Wednesday, September 29, 2010

Comment on Stephanomics on Oil

 IF the world were stimulated enough to get back to full employment, then how much oil would the world need? This is not an impossible question since the close connection between total production and oil production has been visible for decades. Now suppose that the world simply can't pump that much oil at the moment. What are the economic implications of that?
To answer that you have to look at where the world is heading. The price of oil has decoupled from the general price of energy. That means that the price includes a component for the energy, and a component for the extra value of oil as a convenient energy carrier (particularly in our world with so much oil-dependent infrastructure, like trucks, cars, petrol supply chains). This means that (a) Where possible (stationary situations) everyone is moving to other energy sources; and (b) We can increasingly use energy to get oil and still make a profit (this opens up options like tar sands, heavy oil, and in the long run we can even make oil out of thin air, perhaps using algae [I'm not suggesting that algae will ever make cheap oil]).
Other energy will never be as convenient as oil that flows out of the ground under its own pressure. Lack of convenience won't matter if it's cheap enough. The Green view that the cost of energy is unimportant is completely wrong. So the required recipe is clear:
(A) Stimulus must be used to build cheap electricity, not to try to restart "business as usual".
(B) We need to actually suck up any resulting excess liquidity in private hands to prevent us smashing again into the current limit of oil production: e.g. Energy Crisis Bonds in the style of War Bonds.