When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants by Steven D. Levitt, Stephen J. Dubner
Authors: Steven D. Levitt, Stephen J. Dubner
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exactly the situation with oil right now. I don’t know much about world oil reserves. I’m not even necessarily arguing with their facts about how much the output from existing oil fields is going to decline, or that world demand for oil is increasing. But these changes in supply and demand are slow and gradual—a few percent each year. Markets have a way of dealing with situations like this: prices rise a little bit. That is not a catastrophe; it is a message that some things that used to be worth doing at low oil prices are no longer worth doing. Some people will switch from SUVs to hybrids, for instance. Maybe we’ll be willing to build some nuclear power plants, or it will become worth it to put solar panels on more houses.
The New York Times article totally flubs the economics time and again. Here is one example from the article:
The consequences of an actual shortfall of supply would be immense. If consumption begins to exceed production by even a small amount, the price of a barrel of oil could soar to triple-digit levels. This, in turn,could bring on a global recession, a result of exorbitant prices for transport fuels and for products that rely on petrochemicals—which is to say, almost every product on the market. The impact on the American way of life would be profound: cars cannot be propelled by roof-borne windmills. The suburban and exurban lifestyles, hinged to two-car families and constant trips to work, school and Wal-Mart, might become unaffordable or, if gas rationing is imposed, impossible. Carpools would be the least imposing of many inconveniences; the cost of home heating would soar—assuming, of course, that climate-controlled habitats do not become just a fond memory.
If oil prices rise, consumers of oil will be (a little) worse off. But we are talking about needing to cut demand by a few percent a year. That doesn’t mean putting windmills on cars; it means cutting out a few low-value trips. It doesn’t mean abandoning North Dakota, it means keeping the thermostat a degree or two cooler in the winter.
A little later, the author writes:
The onset of triple-digit prices might seem a blessing for the Saudis—they would receive greater amounts of money for their increasingly scarce oil. But one popular misunderstanding about the Saudis—and about OPEC in general—is that high prices, no matter how high, are to their benefit.
Although oil costing more than $60 a barrel hasn’t caused a global recession, that could still happen: it can take a while for high prices to have their ruinous impact. And the higher above $60 that prices rise, the more likely a recession will become. High oil prices are inflationary; they raise the cost of virtually everything—from gasoline to jet fuel to plastics and fertilizers—and that means people buy less and travel less, which means a drop-off in economic activity. So after a brief windfall for producers, oil prices would slide as recession sets in and once-voracious economies slow down, using less oil. Prices have collapsed before, and not so long ago: in 1998, oil fell to $10 a barrel after an untimely increase in OPEC production and a reduction in demand from Asia, which was suffering through a financial crash.
Oops, there goes the whole peak-oil argument. When the price rises, demand falls, and oil prices slide. What happened to the “end of the world as we know it”? Now we are back to ten-dollars-a-barrel oil. Without realizing it, the author just invoked basic economics to invalidate the entire premise of the article!
Just for good measure, he goes on to write:
High prices can have another unfortunate effect for producers. When crude costs $10 a barrel or even $30a barrel, alternative fuels are prohibitively expensive. For example, Canada has vast amounts of tar sands that can be rendered into heavy oil, but the cost of doing so is quite high. Yet those tar sands and other alternatives, like bioethanol, hydrogen fuel cells and liquid fuel
The New York Times article totally flubs the economics time and again. Here is one example from the article:
The consequences of an actual shortfall of supply would be immense. If consumption begins to exceed production by even a small amount, the price of a barrel of oil could soar to triple-digit levels. This, in turn,could bring on a global recession, a result of exorbitant prices for transport fuels and for products that rely on petrochemicals—which is to say, almost every product on the market. The impact on the American way of life would be profound: cars cannot be propelled by roof-borne windmills. The suburban and exurban lifestyles, hinged to two-car families and constant trips to work, school and Wal-Mart, might become unaffordable or, if gas rationing is imposed, impossible. Carpools would be the least imposing of many inconveniences; the cost of home heating would soar—assuming, of course, that climate-controlled habitats do not become just a fond memory.
If oil prices rise, consumers of oil will be (a little) worse off. But we are talking about needing to cut demand by a few percent a year. That doesn’t mean putting windmills on cars; it means cutting out a few low-value trips. It doesn’t mean abandoning North Dakota, it means keeping the thermostat a degree or two cooler in the winter.
A little later, the author writes:
The onset of triple-digit prices might seem a blessing for the Saudis—they would receive greater amounts of money for their increasingly scarce oil. But one popular misunderstanding about the Saudis—and about OPEC in general—is that high prices, no matter how high, are to their benefit.
Although oil costing more than $60 a barrel hasn’t caused a global recession, that could still happen: it can take a while for high prices to have their ruinous impact. And the higher above $60 that prices rise, the more likely a recession will become. High oil prices are inflationary; they raise the cost of virtually everything—from gasoline to jet fuel to plastics and fertilizers—and that means people buy less and travel less, which means a drop-off in economic activity. So after a brief windfall for producers, oil prices would slide as recession sets in and once-voracious economies slow down, using less oil. Prices have collapsed before, and not so long ago: in 1998, oil fell to $10 a barrel after an untimely increase in OPEC production and a reduction in demand from Asia, which was suffering through a financial crash.
Oops, there goes the whole peak-oil argument. When the price rises, demand falls, and oil prices slide. What happened to the “end of the world as we know it”? Now we are back to ten-dollars-a-barrel oil. Without realizing it, the author just invoked basic economics to invalidate the entire premise of the article!
Just for good measure, he goes on to write:
High prices can have another unfortunate effect for producers. When crude costs $10 a barrel or even $30a barrel, alternative fuels are prohibitively expensive. For example, Canada has vast amounts of tar sands that can be rendered into heavy oil, but the cost of doing so is quite high. Yet those tar sands and other alternatives, like bioethanol, hydrogen fuel cells and liquid fuel
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