At the heart of economics is the idea of scarcity—or rather scarcity in the face of infinite wants. Yet scarcity is an issue that touches upon us all, and thus draws the interest of different scientific disciplines. So if we take the idea of scarce oil (let’s call it Peak Oil), we should not be surprised that chemists, physicists, engineers and geologists would want to take a view.
Nonetheless, many economists appear to believe that they have a unique and superior understanding of how scarcity evolves through time (using the tools of supply, demand and price); and they often also behave as if no non-economist could ever hope to gain such insights. As such, we may criticize them for being arrogant—but not as necessarily wrong (and at this point I have to declare that I am an economist by training). But wait a minute, if the arguments of mainstream economists are so evidently correct, why do many of them appear to have a pathological need to misconstrue the arguments of their opponents?
Probably the most enduring urban legend (or urban myth if you prefer the term) of them all in the study of resources is the common interpretation of The Limits to Growth report to the Club of Rome published in 1972. Surely, everyone knows that the report’s forecast of resource exhaustion by the year 2000 turned out to be nothing but a huge joke. And if we don’t know this directly ourselves (having not read through the report because frankly who has the time, and where would we find a copy anyway these days), we know because high profile journalists and media pundits have told us of the report’s spectacular failure on TV, in newspapers or over the internet (or someone in a pub or bar said that is what the report said).
And even if we are of a skeptical, distrustful disposition, we may take comfort from the fact that leading economists tell us about the intellectual bankruptcy of The Limits to Growth authors in the academic literature.
Furthermore, no review by a mainstream economist of Peak Oil thought appears complete without a reference to The Limits to Growth. This book appears to be Exhibit A for the prosecution’s case that anyone who argues that we are running out of anything is an idiot.
Let us take a concrete example from a recent article entitled “Peak oil and energy policy – a critique” by the highly influential economist and government policy advisor Dieter Helm. Early in the paper Helm introduces that all-purpose emotive word ‘alarmist’, which immediately puts me on guard.
The literature on peak oil is vast and much of it is alarmist. The aim here is to identify the main strands of the various hypotheses rather than to provide a comprehensive analysis—to identify the central building blocks and assumptions, in particular in respect of technology, substitution, and reserves.
As usual, ‘alarmist’ is not clearly defined, but presented as a term of abuse. To me, this is a red flag for any piece of analysis: when someone uses the word ‘alarmist’ it usually means that I am in for an exceptionally sloppy treatment of risk. At best, ‘alarmist’ could be used to mean the incorrect calculation of the probabilities associated with unlikely outcomes. Nearly always, however, it suggests that the study of unlikely outcomes is without merit.
Soon after the insult ‘alarmist’ is used, Helm references The Limits to Growth.
The starting point is geology, and this chimes with a wider environmental view that the earth is a fixed factor of production, which has (known) physical depletion limits.
Which leads to the footnote:
The Club of Rome in the 1970s set out this position and made what turned out to be a series of spectacularly erroneous predictions about the depletion of a host of minerals (Meadows et al., 1972).
Now Meadows et al 1972 is The Limits to Growth I referred to above written by Donella Meadows, Dennis Meadows, Jorgen Randers and William Behrens. My edition is titled in full “The Limits to Growth: A report for the Club of Rome’s project on the predicament of mankind”. Unfortunately for Helm, if you actually read the book you will find that it did not make “spectacularly erroneous predictions about the depletion of a host of minerals”. Don’t believe me? Then buy a copy of the book (there are numerous second-hand copies available via Amazon).
Helm is referring to hearsay about Table 4 in the book (attached below is the second half of the table showing the resources ‘m’ through ‘z’: click for larger image), which is the only place in the book that you will find concrete figures attached to particular non renewable resources. Now what this table is not showing is a list of predictions. What it does show is a series of ‘what if’ mathematical calculations.
It is basically a comparison study of linear and exponential growth rates—the kind of thing a not particularly bright high school student could now do on an Excel spreadsheet on a Sunday afternoon. But back in 1972, such calculations required some serious computer power to perform (which no individual had access to then, although you could have laboriously cranked out the relevant curves with a pen, graph paper and slide rule if you had the time).
As an illustration, take petroleum (oil). There are three relevant columns: 3, 5 and 6. In column 3, we see how many years petroleum would last if current known reserves did not increase and usage rates stayed constant (which the authors call the static reserve index). In column, 5 we see the same calculation performed but the usage rate increased exponentially based on current trends (which they call the exponential reserve index). And finally in column 6, we see how many years petroleum would last if reserves expanded fivefold and usage rates grew exponentially. How do we know these are illustrations not predictions? Because the authors explicitly say so in the text on page 63 following the table!
Of course the actual nonrenewable resource availability in the next few decades will be determined by factors much more complicated than can be expressed be either the simple static reserve index or the exponential reserve index. We have studied this problem with a detailed model that takes into account the many interrelationships among such factors as varying grades of ore, production costs, new mining technology, the elasticity of consumer demand, and substitution of other resources.
The most interesting insights from this section of the book do not relate to the naive reserve indices found in Table 4 above, but rather the authors’ explicit treatment of the relationship between the advance of technology and extraction cost.
This treatment is presented as a case study of chromium, which they calculated had a static index of 400 years and an exponential index of 95 years. A more advanced model for chromium was also described in the book which takes into account the extraction cost per unit of resource, the advance of mining and processing technology and the fraction of the original reserve that is shifted to a substitute resource. The book then explains how consumption of chromium will move through time:
At first the annual consumption of chromium grows exponentially, and the stock of the resource is rapidly depleted. The price of chromium remains low and constant because new developments in mining technology allow efficient use of lower and lower grades of ore. As demand continues to increase, however, the advance of technology is not fast enough to counteract the rising costs of discovery, extraction, processing and distribution. Price begins to rise, slowly at first and then very rapidly. The higher price causes consumers to use chromium more efficiently whenever possible. After 125 years, about 5% of the original supply is available only at prohibitively high cost, and mining of new supplies has essentially fallen to zero.
Critically, a neoclassical economist may be able to find fault empirically (perhaps The Limits to Growth is too pessimistic about the advance of technology), but they cannot criticise them for being unaware of price or substitutability. It is also important to be note that the authors are not actually saying chromium will “run out” after 125 years. In their words, the “use of the resource is economically feasible” for 125 years—so after 125 years the resource becomes economically unfeasible to extract even if it still remains in the ground (ie it hasn’t actually run out).
Another important observation the authors make is that if you double the size of the existing chromium reserves, it only adds 20 years to the period of economically feasible extraction. This observation is almost identical to the one made by Steve Sorrell (see my post here) over dates of peak oil production based on the discovery of larger reserves; that is, the peak is remarkably insensitive to large increases in reserves.
Finally, in this whole section of the book we don’t find the use of the words ‘forecast’ or ‘prediction’. The closest we get is the following passage (which the authors wrote in italics for emphasis):
Given present resource consumption rates and the projected increase in these rates, the great majority of the currently important nonrenewable resources will be extremely costly 100 years from now.
Now let me see. So that’s 1972 plus 100. Um, doesn’t that mean the jury is still out on this one? The authors then added this very interesting statement:
The above statement remains true regardless of the most optimistic assumptions about undiscovered reserves, technological advances, substitution, or recycling, as a long as the demand for resources continues to grow exponentially.
From the above, I hope it is crystal clear that Dieter Helm’s description of The Limits to Growth’s “spectacularly erroneous predictions about the depletion of a host of minerals” is incorrect. We can interpret this in either of two ways. First, Helm could have been fully aware that his statement was incorrect and as such was using the urban legend as a piece of propaganda. If so, how are we to judge the rest of his arguments? Which are pieces of propaganda that blatantly tell untruths and which are well-reasoned arguments?
Second, perhaps Helm is unaware that he is repeating an urban legend because he hasn’t followed proper academic practice and checked his sources. I will give Helm the benefit of the doubt and assume this is the correct interpretation. Nonetheless, it still leaves a nasty taste in the mouth, especially as Helm’s paper also contains a number of straw man arguments similar to those put forward by Daniel Yergin (that I wrote about previously in a post here).
In conclusion, the introduction of falsehoods undermines Helm’s later interesting arguments in the article concerning the substitutability of natural gas for oil (which I will return to in a future post). It may be a forlorn hope, but I expect academics to hold themselves to a higher standard.