Matt Simmons' terrifying world of peak politics
By Peter Foster
Celebrity energy doomster Matt Simmons was in Toronto this week peddling his theories on "peak oil," a bogus but fashionable issue that I addressed skeptically here two months ago. I was subsequently assailed by several outraged non-economists who accused me of both mental and moral shortcomings. I was accused of lack of concern for the environment and for our children's future, of being "in denial," of acting as a cardboard-brained huckster for the "mainstream media." I was told that I favoured a world in which there would be nothing to eat but "twenty dollar bills and bond yields." I was also informed that I had been unfair to Mr. Simmons. However, upon hearing him address his fellow Harvard alumni at the National Club on Tuesday, I now believe Mr. Simmons to be not merely misguided but downright dangerous.
Mr. Simmons is a Texas investment banker who is often described as an "energy advisor to George Bush." In fact, his views are closer --much closer -- to those of Al Gore.
Mr. Simmons' critique, expounded in his book Twilight in the Desert, centres on allegations that Saudi Arabia, the world's largest oil producer and reserve holder, is on the point of a potentially catastrophic production decline. Oil production more generally is "peaking," and this will lead to price increases unlike anything seen before. Mr. Simmons, who projects oil at US$200 a barrel by 2010, has admitted that he wrote the book to "scare people to death," and consistently uses alarmist language to justify his Jimmy-Carteresque call to put policy on a "war footing." For example, he describes Hurricane Katrina as America's "Energy 9/11." But if that is the case, one can only wonder at the astonishing success of the private sector's "counterattack." When I last wrote criticizing peak oil theory, gasoline in Toronto was $1.39 a litre. On Monday I bought it for 89.5 cents. If that doesn't speak to the efficiency of producers and refiners, and to the power of markets to solve problems without government "help," then what does?
Most authorities disagree with Mr. Simmons that the peak of global oil production is imminent. Indeed, the International Energy Agency last month issued a statement specifically refuting peak oil scares. But it's not primarily Mr. Simmons' "facts" and projections that are suspect, it's his solutions.
The argument against peak oil theory is not that oil is not finite in supply, or that production will not at some stage go into decline. It is that peaking oil means "the end of economics," or, even more ridiculously, "A New Dark Age," requiring draconian political action. Peak oil theory ultimately isn't about geology or economics at all, it's an example of neo-Malthusian ignorance. It's about a call for a great new wave of energy global governance.
Mr. Simmons doesn't like markets. He has declared that "If you leave it to the invisible hand of Adam Smith, that could actually end up creating a gigantic noose that strangles us."
But while oil may have unusual production characteristics, it is ultimately no different from other resources. Oil supply is inelastic in the short-to-medium term because it is simply uneconomic to develop large amounts of "spare" capacity. Saudi Arabia -- which is at the heart of Mr. Simmons' case -- has long been the only country with any potential for ramping up supply. This means that unexpected surges in demand will lead to corresponding spikes in price, which begins a corrective market process by restraining demand, inducing -- as long as market players believe the price will stay up, a critical proviso -- new exploration and technology, and promoting a search for "alternatives," whose economic threshold is brought closer. This is exactly what happened after the two OPEC "crises" of the 1970s. This year's price increases have much more to do with an unexpected surge in demand from developing nations and with geopolitical instability than with imminent resource limits.
Meanwhile, here's the central question: If not a market response to whatever geology and geopolitics may throw at us, then what?
There are only two possible solutions to the "resource problem." We can look to the great diversity of human knowledge and ingenuity informed by market prices and projections and induced by the prospect of profits, or we can look to a forced political response. The latter is Mr. Simmons preferred route, and his list of recommendations is positively terrifying. He wants to mandate the means by which goods are moved, to stop workers from commuting, to force people to eat local produce rather than bringing it round the world, and to stop globalization, which allegedly depends on "sweatshop labour." This is an agenda that would be recognized as radically "left" were it not coming from a Houston investment banker.
Indeed, when it comes to appreciation of free markets and free trade, Mr. Simmons makes CNN's Lou Dobbs -- leading scaremonger about offshoring and outsourcing --look like Milton Friedman.
How are Mr. Simmons' complex policy wonders to be engineered? Via a "world summit," doubtless organized under the auspices of the UN, and populated by the very same countries he claims are lying to us about reserves (including the United States).
Mr. Simmons -- like old Soviet planners -- seems to believe that good policy will automatically follow from comprehensive statistics, although he makes obeisance to "social democracy." Once "we" have all these figures, "there could be a public debate about what the price of oil should be." The mind boggles.
Mr. Simmons has described the market as a "500-pound wrecking ball." If he wants to see wreckage, he should take a look at the history of government energy policy, and indeed economic policy more generally. Mr. Simmons may -- or may not -- know his geology, but he should spend a lot more time studying economic history.