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May 17, 2006

The Inelasticity Of Supply Peak Oil

The cornucopian economists assure us that when oil prices rise, more oil will get pumped out of the ground. Policy Pete begs to differ. Consider the following graph:

Policy Pete explains:

OK, superimpose over the above a second mental chart showing crude oil prices. (Hint, two spikes on either side centered on 1980 and 2005 and a deep valley in the middle). Now go back to the long production slide and decide whether the dual peaks, which made a tremendous difference to lots of non-petroleum things in the world, made any difference at all to US oil production. Answer: they didn't. The market was willing to reward marginal increments in domestic production up the wazoo, but no amount of revenue and profit, big or small, made any perceptible difference in US production. [...]

Message to Congress: with near zero supply elasticity, it makes no sense to let the domestic oil patch capture all the oil rents. Those funds are needed elsewhere: no, not as a sop to the people to pay for a couple of fill-ups just before the election...They should be recaptured and redirected in a massive way toward the first phase of The Transition Away From Petroleum. [Emphasis added]

That's quite a graph. Remember it. The price spike around 1980 was huge — prices were actually much higher then, adjusted for inflation, than prices today — and it lasted for several years. As you can see from the graph above, the effect on US output was negligible: no amount of money will put more oil in the ground.

People want to believe that rising prices will magically cause supply to increase so they can keep doing what they're doing now, painlessly. It's not going to happen. We have to learn to use less oil. Period.

Posted by Jonathan at May 17, 2006 10:10 PM  del.icio.us digg NewsVine Reddit YahooMyWeb