The Myth of Peak Oil

Projection of Peak Oil

In continuance of the Myth series, today we explore “peak oil.” Last week, an IEA whistleblower made headlines by stating, “We have [already] entered the ‘peak oil’ zone.”  This has obviously caused some stir among environmental experts and politicians.

What is Peak Oil?

Peak Oil is the period of time in which we start finding fewer and fewer places to extract oil. Imagine a bell curve which represents access to oil, peak oil would be at the very tip of the curve, thus the term “peak oil” (see image at right). It’s at this point, it is said, that oil prices will increase at an exponential rate because finding oil fields will become harder and harder. And since our economic infrastructure is based on cheap oil, it will devastate our economy.

Virtually everything we use is based on oil; plastic, rubber, fuel, etc. If the cost of oil rises too quickly, it could cause a snowball effect of rising prices in virtually every product we use. Thus, the collapse of our very way of life.

The Free Market Solution

While this post is titled The Myth of Peak Oil, it’s actually more about the myth of collapse due to peak oil. Scientifically speaking, peak oil makes sense. There are only so many places we can drill before we eventually run out. And, aside from the Abiotic Synthesis Theory, there is no way to quickly replenish those wells.

However, despite this “doomsday” scenario of running out of oil, the free market has the solution. Or, let me rephrase: the free market is the solution.

The free market has this uncanny ability to adjust to consumers’ demands. If demand for a product increases, the market will adjust their supply accordingly. In this case, demand for alternative fuels will force manufacturers to increase supply in those alternative fuels, be they natural gas, electricity, hydrogen, or whatever. Instead of plastics made from oil, perhaps supplies of plastics made from hemp or other materials would increase. As more of those alternative sources are used, the costs associated with those items will decrease.

Will product prices increase overall after peak oil? Only the free market can tell you that. It is possible the prices will increase. However, unlike what the doomsdayers believe, they will rise gradually, not immediately. Eventually, those increased prices will top off as well, as the costs of alternative sources decrease because of increased usage.

So, in the event that we’ve already reached peak oil, the free market is the only solution for preventing a total economic collapse.

The Myth of Deflation

Wendy Macy put together a good video of Rand Paul and Peter Schiff discussing the myth of our current “deflationary crisis.” As the myth goes, prices for consumer goods and commodities have been falling during this last year of the recession, therefore we have a deflationary crisis.

However, nothing could be further from the truth. While prices have indeed decreased, the expansion of the money supply has increased exponentially. The more money the Federal Reserve prints, the more the value of the dollar decreases, thus goods and commodities increase in price. However, in our current situation, we have a couple of factors playing into why prices have decreased.

First, the increase in money supply has been soaked up by banks. The idea was for banks to use the money to  rid themselves of toxic assets and open up credit to businesses and individuals again. However, the banks have not used the money yet, as the toxic assets are still on their books and credit is still tight. Therefore, the increased amount of money has not fully made into into the market yet.

Another reason for decreased prices is liquidation. Businesses are liquidizing their assets in order to stay in business. As evident by the increasing unemployment numbers, businesses are still finding it hard to stay in business. One way to decrease their costs is to let their employees go. Another way is to reduce the prices of their products to drive up demand.

Eventually, however, the banks will let go of the newly printed money, unleashing a fury of inflation on Americans; 1970′s style. How long the banks continue to hoard the money and keep credit tight is unknown, however, what we do know is that with our government spending and deficit increases in the next couple of years, inflation will strike regardless. The Federal Reserve/Treasury will have to print the differences, thus increasing the money supply to the market immediately.