A Free-Market Energy Blog

Obama’s Chu–Echoing Carter’s Schlesinger–Sees Peak Oil and Gas

By -- March 31, 2009

In hearings recently held by the House Science and Technology Committee, new Secretary of Energy Dr. Steven Chu remarked that energy- intensive companies were seeking to save energy because it could result in large savings (so what’s new?). But then the DOE head said, “the more forward looking companies … see in the long term energy costs just increasing because in the long term, as noted before, oil, natural gas production will eventually peak and decline, plateau and decline” (emphasis added). [Note: this is a paraphrase from the recording, at about 1:32.]

Apparently, Secretary Chu has taken to heart the arguments of the Hirsch report, which was essentially a survey of expectations by various forecasters, primarily peak-oil advocates, with little sense of the history of similar warnings or resource economics. Because the forecasters assumed that production would decline after the peak, without regard for prices, and because they assumed that the recoverable portion of resources would not expand, and because they assumed that methods which had always failed before were now reliable, they came to conclusions that were counter to both theory and history. So much for that report.

Secretary Chu’s thinking is reminiscent of the comments of former President Jimmy Carter, who, in his famous Moral Equivalent of War (MEOW) speech in 1977 stated that the problem was that the oil and gas supplies we rely on are simply running out, a thesis that led him to ignore the real problems, such as U.S. price controls on domestic natural gas, which suppressed production, created occasional shortages, and increased oil consumption and imports, and, thus, U.S. vulnerability.

Of course, President Carter was informed by the best and brightest minds of his time, relying on a combination of the Hotelling and Hubbert theories, as well as “top” intelligence from the Central Intelligence Agency. Its former Director, James Schlesinger, subsequently Carter’s first Secretary of Energy, flogged these arguments endlessly, arguing in 1979 that oil production would never surpass the 65 million barrel a day level (it’s now 85 mmb/d). Of course, Schlesinger is one of those now arguing that oil production has recently reached a peak and that the debate has been won by peak-oil advocates.

While supplies of nonrenewable resources like oil, gas, and coal are, in theory, finite and will, in theory, peak and/or plateau and decline, the lack of relevance of this fact is well established but often ignored by those with a Malthusian bias and especially by those in the peak-oil community. Resource economists like M. A. Adelman have often pointed out that the absolute amounts do not matter, rather the costs of the supply compared to competing fuels and other substitutes (particularly capital, i.e., more efficient technology) determines whether and when we cease to produce and consume a particular fuel.

Many examples exist, from anthracite in Pennsylvania to coal in Britain, both of which have peaked and declined—and left consumers with cheaper supplies of energy. Indeed, even in the United States, when oil production peaked, prices dropped as cheaper imports came in (albeit not cheaper for long).

And as for the idea that it is “forward-looking” companies that recognize the need to be prepared for ever-rising prices: In reality, many in the industry have become inured to constant warnings of impending resource scarcity. Much of the energy-efficient investment done by companies is not based on their expectations of a resource-poor future, but in response to economic signals, including tax breaks.

One can only hope that the economic crisis prevents too many companies from being ‘forward-looking’ enough to invest foolishly, for example, in biofuels, fuel cells (hydrogen and other), electric vehicles, and photovoltaics.

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