A Free-Market Energy Blog

‘Peak Oil’ Over, Economists Study Climate Policy Costs

By -- February 17, 2016

“In a 2014 ‘EV Everywhere Grand Challenge’ study, the US Department of Energy finds that the current battery cost is $325 per kWh. At a battery cost of $325 per kWh, the price of oil would need to exceed $350 per barrel before the electric vehicle was cheaper to operate.”

– Covert, Greenstone, and Knittel. “Will We Ever Stop Using Fossil Fuels?Journal of Economic Perspectives (30(1), 2016): p. 132.

In the marketplace for ideas, economists are always selling. We see a situation that everyone knows is imperfect, point out the exorbitant costs and likely mistakes on the road to Nirvana, assure our audience that in any case the market can likely manage things better than government. And we hope someone accepts our research and clients retain our consulting services.

For the longest time, the bulk of economists assured folks that application of simple market models demonstrated that peak oil was irrelevant or wrong. All you needed to see were the continuous growth in accessible reserves and the continuous decline in the costs of getting at them. Most counterarguments were little more than assertions that the weight of the planet is finite. It took a long time, but economists finally won. A rare victory for reality over assumption-laden theory.

The importance of this win became official a few days ago when I got my copy of the Journal of Economic Perspectives, a mainstream (official) policy analysis publication of the American Economic Association. In this issue was was “Will We Ever Stop Using Fossil Fuels?” by Thomas Covert and Michael Greenstone (University of Chicago) and Chris Knittel (MIT).  Their summary answer is “No.”

So the out-of-the-mainstream (remember RFF’s turn toward Malthusianism in the 1970s?) is now mainstream. Is everybody happy? A mix of luck, technology and semi-intelligent policies did the job. Worldwide oil and gas reserves steadily crept upward for decades while Presidents from Nixon to Carter assured everyone that the end of the oil was in sight. Today BP’s World Review says there are fifty years of production in proven reserves, whose total more than doubled between 1980 and 2010.

Technology, the article explains, has changed the odds – U.S. success rates in exploratory wells rose from 20 percent in 1950 to better than 50 percent today. And best of all, things that never counted as reserves have become accessible enough to count, most importantly oil shales and sands.

Just waiting for new technologies are methane hydrates, worldwide estimates ranging from 10,000 trillion to 100,000 trillion cubic feet. And good reason to annex the North Pole before the Russians do.

Depletion Scare Over, But Now Climate

Of course if the market does things so well with so little help from economists, our lives lose their meaning, to say nothing of consulting fees. But what stands in the way of fossil-fuel perfection is that burning all this stuff affects climate. The authors go on to argue that the falling costs of intermittent renewable power may well be outpaced by falling conventional energy costs and further improvements in technologies. So is this bad?

This all comes to a head in the unpleasant arithmetic of electric vehicles. Currently a state-of-the-art electric vehicle is totally cheaper than one that runs on gasoline only if the price of oil is above $350 per barrel (see above quotation from authors).  The record shows that conventional and electric cars are both likely to keep falling in price and increasing in efficiency.

And batteries?  The best even optimists at the Department of Energy can project is equivalence at $125 a barrel of oil about 40 years ahead. Won’t happen.

Economists’ Climate Math

Using the back of yet another envelope, the authors estimate that using “all available fossil fuels” will raise global temperatures by 10 to 15 degrees F over the long term. Here the economists-as-consultants get right back in the saddle with carbon taxes and consumption limits. (Peak Demand, not Peak Oil.)

The job will also need doing in lots of countries that currently have hardly any electricity, and we will be able to use the same sales strategies as in the old days. Accompanying the end of the world will be a rebirth of meaning in the lives of economists.

Of course, these figures assume that our astoundingly inadequate and politicized models of climate are right. For lots of reasons they have done a terrible job in analyzing just the few decades of increasingly unreliable (thanks to retrospective corrections) data out there.  Everyone who matters buys into them because everyone else does.  But what if the problem isn’t really there?  Not a peep from CGK as an avalanche of data and questions becomes ever harder to disregard.


And if the models’ outcomes aren’t really there, what are the costs of policies that maintain an assumption that the end is nigh?  If hydrocarbons are really as abundant as these authors say (and there’s a real consensus), then the loss from policies that foreclose using them will be really big.

The back of the envelope awaits.


  1. Ed Reid  

    “Of course, these figures assume that our astoundingly inadequate and politicized models of climate are right. For lots of reasons they have done a terrible job in analyzing just the few decades of increasingly unreliable (thanks to retrospective corrections) data out there. ”

    Referring to the repeated “adjustments” to the reported temperatures and temperature anomaly products as “retrospective corrections” suggests that the “adjusted” temperatures and anomalies are CORRECT after the “adjustments”. I do not believe that any evidence exists to support that suggestion. Particularly, in the case of multiple “adjustments”, which “adjusted” version (if any) is CORRECT? “Enquiring minds want to know.”


  2. Kent Hawkins  

    I agree that the report ‘Will We Ever Stop Using Fossil Fuels’ (the CGK report), the topic of this post, has a number of questionable aspects. Here are some additional comments.

    First, there is the invalid treatment of the levelized cost of electricity (LCOE). In Figure 4, the authors compare dispatchable generation (coal, nuclear and gas) with nondispatchable (wind and solar) on the same chart. The EIA warns against making direct comparisons between these and necessarily shows them in separate tables. See https://www.eia.gov/forecasts/aeo/electricity_generation.cfm in the paragraph starting with “A related factor is the capacity value…” and the following tables. This is somewhat offset on page 129 of the CGK report, but the representation together in Figure 4 is incorrect and very misleading. I see references to wind and solar reaching grid parity used a lot lately due to such treatment.

    Further, I understand that the EIA uses 30 years for all technology lifetimes for the costing period. Wind (and likely solar) do not last that long. The new, larger turbines that have been implemented since the turn of the millennium are showing lifetimes of about one-half that. See http://www.ref.org.uk/press-releases/281-wearnandntearnhitsnwindnfarmnoutputnandneconomicnlifetime . In effect this alone doubles the LCOE shown for wind (and likely solar as well).

    There are other costs not properly taken into account. These include the significant increased cost of transmission lines to collect the naturally dispersed energy from wind and solar, as well as that the extensive new lines needed to transmit it to distant demand centres. Further, the long distance transmission lines have to have the capacity to accommodate the large surges that occur even though the average over time is in the range of 20-30% of wind and solar capacity.

    There is some acknowledgement of the cost of duplicate mirroring capacity due to the unreliable wind and solar production, but again this is lost in qualifying text, suggesting that it is of small consequence.

    Fossil fuel plants are assigned external costs for their presumed contribution to emissions and climate change, but wind and solar are not similarly treated for the decreased efficiency of balancing generation plants constant cycling due to the irregular electricity production of wind and solar. This is a continuously occurring factor, minute by minute on the grid, and arguably eliminates most if not all of any emissions savings claimed.


  3. Ray  

    The Oxford English Dictionary defines the scientific method as “a method or procedure that has characterized natural science since the 17th century, consisting in systematic observation, measurement, and experiment, and the formulation, testing, and modification of hypotheses.”
    The climate scientists believe that if the data doesn’t support your hypotheses then you modify the data, not the hypotheses.


    • Ed Reid  

      Data, once “adjusted”, cease to be data and become merely estimates of what the data might have been, had it been collected timely from properly selected, calibrated, sited, installed and maintained instruments. Data are “adjusted”, not because they are accurate, but because they are known or suspected to be inaccurate. Worse, estimates are “infilled” when there is no data, either because an installed sensor failed, or because no sensor was installed.

      Then, the estimated temperatures are used to calculate global anomalies and even global average near-surface temperatures to two decimal place precision, though unknown accuracy. This results in reporting anomalies, such as a “warmest year ever” which is 3.83F lower than the previous “warmest year ever” (NOAA).


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