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What’s the economy? or why energy matters

Written By: - Date published: 4:08 pm, January 8th, 2009 - 35 comments
Categories: economy, Environment - Tags: ,

The more I learn about energy, and peak oil in particular, the more concerned I get. So, in the spirit of the season, I thought I would share some of it with you. I’ll get to some concrete things we need to start doing now to mitigate as much as we can the impact of falling oil supplies in the coming years. But before I do that I think a post or two on peak oil itself and its impacts would be a good idea. And, before that, a post on why energy is so important.

So, what is the economy? Basically, it is the conversion of naturally-occurring raw materials into forms we find more useful (and the provision of services, most of which use equipment created from raw materials). All of this wealth creation (conventional economic measures place no value on nature) requires work, in the scientific sense (the transfer of energy from one system to another), to be done. It requires energy turn raw materials into more ‘valuable’ goods. In essence, the economy is the use of energy, whether that energy be supplied by humans, animals, or, mostly these days, from fossil fuels.

Neoclassical economics doesn’t really understand the ramifications of this all that well (neoclassical economics is the economics that we are led to believe is the only economics at school, at university, and in the media). In fact, neoclassical economics doesn’t understand the economy very well at all. Neoclassicism looks at just two types of input, capital and labour, and it assumes (because it lives in a make-believe world) that prices accurately reflect value. So, if 50% of GDP goes to labour and 50% to capital then adding 1% to the labour input would increase the GDP by 0.5%, same with capital, and increases in those inputs should explain all economy growth. Problem is they don’t. Only a fraction of economic growth is explained by increases in capital and labour – the rest, the so-called Sowol Residual, is actually most economic growth and is vaguely attributed to technological progress.

It turns outthat if you look at the percentage increases in energy used (note not just expended but used, so efficiency gains matter too) it matches economic growth almost precisely. That means something very important. We’ve got wealthier (ie converted more raw materials into goods and equipment for services), by using more and more energy, mostly fossil fuels, especially oil (37% of the world’s energy supply comes from oil, 85% from all fossil fuels). To grow our economies we need to use more energy every day and use it more efficiently.

So, what will happen when the day comes that the supply of oil starts to fall? Unless there are dramatic gains in thermodynamic efficiency, less energy means are smaller economy to be divided amongst evermore people. Simple as that. Tomorrow, I’ll write about when that’s going to happen.

35 comments on “What’s the economy? or why energy matters”

  1. Ari 1

    And for everyone reading something like this for the first time: Welcome to Green Economics, that disastrous theory that’s supposed to destroy your economic livelihood ;P

  2. vto 2

    Your starting point appears wobbly and off balance. The economy is simply a financial description of daily human activity. The fact that that human activity (in fact any human, animal, plant or even inorganic activity) requires energy is merely tangential.

    Now back to the fish.. caught a whopper sea-run trout last night.

  3. randal 3

    its all a question of mind over mattter
    we dont mind and you dont matter

  4. Ag 4

    So, what is the economy? Basically, it is the conversion of naturally-occurring raw materials into forms we find more useful (and the provision of services, most of which use equipment created from raw materials

    This can’t be right. If I buy an area of outstanding national beauty and simply leave it alone so people can enjoy it, I have done nothing to it (although I have prevented right wingers from turning it into a golf course, luxury condominiums or a concentration camp or any of those other things that right wing people like).

    Some naturally occurring phenomena have value to human beings simply as they are. An economics that ignores this is not worth the name.

  5. Ag. I agree that it is disgraceful to ignore the value of naturally occuring things but in conventional economic measures like GDP natural services (oxygen production, beauty etc) are worthless. If you bought that land and left it ‘fallow’ you would be contributing nothing to GDP, although you would undobutably be making us wealthier in a wider sense. When we talk about our economy, we are tlaking about artifical (ie man-made) stuff.

  6. djp 6

    I agree with the basic point (that energy use matches economic growth)

    but

    All energy used by humans comes ultimately from the sun (except geothermal I guess)… this is for all intents and purpoises a limitless supply

    All we need is more ingenious ways of harvesting it

  7. Jum 7

    Welcome to Marilyn Waring guys. ‘Counting for Nothing’ – Air, water, unpaid work, kindness, empathy…(refer the slaughter of the sealions).

    Waring informed women, in particular, that the National Accounting System recorded their unpaid work at home as ‘un-productive’.

    Water is in danger of being swallowed by those who will then sell it back to us at grossly inflated prices. If anyone can keep an eye on this stealthy takeover by Nact, you can Standard.

    It would also appear, Steve Pierson, that in order to produce man-made stuff, we have to wilfully destroy nature. There’s clearly something horribly wrong here.

  8. djp. yup there’s heaps of energy in the universe, but the issue is getting it in the quantities that we need in forms we can use with our current tech. I’m a techno optimist but we haven’t got the tech yet and we don’t have a lot of time

  9. outofbed 9

    Unless there are dramatic gains in thermodynamic efficiency, less energy means are smaller economy to be divided amongst evermore people.

    and that is the elephant in the room population growth
    like bacteria in a Petri dish keep, expanding till all resources are used up and then die
    It is impossible to have unlimited growth
    Population / resource use has to be more in balance or our grandchildren ain’t going to have a particularly nice time of it,
    Come to think of it a high proportion of the worlds grandchildren ain’t having a nice time of it now

    Still at least we are getting tax cuts eh ?

  10. Ag 10

    When we talk about our economy, we are tlaking about artifical (ie man-made) stuff.

    Then I think that such a “science” is worthless. What we should be talking about is the management of resources and institutions to promote human ends. That includes everything that people value.

    Most economics is silly anyway. It has taken them how many years to wake up to the fact that people do not behave as their models predict? Finally, behavioural economists are starting to gain some traction. At least there is actual, empirical evidence for their claims. The rest of them have been exposed as sorcerers and occasional lucky guessers. As the current economic disaster has demonstrated, most of them do not have much of a clue.

    As it is, economics would be better served by thinking of human beings as being like a destructive energy eating virus. The only real question we need to ask is whether the virus is capable of waking up and changing its behaviour before it destroys its host and by extension itself.

  11. Peter Wilson 11

    Good post Steve. It is alarming indeed that even among the 20th Century economists I most respect (i.e Keynes / Galbraith) there is almost no understanding of the fundamental role that energy plays within the system. I guess that omission can be contributed to the period in which they were writing and thinking, which was well before we sharply woke up to the limits on growth in the 1970s (and then forgot all about them again in the 1980s…).

    For some good, if rather sobering holiday reading, I do recommend you all have a look at John Michael Greer’s site at http://thearchdruidreport.blogspot.com/. He maps out the future in an energy-constrained world in a way few others can.

  12. Rex Widerstrom 12

    So, what is the economy? Basically, it is the conversion of naturally-occurring raw materials into forms we find more useful (and the provision of services, most of which use equipment created from raw materials).

    Coincidentlly I’ve just been outside catching some sun and re-reading “Voltaire’s Bastards” by John Ralston Saul. And I’d just got to the bit (p237 in my paperback edition) where he says:

    …the ability of governments to effect economic development has been severely handicapped by a growing reliance on service industries for growth… These sectors, it goes without saying, also fourish on on labour which is low wage, part time and insecure, thus creating a false sense of having solved part of the job-creation problem. This growth in services also leaves Western economies dependent upon the most unstable area of economic activity, which is the first to collapse in an economic crisis. Put another way, service industries are to the economy what the uncontrolled printing of money is to monetary stability. They are both forms of inflation.

    Aside from the obvious truth of this in light of the recent financial collapse, how much of the energy use in the economy is expended producing nothing?

    Muldoon’s was last administration that saw NZ as making a living “off the sheep’s back”. From the ’84 Labour government onwards the plan has been to make NZ some sort of “knowledge economy” (indeed that term has been bandied about ad infinitum) with a good dollop of tourist dollars for good measure.

    Agriculture and manufacturing were gutted and anyone who decried it was derided as some sort of Luddite who didn’t recognise progress.

    Even the construction of “golf courses and luxury condominiums” (concentration camps would probably get fouled up in red tape from that abominable RMA, Ag ;-) ) is fuelling the service, not the productive economy.

    To cite but one example, we’ve allowed unprocessed logs to leave our ports for others to add value and, in some cases, ship the finished products back to us with, of course, a far greater margin attached. This was all in the name of “free trade” we were told, but don’t worry, we’ll get it all back when our export markets send their tourists over here and we can iron their pants and wave our pois at them.

    We’re now reaping, in so many ways – including the vast energy used to make zip – the lack of foresight by Labour and National leaders for the past 25 years.

  13. Peter Wilson 13

    If so Rex, that puts all the work undertaken from the 1930s to the 1980s to build up the New Zealand manufacturing sector in a new light. It might pay for us to start digging around in the back shelves of libraries for anything by Bill Sutch and modernise the ideas.

  14. ieuan 14

    Firstly Steve your definition of ‘economics’ is way off, as VTO points out ‘The economy is simply a financial description of daily human activity’.

    If I sell plums from one of my trees at my front gate for $2 a bag that is economics in action but has nothing to do with ‘energy conversion’.

    I also take issue with the idea that we will have to survive with ‘less energy’, what will happen (and is happening) with oil is that as supply falls the price will rise making that form of energy more expensive; this will result in two things, people will use that energy more efficiently and people will look for other types of energy that due to the increased cost of oil are now competitive and viable.

    Sure, with more expensive energy our rate of economic growth will slow but at the same time new energy sources will emerge and one day we will look back at our current orgy of oil consummation and wonder what we were thinking.

    [you’ve expended human energy to turn a naturally occurring raw material, fruit on a tree, into a food source, plums. And that’s just if you’re harvesting them from the wild, if you’re plating seeds, growing a plum tree, pruning it, fertilising it, those are all energy expenditures, plus you’re standing on the shoulders of all the energy that went into domesticating the plum tree in the first place. I’ll get to the point about alternatives to oil – here’s the sneak preview, don’t just assume it’s all going to be fine. SP]

  15. vto 15

    I think you’re all on the slightly wrong track.

    especially randal

    edit – except for ieuan above of course

  16. Ag 16

    Aside from the obvious truth of this in light of the recent financial collapse, how much of the energy use in the economy is expended producing nothing?

    Because without it capitalism would collapse. The fundamental reality of modern society is that there really isn’t a lot of real work to do any more. That’s why we have all these ridiculous McJobs. Does New Zealand really need all those lawyers?

    captcha: craft resigned

  17. RedLogix 17

    SP,

    I’ve googled for “Sowol Residual” and I don’t get any useful results. Could you clarify what is meant by it please?

    Here is an interesting question guys. I am an automation engineer. Consider what would happen if we finally get around to automating everything we currently think of as work. That hypothetically at least, we could feed, clothe and house everyone on the planet with only a tiny fraction of what we currently call ‘labour’.

    What would change? How would the economy work, what mechanisms might govern the distribution of wealth? Would this be a good or bad thing? Would capitalism survive, or would it become more deeply entrenched than ever?

  18. Janet 18

    Ieuan
    The plums didn’t grow without land, soil, water and sunshine. And petrol if the bag is plastic, trees if it is paper. And who spent energy picking them? Lots of energy used on your $2 bag of plums.

    And good that Marilyn Waring’s important work has been referred to. I bet it was a woman tending, picking and packing the plums for no pay.

  19. Greg 19

    Ohk, there’s a few issues with your argument here Steve. One. Peak oil. Myth. The notion that we will all continue to consume the same amount of oil (or even increse it) and one day just run out is laughable. Simple supply and demand economics explains the reality. As supply decreases (as you state) price increases, As price increases, demand decreases. Therefore many consumers take advantage of a substitute good which becomes economically viable as the price of oil increses – electric cars for instance. Also there is a greater incentive to invest in developing further substitutes as they will be worth more. Supply and demand will ensure we make a seamless transition away from oil – probably without even realising it.

    Two. For someone who professes to know better than most economists your missing a fairly basic economic concept on the idea of the corrolation between energy use and economic growth. That infamous ‘mysterious third variable’. Productivity. An increase in productivity causes an increase in wealth. The use of energy does not create wealth as you assert. Wealth merely allows you to use more energy – you can afford it. So obviously there is a corrolation – there is just no causation. That comes through productivity.

    Finally, your hypocrisy annoys me. Apparently anyone who denies climate change is stupid for going against the mass consensus of scientists. But its fine for you to disagree with the mass consensus of economists – you yourself acknowledge this is the case.

  20. Pascal's bookie 20

    Greg. I’m not sure I understand your objection.

    The problem with ‘peak oil’, as I understand the theory, is not that we will just run out of oil, but that the dwindling supply of oil will increase energy prices to far beyond what they are today.

    When you say that demand for oil will decrease as it’s price rises, isn’t that just another way of saying that we will not be able to afford the lifestyle we have today?

    That some new energy source, as yet to be announced, will be economic at the new energy price does not change this underlying fact. Energy prices will be much higher than what we are used to in real terms, therefore (all else being equal) we will be using less energy, so if we do not come up with some much more efficient ways to use energy, then our economic activity will be less than what is today. Or are you suggesting that the new energy source, that hasn’t been developed yet because of cheap oil, will actually end up being as cheap as, or cheaper than, oil has been for the last coupla’ hundred years?

  21. Your grasp of economics is as tenuous as your outlook on life.

  22. RedLogix 22

    Greg,

    The notion that we will all continue to consume the same amount of oil (or even increse it) and one day just run out is laughable.

    Yes it is laughable, because that is NOT what Peak Oil is. The rest of your argument falls over because you are addressing the wrong argument to the wrong subject.

    Therefore many consumers take advantage of a substitute good which becomes economically viable as the price of oil increses – electric cars for instance

    Again the argument fails because there are no feasible technical options for substituting the vast amount of energy oil provides us at present. Electric cars are only a relatively small part of a potential solution. Besides, where do you think the electricity for these cars will come from?

    That infamous ‘mysterious third variable’. Productivity. An increase in productivity causes an increase in wealth. The use of energy does not create wealth as you assert. Wealth merely allows you to use more energy – you can afford it.

    You really have not thought this through have you? Productivity is not a magic dust that when sprinkled on an economy makes everyone wealthier. Productivity is the ratio of output versus inputs. The main driver that improves this ratio is improved technology, which in turn is entirely dependent on available energy. Technology can usually be thought of as a labour amplifier. A road that might have taken a thousand men and bullocks a year to build, is now accomplished in far less time with a mere dozen people, some clever machines and a lot of energy.

    Without a viable source of energy, almost all materially productive technologies are useless. Up until recently the price of oil/energy was so low that it could be ignored for most practical economic purposes. Keynes and Galbraith, and most mainstream economists, lived in an era when the energy component of the economy, while vital, was relatively small and could be ignored. This is no longer true.

    The problem is that we are not running out of oil, but that we are producing it at about the maximum rate that we can physically achieve given the reality of finite sized oil fields and finite new discoveries. The supply and demand curves for oil are very interesting. This clip explains it very clearly:

    Oil Supply Demand

  23. Chris G 23

    greg seems to think peak oil is a myth because of supply and demand. Read any papers in the journals on the topic of oil recently? ‘Oh no not ‘dem socialist scientists!’ – riiiight.

    SP you also need to mention another failing of neoclassical economics and in fact most schools of thought in economics: Non priced value. All the righties will harp on about supply and demand and cost benefit. Trouble is the process of cost-benefit analysis has been this huge shortcut used by economists to decide net benefit… all the while excluding so many other variables in particular things that are not priced but have value.

    Learnt about that in my environmental economics paper – before anyone starts speculating I have no idea what I’m on about…. Or then are we back to that “being from ‘dem dam socialist universities!” a la Dad4J ? ahem.

  24. Pascal's bookie 24

    Thanks for that link Red.

  25. The top story of the year is that global crude oil production peaked in 2008.

    The media, governments, world leaders, and public should focus on this issue.

    Global crude oil production had been rising briskly until 2004, then plateaued for four years. Because oil producers were extracting at maximum effort to profit from high oil prices, this plateau is a clear indication of Peak Oil.

    Then in July and August of 2008 while oil prices were still very high, global crude oil production fell nearly one million barrels per day, clear evidence of Peak Oil (See Rembrandt Koppelaar, Editor of “Oil Watch Monthly,” December 2008, page 1) http://www.peakoil.nl/wp-content/uploads/2008/12/2008_december_oilwatch_monthly.pdf.

    Peak Oil is now.

    Credit for accurate Peak Oil predictions (within a few years) goes to the following (projected year for peak given in parentheses):

    * Association for the Study of Peak Oil (2007)

    * Rembrandt Koppelaar, Editor of “Oil Watch Monthly’ (2008)

    * Tony Eriksen, Oil stock analyst and Samuel Foucher, oil analyst (2008)

    * Matthew Simmons, Energy investment banker, (2007)

    * T. Boone Pickens, Oil and gas investor (2007)

    * U.S. Army Corps of Engineers (2005)

    * Kenneth S. Deffeyes, Princeton professor and retired shell geologist (2005)

    * Sam Sam Bakhtiari, Retired Iranian National Oil Company geologist (2005)

    * Chris Skrebowski, Editor of “Petroleum Review’ (2010)

    * Sadad Al Husseini, former head of production and exploration, Saudi Aramco (2008)

    * Energy Watch Group in Germany (2006)

    Oil production will now begin to decline terminally.

    Within a year or two, it is likely that oil prices will skyrocket as supply falls below demand. OPEC cuts could exacerbate the gap between supply and demand and drive prices even higher.

    Independent studies indicate that global crude oil production will now decline from 74 million barrels per day to 60 million barrels per day by 2015. During the same time, demand will increase. Oil supplies will be even tighter for the U.S. As oil producing nations consume more and more oil domestically they will export less and less. Because demand is high in China, India, the Middle East, and other oil producing nations, once global oil production begins to decline, demand will always be higher than supply. And since the U.S. represents one fourth of global oil demand, whatever oil we conserve will be consumed elsewhere. Thus, conservation in the U.S. will not slow oil depletion rates significantly.

    Alternatives will not even begin to fill the gap. There is no plan nor capital for a so-called electric economy. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and mining equipment. The independent scientists of the Energy Watch Group conclude in a 2007 report titled: “Peak Oil Could Trigger Meltdown of Society:’

    “By 2020, and even more by 2030, global oil supply will be dramatically lower. This will create a supply gap which can hardly be closed by growing contributions from other fossil, nuclear or alternative energy sources in this time frame.”

    With increasing costs for gasoline and diesel, along with declining taxes and declining gasoline tax revenues, states and local governments will eventually have to cut staff and curtail highway maintenance. Eventually, gasoline stations will close, and state and local highway workers won’t be able to get to work. We are facing the collapse of the highways that depend on diesel and gasoline powered trucks for bridge maintenance, culvert cleaning to avoid road washouts, snow plowing, and roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, large transformers, steel for pylons, and high tension cables from great distances. With the highways out, there will be no food coming from far away, and without the power grid virtually nothing modern works, including home heating, pumping of gasoline and diesel, airports, communications, and automated building systems.

    It is time to focus on Peak Oil preparation and surviving Peak Oil.
    http://survivingpeakoil.blogspot.com/
    http://www.peakoilassociates.com/POAnalysis.html

  26. Ari 26

    All energy used by humans comes ultimately from the sun (except geothermal I guess) this is for all intents and purpoises a limitless supply

    The sun does produce more energy than we could currently want to use, but we harness a vanishingly small percent of it. Firstly, most of the sun’s energy is fired off into deep space to show up as light in the night sky of very distant planets, and from our perspective is completely wasted. So, let’s focus on the stuff that hits earth, which is a small percentage, but still probably more than enough to run the global economy several times over. Most of the energy we receive from the sun goes to heating the planet so it doesn’t freeze over- obviously even if we could take it all, we would need to leave enough energy as heat to keep the planet hot enough for life to continue at temperatures somewhere above the level of Alaska.

    Some of our sunlight very slowly and inefficiently converts dead trees and other organic matter into coal and oil deposits over thousands of years- this is where a large share of our current energy comes from, and we are using it up much, much faster than it could ever be produced. Some goes into the uneven warming of the air and water that helps generate wind and tidal currents. Geothermal energy in part relies on the heat from the sun in order to capture, (otherwise it would go to thawing the crust slightly) which leaves nuclear energy as the only energy that doesn’t directly come from the sun- however the fuels we use for nuclear conversion are limited in much the same way as oil and coal are, except the event that produces them is even rarer- we’d need more particles carried to us from another nearby supernova in order to get more, and that could do a lot of damage to life on the planet. Not happening any time soon most likely, so nuclear is essentially a time-limited game as well- even if we open up the ability to burn cleaner and more abundant fuels like thorium.

    This is why the conversion to renewable energy is so important: It’s energy that directly or indirectly comes from the sun and will last at least until the thing starts expanding and gets too cold for continued human existence on our planet anyway. Wind has resource consent problems, (although there are many good sites remaining that could easily power much of the country. I think wind is actually the one example where the RMA works too well, as it seems residents’ complaints get taken with gravity that they are not given in other projects) hydro can be very destructive to lakes and is capped by water levels so it is unreliable in dry years, tidal is experimental at the moment and would need considerable encouragement but is much more reliable than either wind or solar and probably even more energy-rich, and finally solar has only just become cheap enough to pay for its own panels relatively quickly and become straight-up competitive with fossil fuels without considering its environmental impacts.

  27. Sam P 27

    “and that is the elephant in the room population growth
    like bacteria in a Petri dish keep, expanding till all resources are used up and then die
    It is impossible to have unlimited growth
    Population / resource use has to be more in balance or our grandchildren ain’t going to have a particularly nice time of it,
    Come to think of it a high proportion of the worlds grandchildren ain’t having a nice time of it now”

    I agree that resources need to be better distributed, but it is also important to acknowledge that none of these arguments are new, in fact 200 years ago people were thinking that the world was going to end because of over-population and insufficient food (http://en.wikipedia.org/wiki/Thomas_Malthus) but there are 6 times more people on the planet now then there were 200 years ago, so maybe there is some credit in the ‘technology will save us’ argument??? Personally I am not convinced but don’t know enough

    Also Ari ..

    “tidal is experimental at the moment and would need considerable encouragement but is much more reliable than either wind or solar and probably even more energy-rich”>

    Check out http://www.awatea.org.nz .. I read an article by these guys saying that if experiments with seafloor turbines works out as expected, NZ would be able to increase its electricity production by 150% by using only 100km2 of sea floor in the Cook Strait … so there is hope for our carbon footprint!

  28. Matthew Pilott 28

    Did anyone else read Darren Rickard’s contibution? That guy is a friggin’ GENIUS! I’m surprised that anyone commented subsequent to his magnificent contibution without mentioning it. I guess you’re all just in awe of The Rickard’s Awesomeness. Fair enough. How can an ‘outlook on life’ be ‘tenuous’, Darren? For a one-liner you’ve done a poor job – 12 words and you can’t even put a real sentence together.

    VTO: Interesting that you agree with ieuan. Do you agree with this statement: “…and people will look for other types of energy that due to the increased cost of oil are now competitive and viable. because it is pretty much the fundamental point. There’s a large source of energy that to utilise, all we had to do was dig a hole, and set up an infrastructure to utilise it. Now we have to dig holes in difficult and expensive places. So, it’s going to be very hard to dig a hole, and the energy per hole dug will decrease. This means the cost of energy will go up.

    How many dollars per kilojoule do you think it is to dig a hole and wait for black stuff to bubble up?

    What is looking like a viable replacement, at the same price? Nothing thus far – hence the problem.

    I’m not sure what ‘track’ you’re talking about, but fact is you don’t get to decide what it is by making the odd veiled comment from the sidelines.

    Greg: Finally, your hypocrisy annoys me. Your inability to grasp simple logic annoys me. One body of science is right, thus ALL SCIENCE IS RIGHT. GREG HATH SPOKEN. Violate this and a hypocrite ye shall be branded.

  29. Ari 29

    Check out http://www.awatea.org.nz .. I read an article by these guys saying that if experiments with seafloor turbines works out as expected, NZ would be able to increase its electricity production by 150% by using only 100km2 of sea floor in the Cook Strait so there is hope for our carbon footprint!

    Oh, I knew it was promising already, but thankyou. I just mean that unless heavily subsidised it’s a ways off yet.

    And indeed, with a little more investment, New Zealand should not only have no problem meeting our existing power needs purely from renewable energy, (with fossil fuels as emergency backups) but also using the excess from tidal to power electric car networks and battery-swapping stations, and perhaps even export products produced with renewable electricity to other nations. It would be an excellent way to move our manufacturing sector forward.

  30. Mr Magoo 30

    Ari:
    yes, tidal generation is a really exciting prospect. A shame the tidal generation test in the kaipara was brought to its knees with the RMA. But there you go.

    However I would be wary of the claims made by those with the most to benefit. In my experience their predicts are intentionally naive and unrealistic.

  31. Matthew Pilott 31

    If anyone has responded I can’t see it – still having that caching issue which is making commenting rather impractical and this site mostly unusable, unfortunately…

  32. Greg 32

    Red.
    “there are no feasible technical options for substituting the vast amount of energy oil provides us at present.’

    This is the case because they are not necessary at the current point in time. The price of oil is not high enough. Go back to my original post and you’ll see how these feasible options will develop as the price rises.

    “Productivity is not a magic dust that when sprinkled on an economy makes everyone wealthier. Productivity is the ratio of output versus inputs. The main driver that improves this ratio is improved technology, which in turn is entirely dependent on available energy.’

    Well if productivity were a ‘magic dust’ when sprinkled over the economy it would make everyone wealthier, surely you can see that. But sadly, as you point out, it isn’t as easy as that. You assume that the rate at which the cost of energy increases is greater than the rate at which technology improves. This of course is not the case, for as technology improves (which as you say increases productivity), the price of energy also falls RELATIVE to what it otherwise would be with increased demand. Technology does not come entirely at the expensive of energy, because it also creates it.

    Chris.
    “greg seems to think peak oil is a myth because of supply and demand. Read any papers in the journals on the topic of oil recently? ‘Oh no not ‘dem socialist scientists!’ – riiiight.’

    Perhaps ‘myth’ was a more emotive word than necessary. My point was that supply and demand will ensure we develop other viable energy sources before peak oil occurs, therefore stopping it in its tracks.

    Matthew.
    “Greg: Finally, your hypocrisy annoys me. Your inability to grasp simple logic annoys me. One body of science is right, thus ALL SCIENCE IS RIGHT. GREG HATH SPOKEN. Violate this and a hypocrite ye shall be branded.’

    I wasn’t talking about right and wrong Matthew. My view is that both the majority and minority deserve to be heard. My point was that if you are in the minority on climate change you are branded loony and personally attacked by Steve. Yet if you are in the minority on economic issues you are praised. I find this hypocritical.

  33. Hi Steve,

    I would like to point out that most economists would agree with a large part of what you are saying – you are describing a physical process which human action occurs within and the limits associated with that process. However, using it as a critique of “neo-classical economics” seems a bit off to me.

    Neo-classical economics is a broad term for a conceptual framework that gives us scope to look at human action in the face of scarcity (it is the study of the allocation of scarce resources given then assumption of methodological individualism – contrary to other schools which may use a more holistic frame for human behaviour). The idea of “limited natural capital” is indeed part of this framework and, although I agree with your implicit claim that the trade-off can be under weighted in economic debate, it is definitely not ignored by economists.

    Your critique seems to be more closely against Keynesianism. Strict Keynesianism does not have a supply side – resources just appear and are used, implying that we can just grow perpetually. Economists have moved well beyond this view.

    Furthermore, we all agree that the “solow residual” is heavily underdefined by economists. Work by Romer et al has tried to uncover some of the basis of the residual (namely the existence of returns to scale) – however, the very uncertain nature of technological progress makes it a difficult factor to ever try to understand.

    Still, definitely an interesting issue, thanks for the post.

  34. Peak oil is a nonsense, designed by the left to tax us more through nutcase green technology that is inefficient and expensive.

    The world has hundreds of years of oil left to use. Bugger off and let us use it.

  35. terence 35

    RedLogix,

    Matt has the answer you’re looking for: it’s Solow (as in Robert Solow) not “Sowol”.

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