Over at the New York Times, resident libertarian-contrarian John Tierney has a column about a bet he took in 2005 with the late energy analyst Matthew Simmons. Simmons—the author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy—was a prominent believer in peak oil, the theory that we’ve reached the end of the age of easily accessible petroleum reserves, and that the price of ever-scarcer oil would skyrocket in the future, with frightening consequences for the global economy. Tierney, though, had his doubts, influenced by his friend the economist Julian L. Simon—the leader of the Cornucopians, anti-Malthusians who believed that innovation and economics would always produce abundant supplies of energy and other resources. So Simmons and Tierney made a $5,000 bet in 2005 (when the price of oil was $65 a barrel), with Simmons predicting that the price of oil would be at least $200 a barrel in 2005 dollars by the end of 2010, and Tierney wagering that it would be lower than that.
For awhile Tierney looked like he’d made the wrong choice. During the boom years of 2006 and 2007, oil and other commodities climbed in price, with petroleum hitting nearly $$150 a barrel in the summer of 2008. But then the global economy crashed, and with it, the price of oil, which fell to below $50 by the end of 2008. Though the price of petroleum has recovered together with the worldwide economy this year, with oil now above $90, it’s still well below the level Simmons predicted. Though Simmons sadly died at age 67 this August, his colleagues ruled that Tierney (along with Julian Simon’s widow Rita, who bet $2,500) had won the wager.
To Tierney this is clear evidence that Simon and the other Cornucopians are right, and Malthusians like the ecologist Paul Ehrlich and the environmental scientist John Holdren (now the White House science adviser), are wrong. Even as the global economy and global population continues to grow, scientists and businesses find new sources of energy, new deposits of old energy and ways to make the resources we have stretch further:
It’s true that the real price of oil is slightly higher now than it was in 2005, and it’s always possible that oil prices will spike again in the future. But the overall energy situation today looks a lot like a Cornucopian feast, as my colleagues Matt Wald and Cliff Krauss have recently reported. Giant new oil fields have been discovered off the coasts of Africa and Brazil. The new oil sands projects in Canada now supply more oil to the United States than Saudi Arabia does. Oil production in the United States increased last year, and the Department of Energy projects further increases over the next two decades.
So is Tierney right that there will always be enough of everything we need? Certainly the Cornucopians have history on their side—at least so far. From Malthus on, pessimists have predicted that a growing world will run out of food or coal or oil, but that hasn’t happened yet, and on the whole life is getting better and better every day, at least materially. The Cornucopians have even won bets like this before—in 1980, Simon bet Ehrlich, Holdren and the environmental scientist John Harte that the prices of five metals would actually fall by 1990. Just like Tierney, Simon was right.
I have a lot of sympathy for Tierney and Simon’s position. Human beings are incredibly adaptable and incredibly innovative—that’s why life has gotten so much better materially for most of us. But just because they were right in the past doesn’t mean they’ll be right in the future, as Tierney’s liberal colleague Paul Krugman arguedt earlier this week. In a column called “The Finite World,” Krugman noted that even as the American economy remains in the doldrums, oil has become much more expensive, and overall world commodity prices are up a quarter over the past six months. On the surface that doesn’t make sense. Commodity prices should be connected to economic growth—the faster the economy grows, the more demand there is for oil or wheat or cotton, which is largely what happened to commodities during the runup to the 2008 bust. Yet with America barely out of a recession, prices are rising fast, and many analysts believe $100 plus oil is inevitable next year.
Some have argued that the rise is the result of speculators manipulating prices, or inflation due to excess money creation by central governments. But Krugman bats both those arguments away easily. What we’re seeing, he says, is the result of a once again rapidly growing developing world running up against resource limits. In the new global economy, you don’t need a strong U.S. to buoy commodity prices—a strong China is more than enough:
So what are the implications of the recent rise in commodity prices? It is, as I said, a sign that we’re living in a finite world, one in which resource constraints are becoming increasingly binding. This won’t bring an end to economic growth, let alone a descent into Mad Max-style collapse. It will require that we gradually change the way we live, adapting our economy and our lifestyles to the reality of more expensive resources.
But that’s for the future. Right now, rising commodity prices are basically the result of global recovery. They have no bearing, one way or another, on U.S. monetary policy. For this is a global story; at a fundamental level, it’s not about us.
The reality is that we are in uncharted waters. The world has never, ever seen anything like the rise of major developing countries like China and India—over a billion people growing into the middle class, demanding meat, cars, planes, electricity. Just because we proved smart enough to innovate our way out of periods of past growth doesn’t mean we’ll be able to handle a world with 9 billion plus people by 2050, most of them richer than now. We may already see that impact on the U.S., which will likely have to dig its way out of recession with the added burden of high energy prices thanks to healthy demand from the developing world.
And that’s just economics—there’s a deeper story here for the natural world. As the ecologist Carl Safina points out in his forthcoming book The View from Lazy Point: A Natural Year in an Unnatural World, the global economic growth that we’ve witnessed since the Industrial Revolution has come on the back of ecological destruction. Humans are richer, longer-lived and healthier, but rainforests have been destroyed, species have been driven to extinction and the oceans have been spoiled. The planet is not infinite, and its reasonable to wonder just how much we can take from it, just how many people Earth can support. “It’s like your spending the capital in your bank account,” Safina told me today. “While you spend down that capital, spending more than you’re earning, you’re living pretty well—until you get to the end.” We may be closer to that end then we think—and if that happens, high oil prices may be the least of our concerns.