Russ Roberts

Don Boudreaux on Energy Prices

EconTalk Episode with Don Boudreaux
Hosted by Russ Roberts
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Cole on the Market for New Car... McKenzie on Prices...

Don Boudreaux of George Mason University talks with EconTalk host Russ Roberts about the recent surge in energy prices. They talk about why prices have risen, the implications for America's standard of living and the implications for public policy.

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0:36Intro. The Price of Everything. Oil prices and price of gasoline. Demand for gasoline, tipping point: people think there is a psychological barrier after which people will cut back. Unlikely. Oil companies are profit-maximizing. If people didn't respond to prices, why wouldn't they just keep raising prices till people did start to respond? Demand curves slope downward to the right. At lower prices maybe the ways in which people are less noticeable but still there. Common perception is that demand curves are vertical: when price goes up people still drive, but they drive less. SUVs aren't selling very well; people might even move closer to work. Short run response will be different from the long run response. If people don't notice then maybe you can raise prices. Competition would tend to keep prices down. If competition causes gas prices to fall, it much be that people notice. Common mistake: price responds to consumer demand and producers' supply; and also has a feedback effect. Price has been rising over the last couple of years possibly because demand is increasing. In that case we expect prices to go up and for people to consume more. Error is to believe that it violates the law of demand for prices to go up and consumption to increase. What's happened in the U.S. is that our economy has slowed--still growing but at a slower pace--but other countries like China still have rapidly growing economies which is overcoming our slowdown. Want lower prices, not regulated; but having high prices doesn't mean our economy is being harmed. If in response to our prosperity we drive up the prices of energy, education, and housing, it means our economy is doing well, not poorly. Sign of prosperity.
8:42Julian Simon points out that the one resource that has consistently risen in real value over time as opposed to falling in value (people find more oil, tungsten, alternatives) is human labor. Labor is a resource. The increased value of human labor over time reflects the increased productivity of labor; similarly for oil price rise its increased value reflects its increased productivity. Classic problem in economics: a fixed pool of a resource, the price should rise steadily over time, depending on assumptions of industry; but in a competitive industry its price will rise roughly at the rate of interest. Owners of the resource will take it out of the ground, sell it, and invest their money, getting interest, which by increasing the supply of the resource tends to drive its price down. Path of price has to be roughly equal to the rate of interest. Store it in the ground if price is rising faster than the rate of interest. Standard view is that it's natural for the price of oil and other resources to rise steadily over time. In actuality real world doesn't behave that way. Standard reason it doesn't is that in all of those models, the price of extraction is fixed. Certain technology for discovery and extraction. But in fact the prices of these technologies decline over time through ingenuity, so the prices of many natural resources fall over time.
14:04Morris Adelman, MIT, article, predictions that supply of oil would soon run out, quote: "This time the wolf is here." Nothing in the current situation to suggest it is any different from the panic of the 1970s or early 1980s. Technically it's not true that the supply of oil is fixed. Can buy synthetic fuel oil at your local station. Also there is oil in shale which can be extracted. How we define what is oil has some variance. But put that aside. Imagine a mosquito coming down onto a blood-filled balloon. Should she worry that she will run out? If the balloon is the size of a marble, maybe. If it's the size of an Olympic sized swimming pool, no. We don't know how much oil there is. We keep finding more oil, better ways to extract it, consistent with the hypothesis that it could be the size of twenty Olympic sized swimming pools. Long term trend of reserves keeps climbing. It's not an unlimited resource but it acts like it is. Remaining reserves same as they were 30 years before despite using it. Have more inventories in the ground. Proved or known reserves are used to scare people. Analogous to how much food you have in your cupboard. No point to discovering more oil till prices start to rise or when the known reserves shrink, you go out and discover more.
22:35Pistachio nuts, from The Invisible Heart: If you love pistachio nuts and are given a room full of them, you can invite all your friends; but you have to litter the room. Would you ever use them all up? Eventually the room would start to fill up with shells. Peak oil idea, that we are somehow now on the downward trend, non-economic concept. As the shells start to accumulate, there's always one more even in a bowl as you start to look, but after a while the price will rise. People want to hurry that along: rather than relying on the natural role of prices. We bet on ethanol since in the public mind we are running out of oil, we have to have alternatives. What are the alternatives? It comes totally naturally to the economy. We don't have to hurry it along. We are more likely to make a mistake if we try to hurry it along. Think of ethanol; synfuels, sinfuels. Decentralized, emergent incentives to invest are powerful incentives. Before oil there was coal. Jevons, Walras, Menger, co-discoverers of the marginal concept. Early doomsday story: From Jevons's The Coal Question--quote: "We cannot long continue" our current rate of progress. He determined there was no way oil could replace coal. When you look back on it 150 years later it's an absurd claim. In order for China and India to have an effective demand for oil they have to give up something for it. They are producing valuable things for this oil. We are made wealthier as a consequence. So our increased cost of acquiring oil is offset to some extent by the goods and services produced by these countries. Most of those gains though are captured by the oil producing nations.
31:18People are alarmed all the same. Highlights human foible that we assume tomorrow will be like yesterday. Extrapolate to $5/gallon next year. But as in the past, innovation will help. Made this assumption about housing prices till a few years ago. Before George Bush the first people worried that he would do something to raise oil prices because oil prices were "way too low." We can imagine futures but not the future. Can never really get it right. Could people in 1950 imagine what was available in 1975? None of the advances were planned. Schumpeter, creative destruction: it's the very nature of creativity to be creative. All we know is that in the past genuine creativity has taken place and has genuinely increased the standard of living. We're confident it will yield something. But hard to debate because we don't know what will be yielded. Pistachio story: eventually we will leave oil in the ground. But that could be wrong, too. We could find such inexpensive ways to produce it that we just use it all up and turn to a (then cheap) alternative. But people have the view that the sky's always falling. We have probably evolved to be natural pessimists. In a world of strict resource constraints it's better to squirrel things away. Modern great society (Hayek's term) is different. Legitimate fear is that these fears will get translated into government policies. Bootleggers and the Baptists: let's make fuel out of food. Bootleggers, the corn farmers, make out like bandits from this fiasco. Policy has really bad unintended consequences. Even those originally behind it have started to have second thoughts; people who depend on corn have had to pay much more and are poorer. How long will it take for the government to change its policy? Private sector fixes errors quickly--new Coke, Edsel, Corfam. Sugar quotas in the U.S. benefit few and cost everyone more, but the quotas persist.
42:42Perfect political storm right now: people are worried about global warming; people are worried about instability in the Middle East--immense feeling that something has to be done. If we could and if we could do it wisely, good idea. Unlikely that we can do it wisely. Should we sue foreign countries for not producing oil--as George Will pointed out, we'd have to sue ourselves for not drilling in nature preserves. What should our role as economists be? What ought we encourage? What should citizens ask of their politicians? Laissez faire doesn't lead to a perfect world either? On economic grounds, what would good policies be? Get rid of a lot of environmental restrictions on drilling. 1979 was last time of oil spill in Gulf of Mexico. Technology of protecting against spills has improved. Why can't we drill in ANWAR? Encouraging: lack of encouragement for price controls. Always a temptation to use price controls to make consumers happy; but also have a movement to raise prices. Politicians propose gas tax holiday; others propose very high gas taxes. Carbon tax issue: externality, global warming argument is that therefore we should raise taxes; even on pure static wealth conditions, we don't know that the taxes are not too high. Hard to do convincing calculations of whether the taxes are too high or too low or just right. Is the tax return to Uncle Sam higher than the profits made by oil companies for each gallon of oil? Might not be true. Right now oil companies are making record profits. None of this means that oil companies should be protected or coddled or that they are special. What do they do with the money? Give some to stockholders (Russ must own some via mutual shares); if you are really worried, buy their stock. Some goes to finding new oil. Not much goes to building new refineries--very expensive right now to build new ones so they expand existing ones.
53:05It should be pointed out that these protections come at a cost. Thomas Sowell: reality is not optional. Limit drilling in ANWAR and off the cost and have different standards across states. Andy Morriss, Cafe Hayek reference, with co-author, article showing that market for gasoline has become very fragmented which makes it more expensive because of loss of economies of scale as different states make different rules. Prices reflect that underlying reality. Indian and Chinese demand for oil, our increased wealth that allows us to want and afford more SUVs are all part of that underlying reality. Some comes from distortions, but intervening to change the price is like shooting the messenger.
56:17Julian Simon, more optimistic view, The Ultimate Resource, we should always take into account that we can rely on our brains. The human mind is the ultimate resource. Simon's empirical work. The State of Humanity, pollutants, tuberculosis, malaria, cholera, polio--in the developed world we've mostly wiped those things out, the very kind of pollutants that actually killed people. How free is our environment from things that kill, or cause major discomfort? Neighborhoods in U.S. today are the equivalent to sanitary operating rooms compared to 100 years ago. Capitalism is cleaning our environment. We're privileged to be able to worry about the pollutants we today worry about. Ironic that people worry about how dangerous current conditions are though our lifespans continue to increase. Nurse email to Boudreaux upbraided him for pointing out that more people die of cancer today than 100 years ago by noting that we live longer. You are going to die of something and you hope it will be relatively painless and a long time from now; and we've gotten better and better at that.

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COMMENTS (39 to date)
Jon writes:

First off, I have to say that I am a little disappointed that you chose Don to interview for this subject. As Russ indicated, "peak oil" is not an economic issue... so why interview an economist?

Don indicated that he thought it was unlikely that there was a "psychological barrier" after which people would cut back. Oh really? There is a lot of evidence to show the existence of a psychological barrier. Gasoline has risen substantially since 2002, but suddenly, where $3.20 didn't seem like that big of a deal, $4 has galvanized people and companies:
-there are suddenly stories all over the media about what people are doing to use less fuel
-SUV sales have suddenly plummeted 30-50% for May '08 vs. May '07, cars rather than trucks are the top-selling vehicles (Civic sales up nearly 30% year-over year and Toyota can’t meet demand for Prius hybrids - http://www.msnbc.msn.com/id/25189701 )
-gasoline consumption is starting to decline, for the first time in this century http://www.msnbc.msn.com/id/24729486/


I'm guessing that the fuel demand curve probably looks more like a staircase than a line...

A few BIG things you didn't mention:

- it takes years (~5-10) for new oil resources to come online once they have been discovered... and it's very hard to predict what the market will look like in 7 years... thus, there is a latency in the system which lends itself to price spikes and troughs. (Exxon is reportedly still working with the assumption of long-term oil prices less than $65.)

- Half the people in the world DO NOT pay the market price for oil. [The Economist, May 29] There are extensive subsidies in the developing world and many oil producing nations: China, India, Iran, Venezuela, Malaysia, Saudi Arabia... all subsidize fuel for their citizens. Venezuelans only pay $0.05/liter (about $0.19/gal)! When people don't see the price signal, they don't conserve.

- Don mentioned that long-term reserves keep climbing - a couple issues with this:
(a) OPEC reserves are notoriously unreliable. Many OPEC country reserves mysteriously doubled overnight when their production quotas became based on reserves. There's a good chart on stated reserves here [http://en.wikipedia.org/wiki/Oil_reserves]. Pay special attention to the change in reserves in 1988.
(b) Reserves from reliable, more believable sources (big oil) have been falling as they are not able to replace enough to compensate for what they are producing
(c) World oil production has exceeded discovery every year since 1984. Clearly, this is an unsustainable trend. The question of course, is the size of the mosquito's balloon...

-oil wells in mature fields generally have a 'decline curve' where they produce somewhat less year after year. This amount of this decline is somewhere between 2% and 20%... new discoveries have to be brought online every year just to make up for these declines. As new discoveries tend to be smaller and smaller, making up for this decline AND increasing total capacity gets more difficult and more capital-intensive.

-there is not a lot of capacity right now for new oil developments. All the geologists and rigs are being fully utilized… it will take a while for more people to be trained and rigs to be built.

For all of the above reasons, it’s quite likely that production of oil will at best stay basically flat, or more likely, decline in the immediate future (next 5 years). Because of the difficulty in switching to substitutes, this is likely to cause continued price increases. All of the above would have been covered by someone with a bit more background in oil, rather than an economist.


Overall, though, I agree with most of your conclusions: the world economy won’t collapse, and economists should point out that we shouldn't subsidize ethanol and the like, and that we should stay away from price controls... let the price mechanism work! We will adjust and find alternatives once the price is high enough.

Russ Roberts writes:

Jon,

I don't think I did a very good job explaining why the psychological barrier theory was wrong.

The idea is pretty simple. If the demand for oil in the US (and elsewhere) is increasing then you will see a POSITIVE correlation between price and consumption. This is not an upward sloping demand curve, but a shift in the curve that pushes up price.

If the demand in the US stops rising, but demand elsewhere continues to rise and continues to push up the price, then the higher price in the face of a stable American demand curve will cause consumption to fall and we will see the standard negative correlation between price and consumption.

But you wouldn't want to look at the rising consumption levels a few years back and conclude that people don't conserve gasoline when its price rises.

Thanks for the other observations about the world oil market.

Ethnic Austrian writes:

This was a particularily weak podcast. Don Boudreaux did know little about the issue. peak-oil is not some theory that suddenly sprung up because of rising prices. M. King Hubbert predicted the US peak of 1970 in 1950 and projected world peak for 2000, which is pretty close for a 50 year prediction. Later geologists refined the prediction to the mid-2000s.

The synthetic oil he was speaking of was probably made from coal. This is expensive, but it is one of the technologies that will help us on the downward slope of production. It would however make more sense to turn coal into electricity and then drive with electric cars. Synthetic oil was used as a substitute for oil in Nazi Germany.

Russ and Don used ethanol as an example for bad governemnt policy, since it could be the cause of rising food prices for poor people. Suppose ethanol could be produced profitably. (Biodiesel is actually profitable) Would they argue for a ban on ethanol and biodiesel production? Given their libertarian stance, I assume they wouldn't. But you can't use starving poor people to prove your point only when it conveniently fits into your ideology.

Both Russ and Don seem to disregard any motivations for inventions other than market prices. A lot of the technologies that are now economical and are increasingly popular with consumers and industry, such as solar panels, wind power, zero energy housing, were invented decades ago and improved since by enthusiasts, nerds, hippies and governement funded research all of whom were obviosly not responding to prices but were rather genuinly motivated by environmental concerns, care for future generations, etc. Demand for these technologies, if it existed at all, was again driven by tree-huggers rather than price, which allowed some projects and companies to stay afloat and keep inovating.
But these baptists, so to speak, are the very people Russ and company keep making fun of, usually by presenting their concerns in a mocking tone.

The Toyota Prius was developed in the 1990s and has been for sale in japan since 1997, when oil was dirt cheap. So the executives and engineers at Toyota are baptists too.

Russ and Don, like many mainstream economists, claim to champion and believe in human ingenuity. They however seem to see this phenomenon only as an abstract function in subordinance to markets, which is what they really love and care about. I for one regard market prices as only one of many useful artefacts of the human mind and human interaction.

Imagine what Russ and Don would have said in the 1980s to the very inventors that started to pioneer zero energy housing. Probably something like: "Don't bother inventing. You are only wasting resources. Human ingenuity will keep energy prices low and if it won't, human ingeniuity will provide better insulation."

I for one am optimistic. We are actually lucky that physics dictates peak-oil rather than a sudden stop of production at the very last drop. Now that would be truly disasterous.

Most of the solutions to adapt to the situation are already there. A large part of that is simply moving closer together and to work. Also rail is an old and proven technology. Western industrialized nations were able to sustain and feed large populations before. So the survivalist nuts who believe that their Y2K supplies are useful after all are totally of the mark. Globalization will not end either, since shipping large amounts of durable goods over long distances is energy efficient. Hundreds of millions of consumers transporting small amounts of goods with their SUVs is where the inefficiency is at.

The US needs to abrogate its incredibly restrictive and sprawl inducing zoning laws. That seems like a major case of central planing and corporate welfare to me, which is something that libertarians should look into.

I agree that governement action to reduce prices is a bad thing. The Austrian governement had to increase commuter tax rebates recently due to weeks of popular pressure. These tax rebates were an incredibly stupid thing to begin with. He, who subsidizes commuters, begets more commuters.
Governement interaction may keep individuals from adapting to prices by keeping them in the false belief that governements can solve oil prices.

And another thing. Don Boudreaux claimed in the beginning of the podcast that consumers wouldn't care about gaz prices, if they would make up only an unimportant amount of their budget. But we care about prices for all kinds of cheap goods that we purchase infrequently. So this argument against a sudden response in demand doesn't apply. Other arguments however might, so I am not disputing the claim that no tipping point exists. I am agnostic about this issue.

Russ Roberts writes:

Ethnic Austrian,

You seem to have drawn a lot of conclusions about what Don and I believe based on our tone. I'm not sure how that happened. I apologize if I was disrespectful. I have no problem with people developing ideas and innovations for all kinds of non-financial reasons. But using things that waste resources in the name of saving resources seems rather foolish. That's probably what we were making light of, but maybe it was something else.

On the matter of peak oil, I'd like to know what I'm missing.

What's the significance of peak oil? What is the significance of falling production?

There isn't enough oil to go around now. There wasn't 50 years ago. Oil is scarce. If it were cheaper, we would use more of it. As it gets increasingly scarce, the price will rise. Probably. Or not. It depends on many factors as we discussed in the podcast.

Peak oil is not an economics concept. It is an engineering concept. As such, it leaves out the role of prices and innovation. Why does anyone think it important?

Floccina writes:

Thank you I found the podcast excellent.

Brian writes:

There were a few things that you really didn't go over that really seem central to the idea that the market will adapt in a timely manner to fast changing oil prices or swings in supply.

The most important one I think is the price elasticity for oil. It's rather low as elasticities go, meaning that swings in prices because of a leftward shifting supply curve don't translate into accompanying large swings in the amount consumed. This means that as prices increase and supply dwindles, the amount demanded will remain relatively high.

Now, of course, the amount demanded will change somewhat, but since it changes so little the rate at which we barrel toward running out doesn't slow much until we run out of track and fall over that unfinished bridge.

I otherwise enjoyed the podcast though. Good work.

Ethnic Austrian writes:
You seem to have drawn a lot of conclusions about what Don and I believe based on our tone. I'm not sure how that happened. I apologize if I was disrespectful.
Never mind. Just a healthy level of polemics and sarcasm from my side. ;-)
Peak oil is not an economics concept. It is an engineering concept. As such, it leaves out the role of prices and innovation. Why does anyone think it important?
Well, we know through peak oil something very important about the future which is that we have to do with less and less oil in the decades to come, regardless of price.

We don't have to wait for prices to inform us about the situation. I, personally have been convinced of peak oil for about ten years when oil was dirt cheap. Current prices may not even be a result of a peak but could be a result of many other reasons.

There are some things that governements are involved in anyway, like zoning, urban development, building standards, public transportation, highway construction. Policy regarding these issues should be adapted wisely.

Peak oil has also an implication on global warming, namely that it won't happen anyway. I believe it was the swedish university of Uppsala that came out with a report a couple of years ago which showed that even the optimistic IPCC predictions on global warming are unrealistic because there just isn't enough fossil fuel in the ground to make it happen. The Kyoto protocol will fulfill itself. So governements should stop their activism in that regard.

Peak oil is also an important bit of information for individuals. I would discourage any young family for example to build a house for away from their workplaces and other important facilities like daycare etc. That would be a dead end investment.

Al Gore argued that we should act on global warming, even if the likelyhood of doomesday scenarios is less than 100%, just to be sure. Now peak oil is a slam dunk case compared to the IPCC models and there is no direct substitute for cheap energy on the horizon. Notice btw. that technology is not a source of energy. Human ingenuity cannot trump thermodynamics. We know from basic physics how much energy is needed to overcome wind resistance for an SUV shaped object at certain speeds. We also know how much energy sunlight contains per square meter covered. So physics tells us a lot about contraints of nature that cannot be overcome and thus about potential future outcomes. No engine will ever allow a Chevy Suburban to get 50mpg at 60 mph.

The only cheap direct substitute for oil would be nuclear fusion, which has been 30 years off for the last 50 years.

But I am not gloomy or anything. Peak oil is not armageddon. We will adapt and we can adapt with existing technology. I, personaly see nothing that would prevent us from keeping our living standards and the economy may grow all the way, since there is a lot to do.
I am just saying that we can and should act on other information than just running blindly into market prices.

Dustin Santos (loving austrian and new economical institutions) writes:

Im an under graduate young economist from Honduras and just listening to the approach on addresing this and other economical issues that you use is fascinating and exiting for me. For example I loved it when you talked about how consumer demand comes back as a feedback for market prices and can make them go up despite its inelasticity (for driving purposes at least) just becauuse more and "new" people keep using oil every day (not in the words you said it but I guees thats what you meant). Which means that maybe its ironically our own fault but also part of the process of economic growth itself as economic well being that prices are peaking this high and not entirely necessary to the "possible" fact that oil reserves are becoming dry.

You also talked about how creative destruction can make us not only believe in possible efficient substitutes for oil in the future but on how also by innovation humans can improve their ways of extracting oil and reducing its costs. Which brings me to a point that you didnt discuss during you podcast...umm and I dont want to fall into Joe Bains SCP paradigm BUT given the controlling power over oil supply of the OPEC countries and to the fact thet companies are and will continue to be "rent seekers" what makes us think that they would transmit lower extraction costs to prices? ...I mean if people dont start giving signals to this companies that they are not willing to pay greater oil market prices at some point, then maybe innovation and new discoveries that support oil supply, will only keep feeding the current cycle (of course not ever lasting but maybe for longer than we whish to). So I think one way to counter attack this possible outcome would be by really supporting alternative enery resources enough that it will act as a signal for oil companies about their possible reduced profits in the future and for consumers as posibble cheaper and less dependable enery source in the future. Of course one cant predict how oil companies will behave in the near future but still, as you mentioned, about 200 years ago it was coal and now its petroleum, so maybe one day it wont be petroleum and it will be something else, my point is - a substitute -, and how will stakeholder behave under this new circumstances can also be an interesting topic to discuss about...

Unit writes:

About the many ways in which a gallon of gas might be more productive today than it was yesterday, one could just look at the Toyota Priuses: they cover more ground per gallon! Hence they allow people who wouldn't have otherwise driven to drive and people who would have otherwise driven less to drive more, i.e. the overall demand curve has shifted to the right. In fact, even the gas-guzzling SUVs are technological improvements that make gas more productive because they give a higher driving enjoyment, a feeling of safety, greater hauling capacity, etc...and therefore people end up using them more then they otherwise would.

Jon writes:

Russ Roberts wrote: "Peak oil is not an economics concept. It is an engineering concept. As such, it leaves out the role of prices and innovation. Why does anyone think it important?"

Why is Peak Oil important? I'll take a crack at it. Let's do a thought experiment and imagine two extremes.

At one end of the spectrum, we can imagine that oil production increases by at least 1-2% per year for the foreseeable future. I believe this is representative of what was seen for some years leading up to 2004. During that time frame, oil prices stayed relatively low. Life continues normally.

At the other end, we can imagine that if oil production ceased tomorrow, it would be catastrophic for human civilization. Without oil, motorized transportation ceases. Perhaps we'd end up with a Mad Max world where roving gangs terrorized the populace. Anarchy and starvation would be the rule and maybe 90% of the earth's population would perish.

In a Peak Oil scenario, we have a result somewhere in between the two above. Among PO believers, you have those who think that prices will rise somewhat, new technologies and alternatives will come on line, people will carpool, switch to hybrid vehicles, move closer to work, travel a bit less, and everything will be fine. You also have those who think that we will have to revert to 18th century lifestyles, because they were much less energy-intensive.

I think it's going to be a lot closer to the first scenario, but it depends a great deal on the rate at which world production declines. We have evidence for a wide range of possibilities:

The Lower 48 states in the US peaked in total liquid production around 1972 at ~11 million barrels per day. That has fallen to something like 7.5 million barrels per day today, roughly a 1% decline in production per year.

The UK's North Sea production peaked in 1999. In the 9 years since then, production has declined by about 50%, roughly a 7.5% decline in production per year.

In both of these cases, you're talking about friendly governments and access to the best technology and stewardship available at the time. In contrast, in places like Mexico and Venezuela, the oil fields are supposedly mismanaged, leaving oil 'stranded' and unrecoverable in the field, possibly contributing to greater decline rates. As I mentioned in my previous comment, world reserves numbers are of dubious quality. Combined with the variance in potential decline rates above, there is an incredible range of what might happen.

Russ, you say that the peak oil concept leaves out the role of prices and innovation. That's certainly true... one could expect a perfect, bell-shaped Hubbert's Curve if retail prices are fixed and technology does not progress. As we get higher and higher prices, more outlandish projects become feasible - drilling 15,000 feet below the ocean surface, drilling under polar ice, mining and melting tar sands - maybe even shale will become commercially viable. With tremendous financial incentives, many of the world’s great minds will focus on finding technological solutions. Economists and 'cornucopians' (a derisive term that PO believers use) tend to think that these alternatives will come online fast enough to prevent any major disruptions to lifestyles or the global economy. Pessimists think that the decline in oil production will be so fast that we (humanity and the economy) won't be able to adapt fast enough to avoid painful consequences.

One of the reasons for this fear is that there are considerable, though not insurmountable, problems with all of the (known) alternatives:

Potential liquid fuel sources:
-shale: not currently commercially viable; requires massive energy inputs... perhaps more than the energy that comes out.
-corn ethanol: debatable energy ROI, raises grain prices around the world
-tar sands: viable at these prices, but requires massive inputs of natural gas and water, leading to environmental complaints and increased competition for water and natural gas resources. Canadian tar sands thought to be capable of no more than 4-5million bbl/day at peak (about 5-6% of current world oil consumption)
-natural gas - requires a lot more LNG ships to really ramp up usage
-coal-to-liquids: not yet shown to be commercially viable. The joke is that the break-even point for CTL is always the current oil price plus $20.

Other sources for energy in the form of electricity:
(these are potential sources of energy but cannot help much with the fuels required for ships, planes, and tractor-trailers; although they can help with plug-in hybrids and by displacing the coal and natural gas used for electricity production, allowing it to be used in ways described above)

-photovoltaic solar: increasing fast, but from a very low base. Will not be a significant electricity source for many years.
-wind: coming online very quickly, something like 40% increase in installed capacity for 2007 vs. 2006 in the US. However, from such a low base, it will take many years before it makes a serious dent in our energy needs.
-nuclear: takes years to get new plants approved and built and uranium prices have skyrocketed, but this is still feasible if you can get the regulatory approval
-concentrated solar power (mirrors and boilers): quite feasible, but not much installed capacity - requires building many more plants
-increased coal production - we have tremendous coal reserves in the US... we just need to overcome objections from greens and build more power plants

The likely solution to a decline in oil production would involve a combination of many of the above alternatives plus conservation, plus technologies that are currently unknown.

Getting back to the observation about prices and innovation - consider what would happen if the entire world is like the UK's North Sea oil fields. In the case of the UK, the price of oil was something like $12/bbl in 1999 when production peaked. Now the price has increased 1000% and they still can't produce even 60% of the oil they did just 9 years ago. The fear is that the same thing could happen on a world-wide basis... leading to $500 or $1000/bbl oil in just a few years. The lack of a serious production increase over the last 4 years as prices increased five-fold has done little to dissuade PO believers of these types of notions.

Charlie writes:

I love listening for how often Don Boudreaux says "us" and "we," when doesn't apply and is misleading. Don Boudreaux loves to say there is no us or we, when someone uses it who disagree with him, but he can't live up to his own standard. Here is an example about halfway through the podcast. "WE'RE made wealthier when China and India produce valuable things that they trade US for oil." Well, I'm pretty sure there is no we, since I don't own any oil. In fact, I'm pretty sure the we in this case is much smaller than in any political use that Boudreaux has gotten upset over.

I've argued before that we should cut some slack on the use of WE, because saying "individuals who own claims on oil" or "individuals who support a certain political action" is unnecessarily unwieldly, but until then I'll still enjoy the double standard.

Charlie writes:

Unpaused the podcast. Bravo to Russ to at least pointing out that it is mostly oil producing nations that grab those gains. Though, more correctly, it is people within those countries (including the US) with claims on oil.

Russ Roberts writes:

Charlie,

You raise a profound point and although you mention Don, I'm sure I make the same mistake either here or elsewhere--pointing out that "we" is a dangerous term in the political world but finding it hard to purge that shorthand from my vocabulary in economics. I hope to do a podcast on judging policy outcomes that will go into this issue.

Floccina writes:

Ethnic Austrian wrote:

We don't have to wait for prices to inform us about the situation. I, personally have been convinced of peak oil for about ten years when oil was dirt cheap. Current prices may not even be a result of a peak but could be a result of many other reasons

And so do you have a fuel storage system somewhere, have you been buying the 8 year petroleum futures. What actions have you been taking? You must be sitting pretty right now eh?

Ethnic Austrian writes:
pointing out that "we" is a dangerous term in the political world but finding it hard to purge that shorthand from my vocabulary in economics.
Sounds almost like reverse buddhism. They deny the existence of the "self", which to them is a dangerous and fallacious concept, yet they can't help using personal pronouns all the time. LOL
And so do you have a fuel storage system somewhere, have you been buying the 8 year petroleum futures. What actions have you been taking? You must be sitting pretty right now eh?
I almost expected that question.

No, I don't gamble, especially not with futures.
Peak oil doesn't necessarily imply an investment oppurtunity and it wasn't forseable ten years ago at which particular point oil prices would rise and by how much or if at all. Remember that until a couple of years ago, many economists thought that a price above of 27$ would immediately lead to a recession.
The oil crisis in the 70ies resulted in nuclear being brought online quickly and the price of oil tanked. There is also a lot of coal left in the ground. Germany and Denmark started to ramp up wind energy at the time. Anti global warming activism might have reduced consumption. There is the potential of price controls and speculation being outlawed.
And last but not least; peak oil predicts a smooth downhill slope with a plateau that lasts for many years, not a freefall. The world has more oil available for consumption today than in 1999 and way more than in the 80ies, when oil was cheap. Without China and India, we probably wouldn't even notice any price increases today.

And we can't be sure whether oil will continue to rise in price. With SUV sales in freefall as they are right now and similar changes probably going on at the margin in all kinds of places, who knows, maybe we have seen a plateau of oil prices already.

That leaves stocks. But:
1. Most oil companies are owned by governements.
2. Governements could nationalize oil fields of private companies (Russia, Venezuela did just that)
3. peak oil also implies higher production cost. So higher prices don't necessarily have to result in higher profit margins.
4. I have no way of knowing which particular company is running out of oil first and whether potentially higher profit margins could offset production decline.
5. windfall profit taxes.
6. price controls
7. Many companies are also in the service sector.
8. Less oil means less gaz stations.

Basically, I don't know anything about the inner workings of how oil companies do business.

There are many other kinds of resources for which a production decline or peak is forseable. Some regions are running out of water. But how to turn that kind of information into investment success is an altogether different question.

Unit writes:

I don't see anything wrong with Don's use of 'we'. Of course, we should use the world 'we', of course one can talk about benefits to 'society as a whole'. Externalities, third parties, we,... it all make sense. The problem arises when people use 'we' to mean "we should achieve a certain goal through the political process", i.e. politicians should act on our behalf (immediately). People who use 'we' in that context not only assume that somehow the democratic process is a realistic tool for aggregating 'our' common will, but often time don't even bother checking the majority opinion and assume that what 'they' think should be done is what 'we' think too.

Unit writes:

I guess what I'm trying to say is that there is a difference between a 'positive' we and a 'normative' we. When people use 'we' in politics it's often normative: "we should work together to make the world a better place", meaning everyone should be forced to do so. When economists say "we are made better off by free-trade'" it's often a positive statement, meaning it's an empirical fact. Now, one can start arguing about measurements: how do we average well-being? Free-trade does hurt some people, etc...But I think they're two different usages of "we". I could be wrong.

John D. writes:

The podcast makes pertinent points but I was expecting more enlightening discussions about the roots of the surge in the price of oil.

Why not discuss the Enron Loophole, the Commodity Futures Trading Commission, the upcoming 'fix' legislation in october 2008? These are the explanations. Why is no one informing the public they're being scammed once again, like they did by Enron in California?

russ bankson writes:

There were several references in the podcast to the origins of oil and gas as the product of an organic process of decayed vegetation. Is this true? I recall Thomas R. Gold http://en.wikipedia.org/wiki/Thomas_Gold, before his death, espousing a geologic theory of oil and gas creation which, if true, implies huge quantities of yet untapped oil and gas

If the conventional theory is correct then it is not strictly true that oil and gas are non-renewable. They are the result of photosynthesis which an ongoing (thank heavens!) process. The rate of production (not extraction and refinement but creation) however may not be sufficient to replenish current usage.

Schepp writes:

Great Podcast Russ and Don,

It is not easy to accept that price signaling can be strong kick to the chin.

I was listening to the Standford Entreprenuer Series and these bio-fuels folks have yeast that can make desiel and they think that they can be cost competetive when oil reaches $175 per barrel. It is far more complicated given the potential change in sugar production price that could occur with higher oil prices. But that is just one of many competitors waiting in the wings.

Another interesting way to look at it is oil is really solar energy. Oil came from plant life that took sun light and photosynthesized it to make plant life and stored the enegry in carbon form (battery) for thousands of years, pretty efficient energy storage and now is being utilized by us.

Consider also if we keep our environment from changing and not dealing with change. There is a huge price to that when we really will have to change or perish because the universe throws us a new curve ball.

My father always insisted that everything was political. I see almost everything as economic. This was an ecomomic discussion, pyschology and values systems are within the economic realm. The complexity of living where many individuals judge success as single goals and not the true interplay of all the factors will be with us for a very long time.

Dallas writes:

An interesting podcast. Russ stated something to the effect that an oil tax couldn't be justified. I agree that an oil tax would have negative impacts, but a better analysis would be to view an oil tax vs. and existing tax. For example, a crude oil tax of $100/bbl vs a revenue neutral decrease in payroll taxes. In that case, you have to weigh the negative impacts of an oil tax in creating less than optimal alternative energy sources relative to the existing negative impacts of payroll taxes on employment. An oil tax may be a lot better than a payroll tax.

One factor not mentioned in your analysis of oil taxes is the impact on investment risk. For example, a coal to liquid plant or a nuclear power plant is very capital intensive and at $130/bbl energy cost, both would be very profitable investments. However, with OPEC having production costs in the $5-25/bbl range and the possibility of these existing prices being just a short term bubble (I don't think it is), the risk premium on an investment in coal to liquid production would be huge. With an oil tax that doesn't apply to your coal to liquid plant, a $100/bbl tax advantage would insure against the risk of price crashes. People believe that taxes seldom go down, but commodity prices can crash.

The same analysis applies to energy saving investments. The higher the tax on oil, the harder you drive the adaption and innovation.

Matthew Sheldon writes:

Russ-

I have a theory here, which I have seen elsewhere as well. We actually have some elements of an upward sloping demand curve here. How can this be? HEDGING.

As the price has gone up, more and more industries that take oil as a major input cost have a greater incentive to hedge in the futures markets. Airlines and logistics companies have done this for years, but now all sorts of manufacturers are doing it to remove commodity risk from their balance sheets. When this happens, it will drive up current prices because a large part of future production is already spoken for at higher prices, so any producer could simply opt to hold back supply in the case of pricing weakness. This massive growth in futures contracts has had a huge signalling effect that is nog totally supported by the fundamentals of current supply and demand. The large number of futures contracts at already high prices would lead any commodity trader to conclude that buying current supply at the same prices is a pretty fair deal.

Every time oil hits a new high, more companies decide they have to hedge, so you get what startsto look like an upward sloping demand curve. Only when most companies feel that they have properly hedged will they cycle erode, opening the possibility for pricing to return to the fundamentals. Once that happens, you will see some radical price readjustments. My guess is that September will see the price crash back to the $80 level, and hold there. Long term, the price will have a hard time recovering over $100 given the massive restructuring going on in auto fleets and the shifts to rail and ocean freight.

Charlie writes:

-Unit

I completely disagree with you. First, Don use we in an instance where 'we' included everyone. A demand driven rise in oil prices creates winners and losers. I, for instance, am a net loser as I consume oil products, but own no oil. So when Don said, China and India are trading US valuable things for oil. He was quite wrong. China and India are trading people who own oil valuable things for oil. I am a net loser (in this market). I further think that the number of people that are winners in this market is very small relative to the population. So we is very inappropriate here, this logic doesn't require externalities...etc to hold.

Now consider a normative statement: "we should eat more vegetables." Behind this statement is some system of values and beliefs that leads to a normative conclusion. In this case, it totally makes sense to use 'we', because it is a subjective statement about how the world should be. Consider these statements, "We should build a town swimming pool." "We should auction off rights to off-shore drilling." "We should tax everyone in America a dollar and give it to me." There is nothing misleading about we in this context. I don't need to check the majority of my friends opinions before I assert, "We should go to the movies." I just state it as a normative statement, and my friends are free to agree or disagree. The same is true in politics.

Unit writes:

Charlie,

I thought that Don's point was that India and China drive up demand for oil but also use oil effectively to deliver us cheaper goods, so how can you say you're a net looser?

You're welcome to use the normative we all you want but it doesn't lead very far, it's still just your opinion only.

Charlie writes:

Here is how it is summarized:

"In order for China and India to have an effective demand for oil they have to give up something for it. They are producing valuable things for this oil. We are made wealthier as a consequence. So our increased cost of acquiring oil is offset to some extent by the goods and services produced by these countries. Most of those gains though are captured by the oil producing nations."

I think it is clear by Russ's comment after that the gains are primarily accrued to oil producing nations, that he interpreted it as I did, and by Don not correcting him that this is how he meant it.

What you are talking about is a second order effect (at least to the relevent discussion) of Chinese and Indian growth. It is true that I benefit in many ways from Chinese and Indian growth, but that doesn't mean on net I'm a beneficiary. For instance, if I purchase relatively few goods (measured in dollars) produced in China and India, but relatively many oil intensive goods. I am a net loser from this change in relative prices. The idea that they trade US something valuable for OUR oil, isn't relevent for people who don't own oil.

Unit writes:

Charlie,

I'm not so sure it's a second-order effect. I took it to be an example of how oil is becoming more and more productive and how this productivity gain on one hand explains the shift in demand and on the other hand signals that "we" are better off (because wealth is ultimately obtained via productivity gains).

As an aside, what about the fact that the rise in oil prices is also increasing the excise-tax revenues that Uncle Sam is quartering away? I'm not particularly happy about that, but doesn't that benefit "us" all? Or do you in this case think that it only goes to benefit politicians?

Charlie writes:

"I'm not so sure it's a second-order effect. I took it to be an example of how oil is becoming more and more productive..."

That's not the point Don was making. Also, there is no guarantee that the productivity gains will trump the relative price change, either for an individual or a country as a whole. You are still ignoring the relative price change. You can't do this. There are two effects happening at the same time.

"As an aside, what about the fact that the rise in oil prices is also increasing the excise-tax revenues that Uncle Sam is quartering away? I'm not particularly happy about that, but doesn't that benefit "us" all? Or do you in this case think that it only goes to benefit politicians?"

Part of the excise taxes are bourne by consumers, and they aren't bourne equally by all consumers, so again "we" here is misleading. You can't say more excise taxes benefit "us" all, if some of us are net winners and some of us are net losers.

Charlie

Unit writes:

Charlie,

My point about taxes was a failed attempt at humor: scrap that.

I just re-listened to the first half of the podcast:

First Don says "for oil price rise its increased value reflects its increased productivity." Then he says "In order for China and India to have an effective demand for oil they have to give up something for it" they have to produce goods and services that then go into the international flow of commerce and this makes "us all" better off. I understand this as an explanation as to why oil is more productive and thus more in demand. "us" here is not "us Americans" but the total cumulative utility (whatever that is), the world economy is more productive and hence more wealthy, more is better than less, etc...How can you say that he wasn't making that point? He even said something to the effect that the rise in oil price is somewhat offset by the rise of goods and services from China. Maybe we're talking past each other....

Charlie writes:

I think we are on the same page now. But now you can understand how I can be a net loser, even how the majority of Americans could be net losers. If you go back to my original point, it is that Don has this double standard when criticizing people over using 'we.' I looked for the posts of his on cafe hayek about it, but couldn't find any. I don't want to misrepresent his position.

But, in general, I think saying "we're all made better off as a consequence of those exports" is misleading, because there are winners and losers and the losers could potentially far outweigh the winners. I think it is problematic when economists gloss over winners and losers when talking to a lay audience, because it undermines our credibility when losers appear.

But mostly, my point was that Don applies this double standard (as with everybody else that I've ever heard get in a hissy fit about using "we") when getting upset over the use of we. Granted this is a weaker argument that I can't find his posts about it, but I think it is an accurate representation.

*Sidenote: "we" in the abstract sense you mention are wealthier, but we don't necessarily sum to greater utility.

Ed writes:

Why hate the oil companies? They provide a good service. So if someone comes along and provides a cheaper form of energy, should we hate them too?

It sounds like Don and Russ could have brushed up on some background on oil especially for subjects such as synthetic oil.

As far as peak oil goes, I would say it's hard to tell if we're running out of oil when populist politicians do as much as they can to make oil drilling as expensive and time consuming as possible. In additional, nationalized oil companies have less transparency so it's hard to ascertain what the actual price of drilling is in countries like Russia and Venezuela where the oil operations are part of the government. If these politicans in the U.S. and around the world would get out of the way, we would have a clearer picture of the situation.

TripleHash writes:

What about INFLATION? From an entry on my blog...

Classic Head Fake on Oil Prices

Here is the setup. Whenever you don't want people to know the truth, you head fake them by making them go a different way. But how do you head fake two opposing sides at the same time? Here's how you do it in regard to oil prices...

On the right you have McCain who says the reason we have high oil prices is due to the lack of drilling we've done in the last many years.

On the left you have Obama who says the reason we have high oil prices is because we drive SUVs and are not conserving our energy.

Both lines we've heard over and over in the last 30 years or more. You can see a summary of these two positions in this CNN story (Oil crisis: Obama vs. McCain).

Now, one of these ideas has to be correct, right? But what happens if the truth is neither of the two? What happens if the truth is still out there? But what happens if that truth is not what you want people to hear? Then you better make sure that this message is labeled as being crazy or irresponsible. What better way to do that then to make this message delivered by a crazy, mad man like Ahmadinejad. See this story (Iran's Ahmadinejad says oil price artificial) where Ahmadinejad says the oil price is due to our falling dollar and not because of the lack of drilling or driving SUVs.

Let me try to explain what Ahmadinejad is saying. If you are an oil man in the Middle East and you want to buy a BMW that costs 100,000 euros made in Germany. You'd sell enough oil to make 100,000 euros to buy that BMW. And lets say that 3 years ago someone in the United States did the same, and at that time it took $100,000 US dollars to buy that same BMW. Thus whether the oil man used dollars or euros he had to sell the same amount of oil. Now, fast forward to today. Assuming the cost of the BMW didn't go up, the oil man would still need to sell enough oil to purchase the car in euros (100,000). But if he were to purchase this car in dollars, he'd have to spend $150,000 US dollars to buy this car. (The value of the US dollar to the euro has drastically gone down.) Since he doesn't want to use more of his resources (oil) to make this purchase he just raises the price of his oil in dollars to match the amount of purchasing power he has relative to what he can get in euros for the same amount of oil. Thus, the same number of barrels to buy the BMW whether it be in euros or dollars. And now here's the real meat of this. The petrol market deals entirely in US dollars. The middle eastern oil man must buy US dollars in order to sell his oil in the oil market. The US dollar since the early 70's has been used by OPEC as the currency for selling oil. Thus it stands to reason that if the dollar doesn't buy as much as it did before, that you'd have to raise the price of what you sell (oil) in dollars in order to get your value back. And why is the dollar worth less? Inflation. Where does inflation come from? Printing excess dollars. (See more here.)

So there you have it. We're being told that we must drill or we must conserve by the two candidates. The real answer is we must stop inflating our currency and the man who said this is a mad man. The classic head fake times two.

You guys are still completely clueless on this, specifically on the realities of the situation geologically.

This is clearly demonstrated when you make uninformed statements like:
o The whole mosquito argument about not knowing how much oil there is. Its pretty clear that the geologists know approximately how much there is and that it is half used up and its the cheap to find and extract half. Even the way overly optimistic IEA has changed its tune on this.
o Talking about how reserves are constantly growing when in fact discoveries have been less than what has been used virtually every year for decades. This is a clear indicator of how uninformed you are. If you took a peak at the BP statistical review you'd know this. Any way, its clear how bad the situation is because the big oil companies all include natural gas in the "oil equivalent" reserves.
o Talking about shale oil without discussing the concept of Energy Return On Investment.
o Talking about the idea that the price of a fixed quantity of something should rise with the interest rate without acknowledging that things should things will change when the perception shifts from a limitless supply to a supply half used up and the cheap stuff is gone which is the case for the world and oil.
o Fail to make a clear distinction between transportation fuels and other energy problems.

Why don't you bring someone on who knows what he is talking about and then have a discussion? How about Matt Simmons,Jim Puplava, Deffeyes or Donald Coxe? There's probably a tonne of economics academics that are reasonably informed that you could find on this topic if you visited www.theoildrum.com.

I think you are doing a real disservice by discussing something when you are uninformed as if you are informed.

Love your program usually, by your economics ideology combined with ignorance of the specifics is resulting in misinformation rather that helping the world come to grips with what is clearly one of the biggest issues facing it.

Douglas M Dillon

Ryan writes:

I read talk of oil speculators being blamed for oil prices. Is there an economic reasoning to convey if this is true or not?

TripleHash writes:

Came across this...

The Energy Non-Crisis by Lindsey Williams

http://video.google.com/videoplay?docid=3340274697167011147

Ok, I'm back for another comment or two.

You seem overly confident about the ability for the inventiveness of mankind to conveniently transition us to another transportation fuel source.

Since the beginning of the industrial age, how many transportation fuel transitions have there been?
Animal power to steam/wood
steam/wood to coal
coal to petroleum is all I can think of.

Assuming more such transitions being easily accomplished is based on inductive reasoning and in this case from a track record of three events.

Seems like much less of a sure thing than it sounded in the podcast. Didn't you have a highly admired podcast with Nassim Taleb about not trusting in smalish sample-sized based inductive reasoning?

I think this is a big deal and that it is not a slam-dunk that a reasonable alternative transportation fuel exists that can be transitioned to without a major impact on the average American consumer (e.g. having to switch to motor scooters while waiting for the next thing to scale up).

Douglas M Dillon

Nick writes:

I thought the podcast was pretty good overall, but Don Boudreaux committed two colossal factual errors towards the end:

- In citing Julian Symonds, he repeatedly said that diseases such as tuberculosis, cholera, and polio were caused by "pollutants" in the past. They are not. They are infectious diseases caused by microorganisms that are a part of the natural environment. It is absolutely true that, during the past century, life expectancy has risen precipitously, and we now live long enough to die from diseases (including cancers) for which pollutants play a significant role. However, this is due to a decline in infectious diseases, not diseases caused by other pollutants.

- Don also said that "capitalism" is what has led to the decline in mortality from cholera, tuberculosis, etc. This is tendentious and has no evidentiary basis. In fact, planned, collective public health interventions that provide cleaner water and better sanitation are responsible for a large part of this decline. And you don't have to take my word for it; here's an empirical study by Harvard health economist David Cutler:

http://www.economics.harvard.edu/faculty/cutler/files/cutler_miller_cities.pdf

We can thank capitalism and the private sector for many advances in medical technology, health care, and the standard of living. But the decline of infectious diseases is not one of them.

Stephen writes:

I'm a relatively new listener to your economic podcasts, and overall I find your topics typically interesting and somewhat thought provoking. As an Industrial Engineering Major focusing on Economic Decisions Analysis, I can readily understand the topics and methods that you use to formulate your opinions on the variety of topics you cover.

This podcast however, I consider to be a bit of a disaster. Although I strongly disagree with a lot of the conclusions and statements that you make in this podcast, that alone was not enough for me to be absolutely disheartened by the content.

One of the main issues I have contention with is the consistent use by both Don and Russ of using the logic of 'well, it hasn't happened yet, and it may happen, but it may not... and we just don't know'.

Alright. I understand how you can make such a statement, and it is not necesarilly a bad one in it's own regard. However I see both of you sort of relying on it like a crutch, throwing several morsels of information out to support, but never really giving both sides of the issue equal footing in the discussion.

I would love to break everything down and provide some sort of critique, but unfortunately I am at work and cannot devote the time required for such an endeavor.

I would like to end with saying that at my own particular university (Georgia Institute of Technology), if I had used your arguments and reasonings in any sort of graded exercise, I would not expect to earn more than a C for my efforts.

I honestly expected more from George Mason University, and its Economics program. It's prestige is far and wide, and the content and reasoning that I experienced during this podcast definitively betrays such expectations.

However, I hope to avoid coming off as upset or unnerved, I am merely dissapointed and hoping that you can work to solve such issues in future broadcasts.

Thanks for your time-

kumar writes:

If energy prices were siply a matter of demand and supply, how does one explain the sudden drop in prices in these past two weeks in July? Did the demand for oil drop so suddenly because consumers of oil realized that they were no longer able to obtain greater value from using the oil?

Russ Roberts writes:

Nick,

You misunderstood Don. He did not say that those diseases were caused by pollutants. He was making a different point about taking a broader interpretation of the environment.

Douglas Dillon,

The argument that we will transition to new energy sources isn't based on the existence of say, three transitions, but on the logic of how prices create profit opportunities and incentives for the transition.

kumar,

The drop in oil prices is probably the result of both reduced demand and an expectation of future supply. The price of a resource today can be affected by future supply. A new discovery or the expectation of new discoveries don't just affect prices in the future. The expectation of lower prices in the future will encourage people to supply more today lowering price today.

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