Barack Obama will be breathing a sigh of relief after David Farrar gave his endorsement to the President’s call to end oil subsidies. It seems the 3rd oil price spike in five years is getting the attention of even the Right. Something, they’ve got an inkling, is wrong and rising petrol prices are here to stay. But, on the cusp of revelation, Farrar opts for the security blanket of neoclassical economics.
Here’s what Farrar wrote:
I am against subsidies for oil.
We should not shelter people from higher petrol prices. That is a market signal that supply is becoming more difficult
Is that Farrar admitting peak oil is here and the price signal reflects that? It looks like it. But, then, Farrar seems to catch himself and so turns to the neoclassical model that says supply is infinite as long as the price is right.
[high prices] will encourage investment in other technologies, plus encourage greater use of other forms of transport. As for investments in exploration and production, you do not need subsidies for that. As petrol prices increase, then exploration of new reserves becomes economically viable.
OK. Let’s assume that’s true. Let’s say that there are oil reserves and other energy sources out there that can be produced at the rate the economy needs – preferably rising to allow economic growth – providing that the price of oil is high enough to incentivise it. Well, there’s your problem – if the price is high enough. The price of oil is currently so high that it is that it’s killing this so-called recovery. Any new energy source that is only viable at this price is too expensive.
Put it another way. Money is essentially a marker for embedded energy – the amount of work done to add value to something. So expensive energy is energy that takes a lot of energy to produce. They call it energy returned on energy invested. The old oil-fields were cheaper because you got as much as 100 barrels of oil for each barrel of oil worth of energy you used in drilling. With new oil sources, that’s down to 6 to 1.
It may be that there’s an energy source out there at the borders of our scientific understanding or beyond it (zero-point energy, dark matter?) and once we learn the trick of using it, the actual production is cheap (ie low energy). But that’s a hell of a big gamble to hope on. And, even if it’s out there, it’s never going to be a small thing to adopt a new energy source on the scale we’re talking about, let alone in a relevant timeframe. Even fusion is 40 years from commercialisation. We’re stuck with the increasingly expensive energy sources we have
High cost/low net energy sources are no solution even if they can be produced at the required levels. And they can’t. World oil supply has failed to budge significantly in the past six years even as the price has doubled. ‘Conventional’ oil has been in decline for half a decade despite massive (subsidised) investment. There just isn’t enough expensive oil and alternatives to replace the cheap sources that are being exhausted.
And what of Farrar’s suggestion of transport alternatives? All well and good, if you can afford to do it. But we’re in the domino recessions now – we haven’t even regained the GDP per capita of the previous recession and another is looming. Where are families meant to find the money for capital investment in expensive hybrids and electric cars? The average age of cars is rising as cash-strapped families find their budgets squeezed by petrol prices.
All this is made worse by the fact that we have a government that is wasting a billion dollars a year on state highways that could be going into public transport, and is subsidising foreign oil companies to drill up and export our oil even as we spend $8.2 billion a year on oil imports.
Maybe Farrar could have a word in their ear about spending decisions that mask the cost of peak oil…