higher selling prices. Were you more focused on empirical matters rather than the neoclassical economics idea of a depletion premium, what became known as Hotelling’s Rule?
A. It seemed perfectly clear that prices had risen because of short-term political problems, specifically the Iranian Revolution, and that mean-reversion was likely. Basic supply and demand was at work, or, as someone said, the cure for high prices is high prices. And Adelman quickly disabused me of the interpretation of Hotelling’s work that became known as the Hotelling Valuation Principle or Rule.
Q. Back to your MIT model, how did it deal with depletion versus new discoveries?
A. Our model had a demand specification with diminishing returns so that it showed prices growing after a five-year hiatus, but it was still the best forecast overall. Our model also had a depletion factor included, but outside the US, the effect was relatively minor since most regions’ petroleum industry were still immature. A review ten years later found that our model was almost exactly correct in predicting supply from every non-OPEC region.
Q. So there was a free-market flavor, or optimism, early in your thinking. When did that germinate?
A. My embrace of free markets probably began when, as an undergraduate, I read an article by John Kenneth Galbraith describing our economy as seriously flawed, blaming advertising for consumer choice, for example. It seemed illogical; the etatist views of economic policy.
Needless to say, watching the Carter Administration try to manipulate the (regulatory-induced) shortage of gasoline during the Iranian oil crisis confirmed my thinking that government mandates couldn’t substitute for the undesigned order of free markets.
A. Did you have any mentors in the energy field that shared your view?
A. After a couple of years, I began assisting M. A. ‘Morry’ Adelman, who at that time was receiving opprobrium for arguing against the ‘ever-rising price’ and ‘resource scarcity’ beliefs that were so prevalent then. He greatly broadened my understanding of energy economics, especially on the upstream side.
Regarding domestic policies, a regulator from the California Energy Commission, whose name escapes me now, had produced a huge chart showing all the laws, regulations, and groups involved in allocating petroleum supplies under the Carter-era rules. It was rather hilarious, including a set-aside for motor boat owners, who had priority after emergency services.
Q. Tell us about your graduate work in energy at MIT?
A. Actually, the great majority of my energy work occurred after school, where I spent years as a research associate at the M.I.T. Energy Laboratory. Much of the work was on energy supply, including some analysis of uranium markets, as well as oil market structure and energy security.
Some of my graduate work in political economy focused on the belief that industrial policy was responsible for Japan’s economic success, which was debunked by a couple of my M.I.T. colleagues (Richard Samuels and David Friedman, notably).
Q. After school, what was next? Did you interview with energy companies?
A. By the early 1980s, the industry was cutting back heavily and, aside from an offer to work in intelligence, there was little available. One of the people who would have been my boss explained to me (this was 1979) that he “knew” that the Soviets would launch a nuclear attack once they had enough missiles. I couldn’t think of any way to convince him that he couldn’t “know” this, or what kind of proof would be necessary. If they didn’t launch, it just meant they hadn’t done so yet.
This was frustrating. I switched from defense policy to petroleum economics and forecasting because the latter produced a track record that could be judged. And my track record is quite good over the four decades, especially where I have done intensive, data-driven research (as opposed to short-term oil price forecasts, where my record is more mixed).
Fortunately, my M.I.T. colleagues were happy to have me to do the data work, so I stayed on there for some years, doing a variety of studies, almost always data-intensive.
Q. When did you begin lecturing or publishing in energy? Or were you just number crunching somewhere?
A. Until the mid-1980s, I was number crunching. But as part of a three-volume study of world natural gas markets, I wrote much of the supply chapters and then began to write working papers on oil and energy security. However, publishing in refereed journals tended to leave me frustrated; referee reports were often negative but without rational reasons.
For example, “criticizing” the oil industry for believing that prices would continue to increase after the Iranian Revolution was over, instead of mean reverting, brought the comment that ‘the industry had provided lots of cheap natural gas’ as if my point had been an attack on the contribution of the industry instead of its excessive optimism about long-term prices, and the financial losses that resulted.
The result was that much of my research appeared in obscure places like conference proceedings or working papers which, pre-Internet, meant they didn’t always circulate as widely as other work. The fact that some were very lengthy because of the breadth and depth of coverage also reduced the attractiveness to many academic or professional publishers.
Indeed, I had a call from a reporter who told me that he had received a working paper I sent and had “started” to read the (one-page) executive summary. Someone in the trade press told me he liked my 1989 “Oil Prices to 2000,” published by the Economist Intelligence Unit, but that it was so wide-ranging they couldn’t find a particular theme to discuss in an article.
Q. What are examples of how your detailed research provided better insight than other analysts?
A.Well, my 1985/86 natural gas study went into great depth to show that the economics of gas supply were actually much better than many believed. While Europe’s suppliers were seeking ever-higher prices, we showed that new fields like Troll and Urengoi had very low costs.
Similarly, work on Russian oil economics showed that, especially after the collapse of the communist government, their costs were actually quite low and falling, as opposed to repeated warnings of high and soaring costs.
In 2001, in a relatively short article in the Oil & Gas Journal, I noted changes in the market’s structure that suggested oil price volatility would increase. Of course, I also thought this meant higher prices, with a new mean equal to just under $30 (adjusted to 2015 dollars)!
Obviously, this came in well below what was subsequently experienced, although the extent of political supply disruptions, which were unprecedented and certainly not expected by me, largely explains this.
Q. You have been widely attacked as a cornucopian, a flat-earth economist, and always wrong among other things. Does this bother you?
A. Not particularly, since nearly every such attack represents ignorance or errors on the part of my critics. Two argued in 2009 that I was simply incorrect in writing that the oil industry did not embrace peak-oil theories; another said I was obviously wrong since, if you assumed that all oil demand growth in the future would be met by Saudi Arabia, the country would see its resources depleted; and an oil company CEO in 2012 implied I was an idiot for thinking long-term prices would be $50-60, since the marginal production cost was $100/barrel. (The video is on the OPEC website.)
I don’t mind some charges, such as being a shill of the oil industry, since they are meaningless. Serious policy analysts understand that ad hominem attacks are the first refuge of a scoundrel.
More annoying is that my record is often misrepresented by peak-oil advocates, who are largely unfamiliar with my work and cherrypick their sources. My record on long-term oil and gas prices is quite good, and various articles and papers have proved not only rigorous but prescient. But critics focus on my warnings of lower prices in the past decade.
Q. Is your forecasting work for companies or for governments? Have your forecasts, which were more bearish than the mainstream on average, helped public sector or private companies not overrate the boom?
A. Both, sometimes helping design oil market models, sometimes advising on scenario design.
In the 1990s, a number of companies said they modified their rising-price forecasts in response to my work. After prices began rising after 2003, the initial tendency was to practice ‘capital discipline,’ which might have been influenced by my work that higher prices should not be counted on to rescue projects.
Q. And then came a short-lived rebirth of Peak Oil ….
A. Yes, a chorus of “new paradigm” and “peak oil” arguments convinced many that $100 a barrel was the new norm and the cash flowed.
Trying to convince governments, especially oil producing governments, not to expect ever-higher revenues from rising prices has been somewhere close to impossible. Although some officials might want to restrain their fellows, the politicians usually convinced themselves that the goose would never stop laying golden eggs in ever-increasing numbers.
A. Where is the Peak Oil movement today? I believe the new take is “Peak Demand,’ which you countered in a recent Forbes.com article, “The Death of the Oil Industry: Not This Again.”
A. There are still people who think that lower upstream spending and high decline rates in shale oil wells will lead to a peak in oil supply, ignoring the fact that the former is due to the current surplus and will be reversed as needed, and the latter can be overcome.
Peak oil (supply) advocates also like the peak oil demand theme, but there are many ‘Cleantech’ advocates who embrace the latter but have ignored the former. Since many of them start with the desired answer, namely “oil should go away,” there is obviously common ground and overlap between the groups, but some electric vehicle advocates are simply dazzled by the technology, or what they perceive the technology to be.
Q. A theme at the most recent CERA conference is insufficient capital spending in the industry to keep prices from rising. Does this portend oil at $75 or higher, sustained? And will this resurrect the Peak Oil movement?
A. Discussion of possible inadequate upstream investment is an oft-repeated fear which reflects more the visible activity and perceptions of needed spending, which tend to be overestimated.
Lower costs due to a drop in activity offset much of the drop in capital spending. The likely focus on lower-cost resources in the US but also Mexico and the Middle East, means that these fears probably won’t be substantiated.
If some transient event (upheaval in Venezuela, for example) sends prices up, expect Peak Oil advocates to claim some vindication, but then expect them to scatter again once prices fall back to norms.
Q. Turning back to your new book, The “Peak Oil” Scare and the Coming Oil Flood, what has the reaction been? I’m sure there is great satisfaction that you now have on paper what was in your head and what was scattered in boxes all around your work areas.
A. The book hasn’t gotten as much reaction as I hoped, probably because it is too long and a bit technical. I suspect most of my friends and colleagues have set it aside, but will hopefully get to it at some point. So far as I know, only two (non-US) reporters have read the book, and the only ‘review’ was done for the American Library Association (which was positive).
When I speak, relying on material from the book, audiences have been quite receptive. I’m trying to use the gravitas of having published a book to promote my shorter writings that emphasize my points about the importance of solid research (rather than ‘googling’ for anecdotes).
Q. What bothers you most about the current energy debates? And what is your hope given the big changes in Washington, DC, that are now underway?
A. The extent to which quantitative, logical thinking is usually absent. So many people will repeat mantras like “oil is finite” or “solar is getting cheaper” without having any clue as to what precisely the situation is.
Indeed, all too many align politically on questions without consideration for the particularities of the issues. If you support renewables, you oppose conservatives, attack any skepticism about aspects of climate change science and so forth, while assuming anyone who disagrees with you on one subject believes in everything you disagree with.
Q. A lot of your ‘peak oil’ opponents have retired or pulled back from the debate. In a sense, you are triumphant. What is your mindset these days?
A. Well, it’s funny to see analysts praised for predicting that prices would fall in 2014, but I’ve gotten less attention for not only being right but explaining why prices would come back down, and why people mistakenly thought they would stay high.
Of course, psychological research suggests that people listen to those who are certain and confident, rather than talk about the realities of the energy industry. Perhaps I should bluster like T. Boone Pickens, who insists “I’m the expert!” when someone points out he was wrong on peak oil.
Q. Last question: What is next for Michael Lynch?
A. It looks like I’ll be working on energy security next, coming at it more from an economic perspective than a geopolitical one. I have some existing work on oil market behavior in oil crises which I will update, and hopefully improve the debate which is too often dominated by those with little understanding of the microeconomics of the oil market.