econpolicy.com

As I was listening to the speakers at the EIA conference back in March, particularly those speaking about the peak oil issue, my thoughts turned to the old hog cycle theory of agricultural economics. Since I studied this 30-some years ago, I turned to the web to refresh my memory after letting it gel until now.  As luck would have it, the same thing was on Paul Krugman’s mind back in 2001, before the recent run-up in prices (http://query.nytimes.com/gst/fullpage.html?res=9E0CE7D6123BF93BA25752C1A9679C8B63&sec=&spon=&pagewanted=1). I’ll leave it to you to evaluate his argument and decide if he was prescient.

It appears to me that the run-up in prices and the instability of producing countries almost mirrors the situation we had in the 1970’s.  Both times we have been or were bogged down in a foreign war quagmire.  The last time there was an OPEC oil embargo and price controls.  Now we have a Strategic Petroleum Reserve to get us through short term shortages and prices set by markets.

I would not bet on if, when and how oil prices crash again and we have a glut of product on the market.  But the history of the petroleum markets since 1859, when Col. Drake sunk the first producing well, is that it is a boom and bust industry.  I. e., the economics of the hog cycle broadly define other commodities markets, including fossil fuels.  So sooner or later…

Perhaps few know or remember this, but Jimmy Carter tried to make the CIA more open.  The openness did not last past his term in office.  I have two CIA energy documents from that era.  The first is “The International Energy Situation: Outlook to 1985,” published April 1977.  The second is “International Energy Biweekly Statistical Review,” published 25 January, 1978.  The second is obviously a periodical.  I do not know if the CIA still publishes energy forecasts or if such forecasts are publicly available if they are published.  The EIA, as I noted earlier in my discussion of its 30th anniversary conference, was established in 1978.  It’s quite likely that EIA is the primary public source of energy forecasts in the US government, although other agencies, such as the Minerals Management Service and the Federal Energy Regulatory Commission may have good reason for narrowly focused forecasts.  And of course they both collect historical data.  The CIA likely provides some limited energy data to the Executive Branch and select members of Congress.  But forecasts such as those it made in the 1970’s would seem to be an inefficient use of scarce resources.

If anybody wishes to purchase copies of these documents, I am willing to make them available for a rather nominal fee covering the cost of copying and mailing.  In future weeks I will provide some of the estimates made by the CIA and compare them with actual circumstances.

Dr. Schlesinger, as crusty as ever, claimed at the EIA Conference (April 7-8, 2008) that polls during the earlier energy crisis of the 1970s showed the public believed all that “Big Oil” had to do to do to find oil was punch a pipe in the ground.  I don’t know if this is true. I’ve not had good luck in finding relevant opinion polls on energy matters on an historical basis.  I do believe that Americans for the most part feel entitled to plenty of energy at cheap prices as part of their birthright.  But this is my opinion that I have been thus far unable to back with hard data.  If anyone knows where I might obtain historical survey data on American attitudes towards energy prices, please let me know.  However, it seems to me that there is a lingering boom and bust cycle in energy, and during the downswings, the issue is mostly out of sight and out of mind.

At any rate, prior to the energy crisis of the 1970s, the TV show, “The Beverly Hillbillies”, had a 9 year run. “The Ballad of Jed Clampett”, the theme song of the show, has lyrics that begin as follows:

Come and listen to a story ’bout a man named Jed
Poor mountaineer barely kept his family fed
Then one day he was shooting for some food,
And up through the ground come a bubbling crude
(Oil that is, black gold, Texas tea)

If people really did believe that all the oil companies had to do to find oil was to punch a hole in the ground, could pop culture have contributed to this notion? Or was this pop culture based on a belief that one could fire a shot at some game, miss, and strike oil?

The Energy Information Administration is celebrating its 30th anniversary this year with a 2-day conference on energy issues of the day as well as EIA’s usual technical explanations of its ongoing work (http://www.eia.doe.gov/eia_conference_2008.html?featureclicked=1&). 1600 people registered for the conference. I attended most of yesterday’s session and while I cannot make it today, the papers will be posted on the EIA website, so I can catch up at my leisure. Not only did I hear some of the same people who were involved at the beginning or shortly thereafter, including Secretary James Schlesinger and EIA Administrator, Guy Caruso, but today’s issues, particularly as they involve supply, demand and cost, seem to be very close to what they were 30 years ago. This leads me to a number of ideas which I will cuss and discuss in subsequent posts. Please feel free to join in the discussion.

A bit on the lighter side:

After digging to a depth of 10 yards last year, New York scientists found traces of copper wire dating back100 years and came to the conclusion, that their ancestors already had a telephone network more than 100 years ago.

Not to be outdone by the New Yorkers, in the weeks that followed, California scientists dug to a depth of 20 yards, and shortly after, headlines in the LA Times newspaper read: “California archaeologists have found traces of 200 year old copper wire and have concluded that their ancestors already had an advanced high-tech communications network a hundred years earlier than the New Yorkers.”

One week later, a local newspaper in Georgia, reported the following:  “After digging as deep as 30 yards in cotton fields near Adel,  Bubba Johnson, a self-taught archaeologist, reported that he found absolutely nothing.  Bubba has therefore concluded that 300 years ago, Georgia had already gone wireless.”

– Sent by a friend in South GA, where I grew up.

Buddy K

“Peak oil” is the theory, first advanced by Shell Oil Company geologist M. King Hubbert in 1956, that predicted, through the use of a derivative of an oil production decline curve, that US oil production would reach a peak between 1965 and 1970 and then decline.  Hubbert’s forecast has so far proved to be correct. One could not completely rule out the potential discovery of a monster field that proves this forecast wrong, but it is generally conceded to be unlikely.

The theory is currently used to argue that world oil production will soon peak and then begin to decline.  An organization dedicated to the study of peak oil exists (APSO International), as do other individuals and organizations that have bought into the theory and have a presumed interest in defending it.

Perhaps it is unfortunate that the curve derived from Hubbert’s analysis looks much like a symmetrical statistical bell curve, thus giving it a credence that it otherwise might not deserve.  After all, it is not based upon oil prices, alternative energy consumption, technology, supply or demand except by coincidence.  While it is true that oil fields reach production peaks and decline over time and that the “easy” oil is extracted first, the experience of individual fields is highly variable.  There are geological, economic, and often even strategic and political reasons for the extraction rate of a particular field. Furthermore, the CIA and other forecasters were way off the mark in their forecasts of supply and demand in the 1970’s (I have copies of some publicly released CIA forecasts that were off the mark that I will be happy to provide for a nominal fee). Oil prices crashed and remained low for decades and it took many years for consumption to climb back to its peak in the 1970’s. 

That being said, fossil fuels are indeed finite resources, world production will eventually decline and some forecasters will accurately predict the timing, through skill perhaps, but probably blind luck. 

This is an interesting article. I would argue that the authors are a bit misguided. More on this later.

“The Taking of Prosperity? Kelo vs. New London and the Economics of Eminent Domain,” by Thomas A. Garrett and Paul Rothstein (http://stlouisfed.org/publications/re/2007/a/pages/prosperity.html)

Technorati Profile