Energy Myths for the 21st Century

Thursday, October 01, 2009

From a commentary by Nicolas Georgescu-Roegen on Seeking Alpha:

That brings me . . . to the title of this paper. Taking oil as a case in point, it might be true that the most imaginative myths in circulation today are those being generated by OPEC. Having come to appreciate the supreme importance of oil – and how it functions as a benchmark for the world’s energy systems – that organization has informed the oil importing countries that if the oil price goes up and stays up, then they will invest in more production capacity, and also raise their output of oil.

That sounds good – in fact it probably sounds like something you heard in an introductory economics lecture, or read in your favourite textbook or newspaper – only it is completely untrue. It is a distinguished myth, and unfortunately a myth that is believed by many drowsy academics and their students, and probably more than a few influential but not very brainy decision makers. Instead, although there might be exceptions, the aggregate of OPEC producers is not going to invest in additional capacity, and they are definitely not going to produce or try to produce much more oil. Why should they? Would you if you were in their place?

OPEC has also launched the theory that high oil prices are due to speculation (i.e. gambling) and not fundamentals (or supply and demand). This allegation was supported by a finance professional named Michael Masters, who appeared before a sub-committee of the United States Congress, and offered virtually a sacred affirmation that it was speculation and not the physical market that was ruining the lives of American motorists. Both OPEC and Mr Masters were in turn supported by perhaps the most influential celebrity on Fox News, which is a television channel featuring some of the most obsessive voices on the U.S. conservative scene. The voice to whom I am referring on this occasion belonged to none other than Mr Bill O’Reilly, who informed his plethora of admirers that it was “little guys in Las Vegas” who created the problem.

Had this been true, President Bush could have taken the morning train or a helicopter to Wall Street, or jetted to Las Vegas, and using the very significant authority of his government, put things right before lunch was served. Instead he climbed into Air Force One and flew to Saudi Arabia, where he asked the Saudi King to produce more oil, and preferably sooner rather than later. That ‘hat-in-hand’ episode was concluded almost immediately after the delivery of the president’s request, with King Abdullah thanking him for his concern, and wishing him a safe trip home.