April 27, 2006

Environment > Reason Magazine Looks at Peak Oil

I tend to trust Ronald Bailey's science reporting for "Reason," so I find his latest on peak oil reassuring.

Instead of preparing for an energy war, the best policy is to let markets have free rein. Even if, say, the Iranians make the political decision to disrupt the flow of oil to world markets, those markets left to themselves will eventually discipline them. The temporarily higher prices will encourage more exploration and technological advances, which will bring energy prices back down. On the day of his inauguration in 1981, President Ronald Reagan lifted oil price controls. Five years later oil prices fell below $10 a barrel.

One day, the oil age will end. As with all resources, there is ultimately a finite supply of oil. So it is not yet clear how the world will power itself for the bulk of the coming century. But we have at least another three decades to find alternatives to petroleum. “Trusting markets is the only way we can assure energy abundance in the future,” notes the University of Houston’s Economides. “It’s also the only way that we will ever transition to something other than oil and gas.”

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Comments

Do we really have a free market for oil? The uniformity of prices across brands suggests not. Shouldn't Citgo's pricing vary from other brands since it uses mainly Venezuelan oil? Since Weigels has a much smaller advertising budget than national brands, shouldn't their gas be a few cents cheaper? Shouldn't the 3-cent variation we saw when gas was $1.49/gal expand to a 6-cent variation at $2.99/gal?

We've included the cost of road-building in gas prices through gas taxes, but several costs remain external to the market, health care costs due to air pollution being the most significant.

I agree with the basic premise of letting the market deal with the changes in supply and demand, but that solution would be more effective if we eliminated the subsidies and externalities and collusions that deviate the oil market from the free market ideal.

Posted by: persimmon at May 01, 2006

A recent GAO study estimated the federal government will lose $20 billion over 25 years to subsidies written into laws regulating oil exploration in the Gulf of Mexico. A pending lawsuit could quadruple the giveaway. This is but one of the many ways our laws decouple oil and gasoline prices from fundamental market forces.

This has little to do with tax policy or energy policy and lots to do with political corruption. The oil companies spent tens, even hundreds of millions of dollars on lobbyists and campaigns to get those subsidies.

Posted by: persimmon at May 04, 2006
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