"The man who prefers his country before any other duty shows the same spirit as the man who surrenders every right to the state. They both deny that right is superior to authority."
Lord Acton

Wednesday, March 2, 2011

Message to Financial Sense and Erik Townsend: Challenging the collapse of society from peak oil

I left a message for Jim Puplava over at Financial Sense, and posted some alternatives to the peak oil premise over at GreenEnergyInvestor:

Jim and John, I would like to, in a way, challenge your peak oil thesis.   Julian Simon said it well when he wrote The Ultimate Resource:

"More people, and increased income, cause resources to become more scarce in the short run. Heightened scarcity causes prices to rise. Higher prices present opportunity, and prompt inventors and entrepreneurs to search for solutions…In a free society, solutions are eventually found. And in the long run the new developments leave us better off than if the problems had not arisen. That is, prices eventually become lower than before the increased scarcity occurred."

Jim, As a free marketer, I would expect you to also be, at least partially in Julian Simon’s camp that the human mind, and innovation and trade in free markets are our ultimate resource.  A must read book in this vein is “the Rational Optimist” by Matt Ridley.  He’d be great to have on your show.  Also I’d highly recommend you try to get Russ Roberts or Don Boudreaux from econtalk, my other favorite podcast and café hayek, to talk about peak oil with you from a different perspective.  Because, As Don has said recently:

Also, here's some highlights from my post over at GreenEnergyInvestors.  Over there I'm Challenger6:

 I'm familiar with the work of JH  Kunstler. I followed him for a while before/during the housing collapse. Though his scenarios are entirely possible, they are not preordained, and in my opinion, unlikely and linearly myopic. Disaster scenarios and Rome like collapse is not inevitable, it is entirely our choice what to do going forward, by either increasing our quality of life geometrically, or by implementing terrible foreign and trade policy destroying our immediate future, and reverting to a previous level of human development. This is the core of how we should view the world going forward. Luckily, in this modern age governments have far less effective power over their own people than a half century ago.

You make the comparison of bacteria in a petri dish. The Human animal is the only animal that will exchange goods with others in a complex way, e.g. using currency and store of value for future exchange. You can get chimps to exchange a grape for a banana if they would rather have a banana than a grape, but that's really the extent of sub-human trade capacity. Specialization, trade and the use of money, beyond the chimp example is also a distinctly human trait. This also isn't the human race's "first rodeo" if you will. There's been many dark predictions of the scarcity of resources since the beginning of civilization. Sometimes there was a tightness in the resources in question for a time, but it has always quickly resolved itself in the past. It seems that predicting our own imminent doom is also a distinctly human quality. So there really is no comparison between bacteria and humans.

You ask if I think we can "innovate" our way out of the bind we are in. I say that it is human nature to find ourselves in impossible situations and create a solution out of it. In military strategy, we call this "Death-Ground" strategy as it is called in Sun Tzu's "The Art of War" - The Nine Terrains:

"Where if one fights with intensity he will survive but if he does not fight with intensity he will perish, it is 'fatal terrain'."

"Cast them into positions from which there is nowhere to go and they will die without retreating. If there is no escape from death, the officers and soldiers will fully exhaust their strength."

"Cast them into hopeless situations and they will be preserved; have them penetrate fatal terrain and they will live. Only after the masses have penetrated dangerous [terrain] will they be able to craft victory out of defeat."

This death ground strategy has been used effectively from the battle of Gettysburg, When Cortez burned his ships when reaching the new world (so as to motivate his troops to fight the Aztecs), and many other historical battles.  It is a surprisingly reliable strategy and is proof to the resourcefulness and resilience of humans.

Countries like Egypt and others in the Middle East are moving into the crisis window already.* How is innovation going to save them? The global food riots are only starting.

Beware of confusing correlation with causation. Countries like Egypt and the M.E. are truly in a bad situation, but one that is only partly due to the oil situation. There are many causes for the problems in that region, some of the primary causes are how exposed those countries are to increasing prices of food and fuel. I wrote a post about this very subject here before many were even talking about it. Arguably much of the increasing cost of food and fuel is due in no small part to the inflationary monetary policy by the Fed. The other question one should ask is: Why are these countries so exposed and levered to the increasing cost of food and fuel (lower per capita income). The answer is empirically demonstrated to be lack of open trade, insufficiently and arbitrarily enforced property rights, and a lack of effective and fair rule of law.

Back to peak oil: Stanley Jevons wrote in 1865: "It is thence simply inferred that we cannot long continue our present rate of progress. It is useless to think of substituting any other kind of fuel for coal. Fellow Britons must either leave the country in a vast body or remain here to create painful pressure and poverty. This statement was so influential, it helped drive the 'coal panic' of 1866.

We've been here before, and we may very well see increased prices of oil, which will effect conservation of the remaining reserves (less driving), and serve to incentivise substitutions and development of previously marginal discoveries, cause innovation of new forms of fuel and energy.

One more item that I want to throw down on before I go. The idea of "Energy Independence" is self destructive, and stupid. Though it sounds lofty and high minded, it is self defeating. Imagine the US Government decided that the state of New York needed to be energy independent, or better yet, self sustaining completely. They would have to grow their own food, make their own cars, mine their own iron, and make their own fuel. It would be like sending the state back into the 1600s, or worse. Imagine the same thought experiment in your own family. Imagine if you had to grow your own food, make your own shoes, and be your own doctor. You would live in a state beyond poverty as it is known in the civilized world. The whole idea of trade is based on the law of comparative advantage Trade is the only situation in which you can add two components and get a sum greater than the individual components (1+1=4).

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