Articles tagged with "scarcity"
Posted by David Murphy on January 14, 2011 - 10:55am
Tags: bets, david murphy, depletion, john tierney, julian simon, matthew simmons, original, paul ehrlich, scarcity [list all tags]
For decades, economists (Cornucopians or optimists) have been at odds with natural scientists (Malthusians or pessimists) when it comes to the scarcity of natural resources. The economist’s argument, summarized here by Julian Simon, is as follows:
More people, and increased income, cause resources to become more scarce in the short run. Heightened scarcity causes prices to rise. The higher prices present opportunity, and prompt inventors and entrepreneurs to search for solutions. Many fail in the search, at cost to themselves. But 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. (Simon 1996)
The viewpoint of natural scientists seems to be a bit simpler; the more scarce something is the higher the price, leading to increasing prices as resources deplete over time. These opposing views have led to some famous wagers in the past. The most famous occurred in 1980 between economist Julian Simon and natural scientist Paul Ehrlich. The wager was whether the price of five metals would increase in ten years time. Simon won the bet. Another bet was made more recently. In 2005, John Tierney of the New York Times wagered with Matt Simmons over the price of oil. Simmons bet $5,000 that the price of oil would be $200 per barrel in 2010. Tierney won the bet.
As a result, Tierney has publicly applauded himself and the economists’ view in a recent article in the New York Times. He states: “Maybe something unexpected will change these happy trends, but for now I’d say that Julian Simon’s advice remains as good as ever. You can always make news with doomsday predictions, but you can usually make money betting against them.”
But what is the real message (if any) to be gleaned from these bets? Is it that economists are always right and natural scientists always wrong? Is it that prices decline for commodities over time?
I argue that there is very little (if anything) to be learned from these bets, and I explain why below the fold.
Posted by Gail the Actuary on June 11, 2009 - 10:03am
Tags: complex systems, diminishing returns, economics, macroeconomics, natural limits, philip henshaw, scarcity [list all tags]
This is a guest post by Philip Henshaw, known on The Oil Drum as pfhenshaw. Phil has a BS in physics and an MFA in architecture. He has been studying the physics of how natural systems change form for 40 years, first interested in the subject by college physics experiments in how all experiments misbehave. Phil's website is www.synapse9.com.
Economic theory is based on the observed regularities of the past. Some are considered as general principles, or “natural laws” that are expected to never change. From a systems view, though, such laws are emergent properties of the complex system they are regularities of, and prone to change as the system changes form.
Growth systems, for example, invariably change form when they climax, but the present laws of economics describe a complex system that has perpetual growth that never changes form. The question is partly how to tell when such changes might be appearing. Complex systems may vary a great deal without indicating a change in the form of the whole system. What would raise the question is finding events of kinds that are not supposed to occur at all. Present evidence points to depletion of necessary resources as the possible cause of the combined food and fuel price spiral of the past decade.
An example of one such economic law is that scarcities are temporary. In theory, self-interest drives people to either find substitutes, added supplies, or to reduce demand as prices rise, and in those ways scarcity is expected to resolve smoothly.
When none of those three things occurs, though, the economy experiences a continuing price spiral with no substitutes or added supplies being found for an extended period. It’s a primary indication that the physical system is at a point of inelasticity, and changing design in some way. Then the old “laws” become misinformation about regularities that no longer exist. This is a brief research note on one example, to raise questions.
For the last couple of weeks, I have been reading about the issue of mineral depletion, since I want to do some research on this topic. The basic question is whether we can keep relying on producing (rare) metals from the earth to (re-) build our society in the foreseeable future.
The only recent book that I could find on the topic was On Borrowed Time? Assessing the Threat of Mineral Depletion, published in 2002. It was written by John E. Tilton, who is an Emeritus Professor in Mineral Economics at the Colorado School of Mines. He has studied the topic for over 30 years.
I can recommend this book to non-experts as it gives a good concise overview on the thinking on mineral depletion. The text is less than 140 pages long and is presented in an accessible non-technical manner. This made it possible for me to read the book in less than 3 hours.
One major drawback to the book, in my opinion, is a pervasive bias regarding how impending scarcity is assessed. Because of the author's background, he believes that price change is the best way to foresee whether mineral scarcity is approaching. Nonetheless, John E. Tilton is honest in stating his views and has done his best to provide an objective text by incorporating other views critical of his own. These views include arguments raised by Ecological Economists, something which in my experience is rare in books written by economists of the traditional school.
This is the second (the first can be found here) in a series of guest posts by Robert Smithson, a portfolio manager at a London based investment fund.
The world’s oil supplies are not unlimited. Unless the abiogenic theory of oil is correct, then reserves will one-day dwindle, and production will decline. New barrels cannot be “magic-ed” by some trick of economics. Extraction of any fossil fuel extraction is limited. Peak oil is inevitable. Of course, there is debate about when production hits its highs; it may have already happened, perhaps it will come in the next few years, and just possibly, it will be in 2020 or later. But make no mistake about it, we are not endowed with infinite amounts of the stuff.
Sceptics rightly point out that this bell has been rung before. In the mid 1980s, world oil reserves were forecast to last about 20 years; and yet here we are in 2007, with near record production levels. Historically, we have always found new sources of oil – in Alaska, in the North Sea, in the Gulf of Mexico, and off the coast of Africa – to satisfy our addiction. There are prospects in the future too: there may well be (very substantial) new discoveries in the Middle East, ultra-deepwater drilling holds promise, as does the development of new areas such as the South Atlantic, and increased enhanced oil recovery will certainly play a role. This misses the point: finding new oil reserves may push out peak production, but it does not invalidate the concept. Our planet does not contain an unlimited amount of oil.
Many – particularly on this site - argue that economics has little that is intelligent to say about peak oil. Yet the very definition of economics is the study of scarcity, and in particular, the study of the efficient allocation of scarce resources. What more relevant subject could there be for studying the effects of peak oil?
[editor's note, by Super G] From the contributor formerly known as thelastsasquatch.
Fossil fuels comprise the largest commodity markets on the planet. In a world facing an upcoming date when it will have used 50% of its oil (and natural gas), interest in energy futures will continue to increase. And, as energy becomes more precious vis-à-vis dollars, the activity in the futures markets, particularly for crude oil and natural gas, will have increasing impacts on society. Indeed, the amount of finite oil that can be financially controlled by a near infinite amount of money is enormous. The following is a basic primer on energy futures and will be one of several foundational posts linked to a longer upcoming story, "Peak Oil, Investments, and Diversification". I will outline the basics of an oil futures contract, and discuss the risks and rewards of investing in energy futures. The post will conclude with a discussion of the growing paradox between money and energy.
In this paper we use results from the Hotelling model of non-renewable resources to examine the hypothesis that technology may increase petroleum reserves. We present empirical evidence from two well-documented mega-oilfields: the Forties in the North Sea and the Yates in West Texas. Patterns of depletion in these two fields suggest that when a resource is finite, technological improvements do increase supply temporarily. But in these two fields, the effect of new technology was to increase the rate of depletion without altering the fields' ultimate recovery - in line with Hotelling's predictions. Our results imply that temporary low prices may be misleading indicators of future resource scarcity and call into question the future ability of current mega-oilfields to meet a sharp increase in oil demand.The paper is fairly standard fare for the peak oil community but what turns out to be of interest is the application of the work of Harold Hotelling regarding the Extraction of Exhaustible Resources and their discussion of the economic view of resource scarcity as regards oil. Examining the use of EOR technology in the historic production of Yates (West Texas) and the Forties (UK North Sea), Gowdy and Julia conclude that temporary incremental production gains are offset by later steeper decline rates in the tail end of production without increasing the overall URR. Their main conclusions are essentially that 1) oil is not being treated as a finite resource as the oil field analyses predict and 2) temporary production gains mask real scarcity and result in misleading low oil prices. Let's look at the work of Hotelling in the context of peak oil and see where that goes. This post runs a bit long so I hope you'll bear with me here.