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June 3, 2005
Peak Oil
It's very much worth reading Kevin Drum's Peak Oil series (summary here). In particular, if you understand the underlying issue (which basically is that oil is not an infinite resource), his plan in part 5 is worth reading and debating.
Even if Kevin is too pessimistic about new oil supplies coming online, which he may be, his proposals as a general rule make a lot of sense. I think Kevin has missed (or I have missed in reading the series where he addresses it) some optimistic factors.
The most important of these is that markets work. As oil increases in price, the cost of alternatives (synthetic lubricants, biofuels like biodiesel, vegetable-derived alcohol and so forth) decreases in relative terms. At some point, the price of oil is such that these alternatives predominate, and the infrastructure begins to switch over. This reduces aggregate demand for oil, which then stabilizes at the new (higher) price. And assuming that the availability of oil continues to drop, the alternatives will take over more and more of the uses of oil, because oil will continue to get more expensive.
Eventually, the end result is that we don't use oil for hardly anything, but at the same time this results in a higher energy cost overall in the economy, and thus lessened economic output. Of course, this could be overcome by productivity gains elsewhere, and we've got a pretty long time horizon to solve the problems, so it's likely that this will not look as bad to people living through it as it will to economists looking back at old data fifty years from now.
Direct taxes on oil products is probably not a good answer, and here is why: the intent is to prevent increasing the cost of energy to the economy, or to delay that as long as possible. Taxes artificially raise prices, and thus artificially lower consumption. Good that consumption is lowered, but all you've really done is to start now on the increased costs. Stricter CAFE standards and not exempting SUVs and other non-commercial vehicles would be a much better response. So would increased tax credits for owning alternative-fueled vehicles, vehicles with higher mileage, hybrids and so forth.
Research into better electricity storage mechanisms - particularly high-efficiency, lightweight, low-cost, easily disposed of or recycled batteries - would be a good place for the government to spend research dollars. The economic driver for this is a ways out right now, but producing a better storage mechanism before the market demands it would have some advantages: cars could be converted to electricity more effectively, meaning that sources other than oil could be used to generate power for vehicles; space and military applications abound; and it's likely that such research would lead to breakthroughs in unrelated areas.
Finally, it would be good to explore distributed power generation. We used to have solar panels on my Dad's house in the 1980s. They never generated enough to repay the cost, and I cannot think how much landfill space they will generate when they are removed (that house won't last forever). But there are good cases for using solar and wind energy as supplemental systems, along with on-demand water heaters and other technologies like heat recapture. With all of that said, the market will take care of this as energy prices over time rise to be more expensive than these technologies are and will be. Still, if we put some research into these areas, it's possible that we could find ways of reducing their current costs, and thus making the market action kick in faster.
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