Monday, July 15, 2013

Peak and Peak

I hope some of my former students in the sustainability class have been following the recent news on oil production in the United States. The last time I taught the class I showed, from a couple of years ago, a glimmer that the path of U.S. oil output was turning upwards, in spite of the nominal historical track that seemed to follow the "Peak Oil" theory. Now, with some more years of data available, the trend is clear. According to the June 12th, 2013, Wall Street Journal, "U.S. crude oil production grew by more than one million barrels a day last year, the largest increase in the world and the largest in U.S. history."

 The problem with the "Peak Oil" theory is that it took a perfectly fine, narrow, engineering model of individual oil fields under ceteris paribus conditions and tried to turn it into a sweeping economic model that ignored the price mechanism completely. In fact, one could argue that "Peak Oil" became almost a theology or an ideology rather than it's original intent as a narrow engineering model.

Prices matter. They matter directly and they matter because they spur attempts at technological innovation. And, when technological innovation succeeds, that is itself a shock to the conditions of supply and demand. Ask the folks in places like Texas, Oklahoma, and North Dakota, which are leading the U.S. to become a rival of Middle East countries in terms of oil production.

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