Tuesday, November 6, 2012
What's Wrong with This Picture?
The above graph purports to display a growing "supply gap" in oil supplies relative to demand associated with an increasing physical scarcity of oil, known as "peak oil." My friend and frequent co-author Peter Grossman delivered a colloquium at the Ostrom Workshop, during which he explained why this graph is almost certainly wrong: (1) it assumes completely price-inelastic demand for gas (the price elasticity isn't great, especially in the short run, but it's not zero, see, e.g., here) and (2) ignores potential substitution effects (as well as incentives created by rising oil prices to develop new substitute fuels). As Peter argued, real gaps between supply and demand tend to result not from normal market processes, but from misguided government policies that control prices (or impede supply-demand equilibrium in some other way). The broader theme of his talk was the history of energy policy failure in the US over the past half century, which is also the subject of his forthcoming book, US Energy Policy and the Pursuit of Failure (Cambridge 2013).
Posted by Daniel H. Cole at 1:54 PM