Is oil cheap only because of the recession?
New York Times columnist/blogger John Tierney linked to my post last week on his bet on oil prices with Matthew Simmons. Reprising Julian Simon's famous bet with Paul Ehrlich, Tierny bet "Peak Oil" theorist Simmons on the average daily price of oil in 2010. Tierney says it'll be less than $200; Simmons says more.
Several commenters on Tierney's blog seem to acknowledge that he's likely to win. (Oil is below $40.) But they say he lucked out with the severe global recession, which has depressed the demand for energy. The oil-price plunge, these commenters suggest, says nothing about long-term resource sustainability and long-term resource prices.
Not true. Granted, the recession does force energy prices lower, and the recession won't last forever. But recessions and limits to growth are a crucial factor in favor of anybody who's betting against long-term resource inflation. Until recently world GDP was growing close to an annual rate of 5 percent -- an astonishingly fast pace. The idea that it couldn't keep up was crucial to anybody betting against higher oil prices. Unsustainable demand was a key factor in the oil bubble.
But the business cycle is only one way economies adjust to seemingly scarce resources. When resources become expensive, we buy fewer of them. When resources become expensive, people switch to alternatives. When resources become expensive, entrepreneurs seek new sources or invent technology to better exploit old ones. All of these things have been going on with oil in the last two years. They are real but unmeasurable factors in its price decline. It's not just the recession. Tierney didn't luck out. He knew the odds favor the resource optimists for many reasons.
The real problem with sustainability has to do with carbon emissions and climate change. So far the true cost of carbon emissions isn't priced into oil and other energy. We need to price carbon correctly -- through a tax or a cap-and-trade system -- so that the myriad, uncoordinated economic adjustments that have made oil less than $40 can also work to mitigate global warming.