Tuesday, June 17, 2008

Knowing your limits 

A minor discussion broke out on the blog by Janet that became a blog post for Jeff Rosenberg. It is a repeat of the Democrat refrain that you can't drill your own way out of the energy problem. "The days of cheap oil are over," Rosenberg declares in a follow-on to an early post with even greater grandiosity:
Instead of looking resolutely back to the past and trying to figure out how to return there, why not recognize the challenges of the future and actually propose a plan to meet them? We can no longer find large enough oil deposits to make oil a viable energy source in the long term, EVEN IF we didn't care about the consequences to the environment. It's time to invest in alternative energies, raise gas mileage (CAFE) standards, and start building our cities in a way that does not require us to drive everywhere.
I admire people with breathtaking, sweeping visions of the world, and I have to think from this statement that Rosenberg is intimately familiar with geological formations around the country. That capitalized "EVEN IF" gives lie to his argument that we cannot -- if we showed him we had trillions of barrels of oil in North Dakota, we would never be allowed to do that because "we don't care about the consequences to the environment." He does, he's better than we are, and he will tell us that we cannot drill. This is the vision of the anointed. The process costs, as Vinod points out, are simply incidental. Feasibility is something we can just overcome by force of will.

Let's imagine that John Palmer and Jerry Taylor are right and that in the long run a 1% increase in oil supply would reduce the price of oil by 1%. The rate at which you would extract from the new find would be determined by both extraction costs and by the rate of interest one could get on the proceeds from selling oil. If prices go up 3%/yr and the rate of interest is 5%, you're better off getting as much as you can out now and investing the proceeds rather than leaving it in the ground. If prices are going up 10%, your best investment is to wait. But as you extract more oil, the cost of extraction rises. This really doesn't require a great deal of thought, but it requires a recognition of the limits of drilling and the alternative costs of changing to alternative energy, of increased deaths from lighter cars that meet CAFE standards, of tearing down whole cities to rebuild them in Rosenberg's cosmic vision. One that recognizes no limits ... as long as you just believe. Not a world in which there are tradeoffs.