What we might call the Julian Simon school of economics (i.e. most economists) insists that over the long term, market forces solve most problems of supply and demand by providing incentives for people to innovate and substitute around diminishing resources. Applied to the coming global peak in oil production, these economic optimists insist that everyone just sit back, relax, and let the market work its magic.
In the unlikely event that oil supplies start to decline, we're told, the market will seamlessly and transparently provide incentives for people to improve efficiency and substitute alternatives. The usually unspoken assumption is that this will happen without any interruption in the essential growth paradigm of modern economies - that is, economies will still grow even if oil supplies are contracting.
That's a whopper of an assumption. Economists generally assume that the economy grows because market forces encourage it to grow, ignoring the possible role oil itself plays in allowing the economy to get bigger year after year. It may simply be a concidence that the modern, industrial economy started to take off around the same time people started using fossil fuels, but that seems highly unlikely.
One thing Hurricane Katrina is already teaching us is that even a modest disruption in the supply of oil can cause rippling effects that appear to be out of all proportion to the disruption. A few percent drop in supply may seem trivial, but the economy is already operating on a razor's edge with no spare capacity.
People expect the market to deliver: instantly, seamlessly, and continuously. When that certainty is threatened, whether by spiking prices or temporary shortages, people panic. They hoard resources and stop spending money on trivial items - but the modern North American economy is based on the consumption of trivial items.
|Year||Population||2% Decline/Year||3% Decline/Year|
|Total Energy||Per Capita||Total Energy||Per Capita|
Consider this modest exercise: If oil declines by a mere two percent a year and population increases by one percent a year, the oil energy available per capita drops to only 47 percent of its initial level after twenty-five years. If oil declines by three percent a year, the per capita oil energy available at the end of a quarter century drops to 36 percent.
Does anyone really believe we can either reduce our consumption or substitute alternatives by such a huge amount over such a short period without dramatic changes to our economy, our society, even our culture?
Economic optimists glibly explain that people will respond to incentives and the market will produce whatever changes are necessary to accommodate the declining availability of oil. What they don't bother to ask is: just what changes will be necessary? What will those incentives be?
The issue is not whether or not we have to make changes. The issue is under what circumstances we make those changes.
If the market reduces demand for oil by simply pricing a significant percentage of energy consumers right out of the market, then millions of lives will be disrupted as people who are suddenly not rich enough to drive attempt to make other transportation arrangements.
Just as the current default arrangement - driving on public roads in private vehicles - has grown out of a complex interplay of market forces and government activities, so too will any future arrangement. That is, it's not enough to say, "The market will provide incentives," since the market alone does not do this today.
Governments decided to make our 'driving economy' possible by building the infrastructure for cars and trucks but expecting the rail industry to pay for its own infrastructure and providing only minimal funding for public transit on the road network.
In the face of post-peak oil declines, governments are going to have to revisit their decisions on what infrastructure to build, thus changing the array of incentives and choices the market will provide. To pretend otherwise and ignore the critical role of governments is to invite disaster by creating an impossible expectation for markets.
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