Peak Oil-ers Do Not Understand Markets

The ‘Peak Oil’ debate is one of the regular use of alarm-and-despondency, added to popular ignorance, to frighten the chattering classes into desperate measures to combat whatever the pressure group considers the world’s number one priority.

So far, on an environmental front allied to global warming, the ‘alarm and despondency’ tendency has caught the eyes of governments, lobby groups, politicians in and out of office, the media (which loves nothing so much as a headline-grabbing story for its news cycles), and the impressionable minds of children and some parents, that ‘something must be done’.

Well, that’s not for me to get involved in. After aids, Mad Cow Disease, lead-in-petrol panics, terrorist bombings, radiation poisoning, ID cards and Big Brother in the guise of the Nanny State ('everything we eat is poisoning us'), I am quite relaxed about the latest end-of-the-world-is-nigh hysteria, especially when exponents parade their ignorance of basic economics; a far easier challenge than understanding the natural sciences. I am not sure the global warmers are sound in their claims to scientific certitude, but I am absolutely sure that Peal Oil-ers do not understand the economics of markets.

A Mr de Sousa, apparently a Peak Oil-er, writes:

“A regular economist will tell you a fable like this:
If a shortage of potatoes occurs either by lack of supply or by growth on demand the market price will rise. This new higher price will signal to the farmers a need to produce more. Supply will rise, meeting demand, lowering the price and bringing the market back into balance.”

And Tim Haab on of the impressive “Environmental Economics” Blog takes him up on the fabulous nonsense of the above quotation. I shall not try to improve on Tim Haab’s demolition of Mr de Sousa’s presentation of how a market adjusts to an excess demand at the going price.

Tim Haab writes:

“If there is a lack of supply--presumably due to some unexpected conditions like a drought--or growth in demand, the market price will rise. I agree. But, the reason the price will rise is to remove the shortage. A shortage occurs when the quantity demanded exceeds the quantity supplied at a given price. This creates upward pressure on the price causing consumption to fall and quantity supplied to rise. This is what Adam Smith referred to as the invisible hand and TODEE refers to as the magic hand. When the price rises high enough, quantity supplied will equal quantity demanded and the shortage is gone. So far I agree with the potato fable--although I might have worded it a little different.”

Comment
Whether the physical quantity supplied rises depends on many factors and the time-lags involved (supplies do not adjust at infinite velocity); but what is certain (barring government intervention) to happen is that price will rise and this reduces effective demand, often quite quickly at the margin, and increasingly so, as customers are disappointed when sellers refuse to sell at the previous going prices.

Mr de Sousa’s potato example itself should have told him about the growing season (a lack of knowledge of botany and biology?) and it will take time to increase the physical supply, should that be a response from suppliers on this occasion. The increase the physical supply of oil depends on geology and the costs of extraction, and the availability of the products of substitute technologies, and suitable politics.

Where I do have a reservation about Tim Haab’s rebuttal of the luckless Mr de Sousa’s efforts is in his statement that: “This is what Adam Smith referred to as the invisible hand and TODEE refers to as the magic hand.”

Regular readers know that Adam Smith said no such thing about price adjustments in markets linked in any way to ‘an invisible hand’. New readers may scroll down the archives and see many examples of what he used the metaphor of ‘an invisible hand’ for and they do not include price theory.

I have no idea what ‘TODEE’ stands for, or what they mean by the ‘magic hand’. It has nothing whatsoever to do with Adam Smith’s political economy, or with economics. ‘Magic’ belongs to nonsense like astrology, contacting the dead in séances, Tarot cards and superstition.

There is nothing ‘magic’ in markets; their processes are well known and commonly understood by Economics 101 (though apparently not by Peak Oil-ers). Like rainbows, markets may be admired but not wondered at, and understood but not worshipped.

[Read Tim Haab’s measured demolition of the latest economics from the Peak Oil-ers at: http://www.env-econ.net/2007/02/an_attack_on_ec.html]