The paradox of the economic impact of rising production costs

In my previous post I claimed that the impact of Peak Oil arose from the change of production cost of oil, rather than the change in price. I still think that is correct. However the detail of how it was expressed was wrong.
In the case where the price rises with no production change, there is just a transfer of money and consumption from buyers to sellers with no net economic change. But then I said that when there is a change of production cost then the extra cost of production disappears out of the economy. That is clearly wrong. Money flows to the producers, but instead of flowing on to consumer purchases it flows on to production expenses, like oil rigs and oil workers. But in so far as it flows to more oil workers it is no different to when it flowed to the owners of the oil resevoir. Similarly when it flows to the workers and owners making oil rigs.
Either way the money flows through the oil production process. So what difference does it make to the economy whether it flows through to owner consumption, or it flows through to production costs?
Obviously I think it does make a big difference, though not in the simplistic terms of the previous post. My intuition is that it flows through with more resistance when it flows through to production costs instead of owner consumption.
So my challenge to economic theorists is to find a way of talking about the economics of resource, and particularly energy, production and use, that correctly explains the impact of rising production costs on the economy. If it is only comprehensible to mathematicians that will be better than nothing, but bonus marks will be awarded if it is comprehensible to politicians and voters (and me).

How Peak Oil destroys the world economy

[update: Note that the following post (http://grampsgrumps.blogspot.com.au/2011/09/in-my-previous-post-i-claimed-that.html) has a correction to the logic of this one.]

Having expected Peak Oil to seriously impact the world economy, I was not surprised when high oil prices were followed closely by economic problems in 2008. Surely now the world would wake up. But no, the economic problems were attributed to malfunctions in the the financial system. And we Peak Oil believers struggled to put a coherent case.
It is tempting to focus on the high price, but consider what happened when the price went rapidly from $130/barrel to $140/barrel in 2008. Obviously this made consumers, and importing nations, poorer. But it made producers richer by an exactly equal amount, and what can they do with that windfall but spend it, or recycle it by lending it to others to spend? So the net effect on the total world economy is zero, and that is what economists perceive.
Even though the price is now around $100/barrel, as it was in 2008, still most oil comes from old fields that used to profitably produce at $20/barrel, and still could. However all of these big cheap oilfields are past their peak. They produce less every year. Oil production continues to struggle along on a plateau of constant production. But this is made up of increasingly less of the cheap oil, and increasingly more of the expensive oil from newer fields.
Now imagine what happens when we lose a barrel of oil that cost $10 to produce, and replace it with a barrel that costs $60 to produce. That is $50 worth of productive effort that was available for consumption or building new infrastructure. Now that $50 of productive effort is used and lost.
The world consumes about 30 billion barrels per year. The depletion rate on existing oil wells is about 5%. As a rough guess, perhaps 1.5 billion barrels/year (5% of 30 billion) is being replaced by much more expensive barrels each year. In that case, multiplying by $50, it amounts to $75 billion/year lost to the world economy. Perhaps Kjell Aleklett and his team can come up with the right number. Whatever it is it is certainly big enough to cause major disruption to our growth-oriented economy.
So far the economy has managed to grow by: switching to energy alternatives; using petrol more efficiently; and turning to less energy intensive ways of working and playing. This is going to get harder as we come off the plateau and start the actual descent.

Demographics

Chatham House has an article on Demographics which set me thinking. How important is the ageing population for its effect on the environment (e.g. global warming)? Old people consume but don't produce. However governments see full employment as a key goal. When an old person dies that reduces consumption. But the matching fall in production doesn't happen. Either automatic processes or government action restores production (making everyone else richer).

Of course this will be irrelevant in many possible future circumstances where production is limited by energy not labour shortages. In that case population at any age is irrelevant to pollution.

global warming impacts viticulture: irrelevant

Viticulture! I can't believe the way people who want the world to stop burning fossil fuel think it is some sort of minor matter, so that it is worth mentioning all sorts of trivia like the impact on tourism here or increased disease there. If we stopped burning fossil and nuclear fuel tomorrow (as the lunatic fringe wants) then the carrying capacity of the world would be much less than a billion people. At least they'd all be living close to nature: too close for comfort.

IF we find something cheaper than coal for energy (our only chance to stop burning coal) then just the cost of changing infrastructure will be huge and mostly hit the poor. How much are people prepared to pay to save the world? A major Australian mining union has said "not one job". America has no interest in growing food instead of transport fuel despite the visible impact of rising food prices on world stability. Just the minor rise in energy costs, from initial (ill-advised) renewable subsidies and requirements, has annoyed the Australian electorate enough that the latest polls suggest the government will be wiped out in the next election, if they make it that far.

The world needs cheap energy. It can only come from Nuclear. Nuclear design is a nightmare since elements keep changing and having different chemical and physical characteristics. And clearly we need to prove safety, since "just trust us" isn't going to work. The way to prove safety is to make lots of identical small reactors so that we can test them in extreme conditions [on a remote island]. And this needs to be done in a very open way. "OK, here's our simulation of what will happen when we do this. Now let's actually do it, and everyone can watch live on the Internet".

sorry about the rant.

[response to Azimuth project discussion entry]

Make maths useful: response to Baez blog post

For a decade and more my wife complained about word processing people, and I kept telling her: you'll never get documents created as you want in a timely fashion unless you do it yourself. Programming is a bit like that too: and spreadsheet programming shows that people want to program if the environment is accessible enough. It is nice when sophisticated mathematics makes a difference. It is nice when real mathematicians can cooperate with people in other fields and use semi-sophisticated mathematics to help them. Yet I feel that the real need is for everybody to understand unsophisticated mathematics enough so that when they have a problem amenable to mathematical treatment they at least recognise that and look for help. The Internet seems a wonderful tool for educating people about mathematics, but I feel there won't be much progress until the educational authorities stop regarding mathematics as an optional skill. At any rate one of the issues seems to be that mathematicians love to generalize, but the implications of the general theorems don't percolate down. I remember an memoir by a famous mathematician (perhaps Arnold) complaining about papers published on how to solve particular types of PDE, when they were just special cases of a "well known" general theorem. Unless mathematicians are also involved in the real world, or at least the less unreal world, then they won't know how their understanding can make the difference it should.
If plants keep their leaf pores smaller, that means that particular plant types can grow in drier conditions. At the edge (if rainfall stays the same) that means more tree covered areas which is a negative feedback on CO2. In other places I presume it means that you eventually get different trees (basically because trees which are adapted to relatively dry conditions lose out to trees that don't have those adaptations where those adaptations aren't necessary). So its tricky. And isn't this typical of so much relevant stuff. You see a summary of a result and you wonder: "did they allow for this or that?". It would be interesting to develop an oracle (like Watson?) which could absorb a lot of information and answer questions like that.

Democracy and the war on drugs

The Arab world wants democracy. It seems like an unstoppable force. This is perhaps unrealistic, because the end of cheap oil is making everything expensive and democratic regimes are also going to feel that. But at least the people have the safety valve of the ballot. This would work better if terms were shorter, like Australia’s 3 years and America’s 2 (for the House of Reps).
But many countries are going backwards because of the corrupting influence of drug money: most noticeably Afghanistan and Mexico. It is essential to take the profit out of selling drugs, and there is a natural way to do that. Drug pushers start by providing drugs cheaply, then make their profit from those subsequently addicted. Making it illegal for addicts to get there drugs is highly counterproductive. Here’s the alternative:

• Continue to ban the supply and sharing of drugs, with severe penalties particularly to the supplier, but also to anyone receiving or possessing;
• Allow addicts to register;
• Registered addicts can receive supply, for their own use only, from a government channel;
• Supply is guaranteed, not requiring immediate payment, so addicts are not forced into crime;
• For more dangerous drugs, users might be required to consume under supervision.

This will remove the financial incentive for drug crime. Rich addicts will still get their drugs illegally, but the big market for poor addicts will be largely eliminated. The cost saving will be immense:

• End the war on drugs;
• Remove the malign influence of drug barons on politics in many places;
• Getting into contact with addicts in this way will enable cures in many more cases.

thinking about interconnected information

Natural language is designed to be a good way to represent internal mental states. And internal mental states are where we exploit the brain's amazing capabilities to do parallel search for interconnections. So natural language has to be at the core of communication of clear thought. However when you get a real lot of natural language, like a large text book, I wonder how easy it is to get that into a good internal brain structure.
Anyway this set me wondering whether one might try to copy the brains internal structures a bit. The idea is to have nodes that are connected in multiple ways and amenable to computer processing. The text is unambiguous (as far as possible) because the ontology and parsing is specified. Nodes can link to other nodes in various ways, including:

• (parameterized) Bayesian network specifying the probability of a node given another (when meaningful); 
• software module interaction for nodes with associated software; 
• just links; 
• ... 

The hope would be that you could put in a statement (like the economics one given partially above) and it would search around, find other relevant stuff, find data which might bear on the matter, code that might let you do relevant calculations on the data, and other useful stuff. This would be linked to information relevant to the individual. Individuals can specify how much they understand nodes, how much they agree with them. If you want to understand something new then it would lead you through other stuff you need to understand first. And it could do lots of other useful things to help you understand the subject...