Broad Description of the Libertarian Response to Peak Oil Enthusiasts

The only thing missing is, like, 100 footnotes. Also, this is in response to just one Peak Oiler, so some comments are irrelevant, and other Peak Oilers would have other counterpoints.

I'm afraid that line-by-line responses are going to get too large to manage, and your constant strawman substitutions for my actual positions are interfering with any substantial discussion because I now have to spend more time responding to your claims of what I am **not** saying. At no point have I proposed "tin can cars", I am not a member of a "cult of Simon" (whatever that is), I am not defending RMI (see my first post - I continue to be critical of a number of RMI ideas and it would be quite improbably to be both an RMI and a Simon "zealot" as RMI is highly critical of Simon), I am not a proponent of car culture (I coined the phrase "replacing the town square with the square town"), I have not forgotten that prices may go up, I am not defending hydro or nuclear, I don't think that solar and wind are ready to completely substitute for oil except in specific applications, I am not defending government-subsidized ethanol programs, I am not promoting hydrogen, I am not promoting government subsidization of oil or cars (quite the opposite), I am not saying that biofuels alone will "save" us from depletion, I don't "foolishly have faith in a miracle of some kind of technology that can change the laws of thermodynamics", I don't "see cultural resistance to dumping the car culture as impossible for the people to overturn", I am not forgetting that people are frugal by nature (but I do know that they aren't solely motivated by their budgets), I am not defending ridiculous zoning laws that require parking spaces or setbacks, I do not favor federal and state road subsidization, I am specifically against government subsidization of fleet replacement because I think it is both unnecessary and harmful (another RMI idea with which I disagree), and I am not promoting CAFE.

I apologize for not having taken the time to better understand the jitney proposal; I thought you meant that it would be a gov't-mandated program. It is not your idea, though. David Friedman described something similar in The Machinery of Freedom, a book he wrote in 1973, and he was citing earlier sources. I even considered implementing something like it for a very specific purpose in my home town. However, he proposed it for urban environments, recognizing that this is not a serious proposal for suburban or rural environments. He also outlined a couple of problems with it, which you have not. Furthermore, the plan I have outlined allows for the inclusion of the jitney solution as one of the many approaches that can and will be taken (and likewise yours can include mine, so I'm not sure why you seem to be so negative about something you don't seem to have studied very thoroughly).

But the jitney solution doesn't have all of the advantages you claim. The fleet still has to be built and maintained, which requires the same or more manufacturing energy which you say I haven't shown to be conserved; you apparently aren't holding yourself to the same standards. Also, I conservatively predicted a market-driven solution that quadruples energy efficiency, but if you share your ride with a single person, you have only doubled your efficiency (actually, not even that much because you also added another 5% to the vehicle weight) for just that portion of the ride where you share. I have low expectations for the efficiency of gas-hog SUVs pulling trailers, and lower expectations for the desires of people to ride in them.

Friedman called the jitney chapter, "99 and 44/100ths percent built", by which he meant that the infrastructure already existed. With the internet and wireless communications, it is even further along today, yet it hasn't happened, yet. Do you know why not? A culture will never change merely because people could save a buck or two on what amounts to a computerized hitchhiking system. Besides their money, people also value certainty, convenience, time, safety, and so on. A jitney system requires that I coordinate not only my trip from A to B with someone who happens to be going that way at the same time, it also requires that I coordinate with someone going from B to A at the same time I want to return. Sharing rides with more than one person requires solving a geometrically more complex coordination problem, and information has a cost, too. To switch to a jitney system en masse would require that the cost of driving rise far enough that it outweighs those considerations. If it rose that far, I would suggest that even the jitney drivers would abandon them because they have to run the risk of driving about when there are no riders going the same direction at the same time. It's 99.44 percent built and requires no rise in the cost of oil - so where is it? I contend that you have not thought it through.

I am a longtime proponent of deregulating railroads, which would still exist in my world … if they can compete! (I believe they will) The railroads are already engaged in major construction - I read recently that several lines are building double track from major ports across the continent in places where they were previously only single tracked – so "we" don't need to do a thing. However, trains are not a complete solution for transporting goods (if they were, they would already have driven trucks off the road). Yes, they are 5x more efficient in terms of the rolling energy, but economically, "the conventional wisdom is that rail transportation is never likely to be practical (except for some notable exceptions) for distances under four hundred miles because of the high ratio of terminal time to running time on short runs." – Albro Martin, _Railroads Triumphant_

As for my real argument, I'll make this as simple as possible. I find that it always makes more sense to read both the idea and the critique rather than just the critique, which you seem to be doing with respect to the broader picture ideas I have been painting. If you are arguing against what you think is a Lovins argument, then you aren't arguing against anything that I am defending. Making off-hand dismissals of Simon as a cult figure (ad hominem) without having actually read anything of his, or Googling third-hand criticisms of RMI (strawmen) may serve some sort of purpose in scoring debate points among your like-minded peers, but it doesn't serve to enrich anyone's understanding, least of all your own. It is intellectually lazy.

Here goes:

Price is a function of both supply and demand, just like the cut is the function of both the upper and lower blade of scissors (Alfred Mashall).

Asian demand for oil is rising.
Supply is not rising as fast as demand.
(see Jim Hamilton's Econbrowser blog for support of both statements)

It is not necessary for supply to fall for prices to rise. It is possible for prices to rise even if supply is rising because supply is not rising as fast as demand.

When prices rise, people respond. The strength of that response is sometimes referred to as "elasticity". Consumers may not change their behavior right away because they have seen prices rise and fall before and have expectations that prices will fall. When the prices do not fall as expected, people begin to think of new ways to reduce the amount they are spending on fuel. They might take fewer trips, turn down the thermostat in the winter (or up in the summer), wear sweaters ala Jimmy Carter in the winter, combine trips, carpool, or use mass transit in the city. Cyberspace allows us to telecommute rather than meatspace-commute, and even operate machinery remotely.

If they decide that fuel and other factors (like time spent sitting in traffic jams) are taking too much of their budget and time, they might take additional steps. Among these are big, obvious steps, like replacing their appliances and vehicles with more efficient models. Evidence shows that they have been doing this for years despite low fuel prices. They have other options, too, like adding insulation to their houses, or swapping their incandescent bulbs for compact fluorescent lamps (CFLs) or even LEDs when they hit the market. They might even remodel their houses with "low-e" windows, tankless water heaters, and attic fans. All of those can be called "demand-side substitutes" for fuel. The sum of all purchases of those items is called the "demand" for them. When that demand goes up faster than the supply of those goods, that in turn drives up the price for those substitutes just like increasing demand drove up the price for oil.

Some economists like to think of prices as information; when the prices of things like CFLs rise, this is a signal to the manufacturers of the demand-side substitutes to start making more. They want to do so because they can make more money (assuming that people are motivated to some extent by self-interest; this is usually held to be a good assumption). In some cases, the price rise is a signal to entrepreneurs who aren't even in the industry to start a business making those substitutes. In other cases, it is a signal to even more innovative people (engineers and scientists) to invent new substitutions that haven't even been thought of, yet.

But that isn't all that happens when oil prices rise. Oil prices are information, too. When oil prices rise, it acts as a signal for energy companies to try to find more oil. They want to do that because they think they can make more money at the higher prices. They develop new ways of finding oil, more efficient ways of bringing existing oil to market, and new ways of extracting oil they knew about but couldn't afford to bring to market under the older, lower prices.

But just as the prices also signaled entrepreneurs, engineers, and scientists to develop and sell new products that decreased fuel consumption (remember the "demand-side substitutes" above?), oil prices signal similar people to develop and sell new types of fuel. These are called *supply-side substitutes*. Oil is found in the ground, and was created millions of years ago from plants and animals. Since it would take a long time to make new oil this way, the scientists and engineers try to find ways to make replacement fuel from processes that can be repeated year after year. These are called "renewable" resources.

Now, this sounds like a perpetual motion machine, which is currently thought to be impossible because it violates something called the 2nd Law of Thermodynamics. But the 2nd Law only holds for a closed system, which the earth is not. The earth is constantly bathed in over 100,000,000,000,000,000 Watts of power [I originally said "energy", but Watts are power and kW-h are energy] from the sun, that big yellow thing in the sky. For those fans of arithmetic out there, that's enough energy each hour to satisfy all human requirements for a year, but we only need to capture a fraction of it.

Some of that energy we can capture directly. We can build things called "photovoltaic (or PV) collectors" that over their lifetime take in somewhere between 1 and 7 times the amount of energy it takes to build them. Scientists and engineers continue to make them better, cheaper, and with fewer nonrenewable resources, so this ratio will improve. We can also build thermal collectors, which require lots of mirrors to redirect the power from the sun to a single source. These generate many times the amount of power it takes to build them because mirrors are simple to make. Both of these systems turn the sun's energy into electricity and/or heat. This isn't a perfect answer - many parts of the world are unsuited to these processes, and these devices take up lots of area. Fortunately, some parts of the world are suited to them, and almost every house has a lot of unused area on the top.

Some of the energy we can capture indirectly. The sun heats air unevenly, resulting in wind. Wind power systems generate many, many times the amount of energy it takes to build them because they are also very simple. However, wind generators are noisy and require space and towers, which some people understandably don't want near their homes. The sun also heats water which evaporates into the air and then falls as rain on places where the sun's energy is transformed into potential energy. Eventually, it collects into rivers and develops kinetic energy. People used to dam the rivers and direct the energy through a hydroelectric system which converted the kinetic and potential energy into electricity. However, there are environmental problems with that, so it is largely being abandoned (except in China). But people in very rainy places get enough rain that they can build smaller versions of the dam. Those are called microhydro systems. I have even seen rooftop hydro systems.

Plants and animals convert sunlight energy into protein, cellulose, sugars, and other chemicals. Some of those chemicals can be turned into a substitute for oil products through a variety of methods. Some of those processes consume more energy and other resources (like soil) than they produce, but others produce more than they consume. Scientists are studying those more intently, and have found several plants and processes that yield more resources than are required to grow the plants and manufacture the fuel. Some plants are currently used for food, so switching them to fuel use would cause a rise in the cost of food. Some farmers raise animals which convert plants into chemicals which the farmers can't sell and have to store; scientists have found ways to turn those wastes into fuel. Still other farmers might be tempted to switch from growing the plants they grow now to growing fuel plants. It would be up to them to figure out whether it would be more profitable to grow food or fuel crops, with guidance from consumers through the price mechanism (see above). Another group of farmers - you may not believe this - are paid by the government to grow no crops at all! They could easily switch their land into fuel production. Some farmers are paid by the government to grow crops that consumers don't want, so stopping those subsidies will allow farmers to switch to fuel crops at a net savings to the country. Still other farmers are growing fuel crops in places they couldn't before, so if some of those crops are fuel, it will not impact the food crops.

Still other people have found that we can use waste products, including used restaurant grease and cellulose from wastepaper, to make fuel. More recently, scientists have found ways to use "chaff", the part of the plant that we throw away, to make fuel. There are a few ways of looking at the potential results. You could say that the farmers are growing food, and fuel is an almost-free byproduct. Or you could say that they are growing fuel with an almost-free food byproduct. Or they can reduce the cost of the food they sell by using the income from the fuel to offset that lost income. Using waste to produce fuel serves three purposes: it doesn't compete with existing food supply and in fact makes food cheaper, it reduces waste that has to be treated or stored in landfills, and it supplies renewable energy.

Besides the sun, there are other natural sources of energy. One of them is the gravity pull of the moon; it causes the oceans to move up and down. In some places, people catch the water when it is up, and then transform that energy into electricity with dams when it goes down. The core of the earth contains a large amount of heat or geothermal energy which people are already using. Lastly, the energy stored in atoms is available, but I am not defending that because describing that would require a lot more writing, they don't appear to be feasible in a free market, and some energy production processes associated with atoms are generally thought to be a bad idea with present technologies and geopolitical realities.

So, what can we do with all of the energy that we capture from the sun, moon, and earth? For one thing, we can use that energy to manipulate the atoms into shapes and processes that are useful to us, including food, fuel, information, storage, transmission, and analysis. As long as the sun stays overhead and the moon keeps revolving around us, we can continue to look for more ways to create fuel and information. In general, we will keep those processes that yield more than they consume. This is called "wealth creation", and humans have not only been doing it for many years, but we seem to be getting better at it with each passing year when given the chance.

For all or most of those fuels, the infrastructure to use them already exists since cars and appliances already run on the outputs (biodiesel, ethanol, methane, and electricity). The system to deliver the fuel already exists (fuel stations, delivery trucks, power grids). The only thing missing is more alternative fuel manufacturing infrastructure. It does not make sense to ask me to prove that the manufacturing sector already exists and is ready now to assume the mantle of low cost alternative to oil because I have implicitly stated that the low cost fuel now is petroleum oil (see discussion about rising prices above). I am not arguing that the high cost alternative (now) is the low cost supply (now), so why are you asking me to defend that argument? When oil prices rise above certain levels, we have options that will come on line when they make economic sense, and/or when the price of alternatives drops below certain levels, we will see them take more market share from petroleum. In some windy and sunny places, that has already happened. Petroleum prices won't rise due to depletion overnight; even if we reached Peak Oil, it won't happen they way you and many others seem to imply. The CEO of Shell won't get a call tomorrow from his Chief of Exploration saying, "I quit. We can't find any more oil," and then another call from his Chief of Extraction saying, "I quit. All the wells went dry last night," and then another from the CEO of BP saying, "Hey, Ralph! We're tapped! You?" Even Hubbert didn't see it working that way, so I have no reason to believe that it will unless you care to try to provide one.

Lacking such belief, the only alternative is to believe that prices will rise gradually, if at all. If people think that oil prices are going to rise, then they will start looking at alternatives and try to make the switch when it makes sense. If oil companies think oil prices are going to rise, they are going to conserve the oil in the ground, which will only force people away from oil faster as prices rise faster. Paradoxically, that means that there will be more oil in the future and therefore prices will not go up. That is why it is said that anyone who understands the Hotelling rule has not had it properly explained to them.

People who show charts showing a rising quantity demanded despite a declining quantity supplied have apparently never studied physics; people who show demand charts that continue to rise steadily even after the point at which they assume prices will rise rapidly and dramatically have never studied or understood economics. The economist most frequently associated with explaining the interaction between natural resources, population, price, and substitution was Julian Simon, but the ideas were not his, nor is he the only economist who thought they were good ideas. He merely collected lots of data to show how they worked. If someone were to say that those ideas are good because Julian Simon said so (or bad because he did), that would be an "appeal to authority". Arguing that those ideas are good because lots of people agree with them would be an "appeal to popularity". Both of those are "logical fallacies"; I am not making those claims. If someone said that those theories are good because they have both explanatory and predictive power, then that would *not* be a logical fallacy. However, it is still possible for the ideas to be incomplete or inaccurate; the map is not the territory, and Simon's data was necessarily backwards-looking (nobody has invented the Way-Forward machine, yet).

In a free market system, it is reasonable to believe that people will combine these and many more solutions to respond to higher fuel prices. I am not claiming that only one will be the answer; I'm not even claiming that one or all of these will be alternatives 100 years from now. I'm not defending any particular balance between demand-side and supply-side substitutes. I'm not defending negative-yield corn-based ethanol programs that are championed by ADM (because they own most of the corn infrastructure). I'm certainly not defending the unrealistic claims of people in the 1970s who thought that these or other sources would be "the" answer, especially when you consider the fact that I believe petroleum will be cheaper 10 years from now than it is today. Stop and read that sentence again and think about the implications with regard to the claims of those activists in the 70s in light of the last few paragraphs; they probably still don't understand why they were wrong, but they still think Simon and the theory he championed are "crazy". What was Santayana's definition of a fanatic? I am, however, claiming that we are generating and will continue to generate potential answers far faster than we are "running out of oil". Another economist named Hayek made a strong argument that a few people will not do as well at solving complex problems as many people will, because many people will try many different solutions and combine them in unexpected ways and the best ideas will flourish. The only real problem that faces us is whether prices will rise so fast that humanity is unable to transition to a sustainable future, leading to widespread strife and disruption. Just as nobody knows for sure that this won't happen, nobody has shown any convincing evidence that it will, either. People we call "futures traders" don't seem to believe those prices are headed up any time soon (see J. Hamilton's Econbrowser blog), and they are highly motivated experts.

Fortunately, we know from past experience that when faced with such problems, people have responded quickly. In 1956, during the Suez Crisis, world production fell 10.1%. In 1973, supply fell 7.8% during the Arab-Israeli War. In 1978 and again in 1980, world production fell 8.9% and 7.2% when more problems arose in the Mideast, respectively. Finally, in 1990, production fell 8.8% when Iraq invaded Kuwait (Econbrowser, again). Each of those was the result of deliberate, swift, and political decisions made by humans, not because of slowly accumulating technical problems with supply such as Hubbert's Peak. All of these periods have been associated with economic downturns, but the current period of high prices is not.

During a period in which fuel prices rise high and fast enough, fuel efficiency may become a source of competition. If several competing widget manufacturers have nearly identical land, capital, labor, and raw material costs, but one uses fuel more efficiently, then it won't be surprising when their costs are lower. Since consumers will buy the lower cost widget, it won't be surprising when the efficient company gathers more market share. This effect will be compounded if the efficient manufacturer also happens to make the most energy-efficient widget because consumers will include lifecycle costs in their purchase decision. In other words, all else being equal, consumers will perform demand-side substitution with the widget whose manufacturer has done the best job at demand-side substitution. That is exactly what happened in the late 70s and early 80s, the period of high prices and low oil production that lasted so long that people shifted their taste in cars. During that period, sales of efficient Japanese cars made by efficient Japanese manufacturers took off while Chrysler almost went under and the other Big 2 had to scramble. Some analysts will look at before/after pictures of that period and conclude that we "dodged a bullet by shifting manufacturing to more fuel-efficient manufacturers overseas" (paraphrasing), as if there was a conscious decision to "cheat the system", but those analysts only demonstrate their own ignorance of market dynamics that are initiated by price changes. It wasn't cheating: it was exactly what we would expect. In fact, we can look at the current period and see a similar outcome: SUV-heavy GM is getting pounded by high quality, efficient Toyota again as oil prices rise (this time, because of higher demand). The big difference between now and then? Real growth in the economy from 1979 to 1983 (to use your years) was 7% despite a recessionary period in the middle. Today, there is no recession even as oil prices rise.

Because of the competition with more efficient producers in the early 80s, and the winnowing of inefficient producers and methods, the United States now produces more goods and services per person per barrel of oil than any other country. Yet companies are always trying to do more with less and American companies always have to compete with foreign companies who have new ideas of their own (Hayek strikes again). For example, some of them know how to make very fast Formula 1 cars out of carbon fiber, which is lighter than steel, but also stronger. Car companies are looking at ways of taking this technology from the track to the driveway because it will ultimately be cheaper than steel, take fewer resources and less energy to build, but produce a car that weighs less, requires less power for equivalent performance, and results in a safer vehicle. Mercedes is already using this technology, but it won't always be so expensive. Remember that Mercedes was also one of the first companies to put airbags in expensive cars, but now almost everyone has one.

"Superlighting" is just one of the ideas championed by RMI and its chief investigator, Amory Lovins, who is famous for breaking with the environmental movement because of his belief that the transportation sector - which accounts for over 2/3 of all energy usage in the US - should be constructively engaged, not attacked. Whether Lovins and/or his arguments are correct, see the discussion above concerning appeals to authority and popularity. Although Lovins and his co-authors denigrate Julian Simon every time they refer to him, their research is in agreement when looking backwards. However, when looking forwards, Simon believes that self-interest, the profit motive, and human creativity will trigger a response to tight resource markets (not the same as depletion, if you have been paying attention) while Lovins believes that an array of government mandated and funded programs are necessary (despite his own evidence). Simon says change will happen, Lovins says it should happen. To me, that's like making a moral argument for breathing: it's tautological. And Lovins thinks it should happen faster, but doesn't explain what the hurry is (he bases his predictions on a 2025 horizon, so his motivation certainly isn't a 2010 supply peak). I am not certain who is right, because I don't possess something called "omniscience". However, I lean towards the Hayekian process because it has proven to be so much more effective in the past and because central planning and government interference lead to unintended consequences, are open to capture by rent-seekers like ADM, and seem to perpetuate long after the original justification ceases to be plausible. But I am open to some of the market-based options offered by the Lovins camp as part of the overall solution. I even think jitney transport is interesting, but certainly not world-changing. I think of Lovins as descriptive while he intends to be normative.

The goods and processes I have described are only the tip of the iceberg. For example, many people are trying to figure out how to mass-produce the silk of the orb spider. Before you have a conniption regarding how many spiders I have to raise, the answer is zero - look it up! This silk can potentially be produced with 100% organic inputs, no petrofuel required. It also happens to be many times stronger than Kevlar, so it can be woven into material and laid up into car body shells that are many times stronger than Formula 1 racing cars. It is simply impossible to exhaustively list all of the possible partial solutions to increasing oil prices because by the time you have researched them, catalogued them, and written them down, somebody will have added to the inventory.

My answer to your challenge is that I believe that 10 years from now, there will be both more passenger and vehicle miles driven because oil will be cheaper and because people will have found more efficient ways to get around, both in cars and out of them. Remember that the Chinese are starting to trade their bicycles in for cars like mad.