‘Peak Oil’ Over, Economists Study Climate Policy Costs

“In a 2014 ‘EV Everywhere Grand Challenge’ study, the US Department of Energy finds that the current battery cost is $325 per kWh. At a battery cost of $325 per kWh, the price of oil would need to exceed $350 per barrel before the electric vehicle was cheaper to operate.”

– Covert, Greenstone, and Knittel. “Will We Ever Stop Using Fossil Fuels?” Journal of Economic Perspectives (30(1), 2016): p. 132.

In the marketplace for ideas, economists are always selling. We see a situation that everyone knows is imperfect, point out the exorbitant costs and likely mistakes on the road to Nirvana, assure our audience that in any case the market can likely manage things better than government. And we hope someone accepts our research and clients retain our consulting services.

For the longest time, the bulk of economists assured folks that application of simple market models demonstrated that peak oil was irrelevant or wrong. All you needed to see were the continuous growth in accessible reserves and the continuous decline in the costs of getting at them. Most counterarguments were little more than assertions that the weight of the planet is finite. It took a long time, but economists finally won. A rare victory for reality over assumption-laden theory.

The importance of this win became official a few days ago when I got my copy of the Journal of Economic Perspectives, a mainstream (official) policy analysis publication of the American Economic Association. In this issue was was “Will We Ever Stop Using Fossil Fuels?” by Thomas Covert and Michael Greenstone (University of Chicago) and Chris Knittel (MIT).  Their summary answer is “No.”

So the out-of-the-mainstream (remember RFF’s turn toward Malthusianism in the 1970s?) is now mainstream. Is everybody happy? A mix of luck, technology and semi-intelligent policies did the job. Worldwide oil and gas reserves steadily crept upward for decades while Presidents from Nixon to Carter assured everyone that the end of the oil was in sight. Today BP’s World Review says there are fifty years of production in proven reserves, whose total more than doubled between 1980 and 2010.

Technology, the article explains, has changed the odds – U.S. success rates in exploratory wells rose from 20 percent in 1950 to better than 50 percent today. And best of all, things that never counted as reserves have become accessible enough to count, most importantly oil shales and sands.

Just waiting for new technologies are methane hydrates, worldwide estimates ranging from 10,000 trillion to 100,000 trillion cubic feet. And good reason to annex the North Pole before the Russians do.

Depletion Scare Over, But Now Climate

Of course if the market does things so well with so little help from economists, our lives lose their meaning, to say nothing of consulting fees. But what stands in the way of fossil-fuel perfection is that burning all this stuff affects climate. The authors go on to argue that the falling costs of intermittent renewable power may well be outpaced by falling conventional energy costs and further improvements in technologies. So is this bad?

This all comes to a head in the unpleasant arithmetic of electric vehicles. Currently a state-of-the-art electric vehicle is totally cheaper than one that runs on gasoline only if the price of oil is above $350 per barrel (see above quotation from authors).  The record shows that conventional and electric cars are both likely to keep falling in price and increasing in efficiency.

And batteries?  The best even optimists at the Department of Energy can project is equivalence at $125 a barrel of oil about 40 years ahead. Won’t happen.

Economists’ Climate Math

Using the back of yet another envelope, the authors estimate that using “all available fossil fuels” will raise global temperatures by 10 to 15 degrees F over the long term. Here the economists-as-consultants get right back in the saddle with carbon taxes and consumption limits. (Peak Demand, not Peak Oil.)

The job will also need doing in lots of countries that currently have hardly any electricity, and we will be able to use the same sales strategies as in the old days. Accompanying the end of the world will be a rebirth of meaning in the lives of economists.

Of course, these figures assume that our astoundingly inadequate and politicized models of climate are right. For lots of reasons they have done a terrible job in analyzing just the few decades of increasingly unreliable (thanks to retrospective corrections) data out there.  Everyone who matters buys into them because everyone else does.  But what if the problem isn’t really there?  Not a peep from CGK as an avalanche of data and questions becomes ever harder to disregard.

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And if the models’ outcomes aren’t really there, what are the costs of policies that maintain an assumption that the end is nigh?  If hydrocarbons are really as abundant as these authors say (and there’s a real consensus), then the loss from policies that foreclose using them will be really big.

The back of the envelope awaits.