Sunday, April 17, 2005

The Party's Over (Book Review)

We’re running out of oil! Civilization will end! If this seems like a non-sequitur, then The Party’s Over will not help you see the connection.  The author, Richard Heinberg, describes himself as a writer and educator, and his book is full of details and substantial quotes from experts on all sides of the energy issues. But I couldn’t help feeling that this is not really a book about oil as much as it is a reflection of some great moral snobbery.  It’s as if he believes that our growth-oriented society is somehow inherently evil and that our years of profligate consumption have finally caught up to us, leaving us with a huge inevitable hangover. Unfortunately, the book is too full of errors to make his case.

The meat of the book is Chapter 3 (“Lights Out”), with an excellent summary of the arguments for and against the Upcoming limits on oil production, as predicted by M. King Hubbert nearly 50 years ago. That the so-called Hubbert’s Peak is real, and even imminent, is not particularly controversial. Although many mainstream oil analysts believe that production can continue growing to match consumption far into the future, Hubbert showed that this just wasn’t realistic. In fact production in the U.S. peaked decades ago, and there are numerous good reasons why it’s likely to peak worldwide within the next decade.  Numerous mainstream decision-makers agree, including the chairman of ChevronTexaco and other oil companies; even BP admits the end is near when their new marketing campaign tries to explain that their company stands for “Beyond Petroleum.” Why does the peak matter? As any economist can tell you, when supply no longer keeps up with demand, prices rise. As long as society is dependent on oil for growth, then either the price of oil will go up to match the demand, or growth will stop. And that’s where Heinberg’s moral snobbery gleefully says “gotcha!”, using the rest of his book to summarize all the consequences of slow or declining growth.  The banking system will collapse!  (p.170) because “nearly all the money in existence represents debt.”  (well yeah, but since one man’s debt is another man’s asset, he could as easily have said all the money in existence represents assets). The U.S. won’t have shoes! (p.180) because they’re all made overseas, and higher fuel prices means imports will plummet.

The trouble with this argument is that it ignores basic math, on several levels including the laws of supply and demand, and the fundamentals of net present value.  Heinberg’s case is based on a math error so simple that it calls into question the accuracy of the entire book.  EROEI (Energy Return on Energy Invested) is a simple concept: producing energy usually requires expending some energy, whether in the form of the power that drives an oil well pump or the energy it takes to construct and operate a windmill. Throughout the book, he insists that high EROEI is good (a net profit) and low is bad (a net sink), which sounds reasonable except that he doesn’t appear to understand that in fact a ratio is based on the number one: anything greater than 1 is a net profit, and anything less than 1 is a net loss. Incredibly, Heinberg argues that the ratio can be negative! (p. 138). Huh? Does he mean you can insert a negative amount of energy and get a positive amount back? No, it means he simply doesn’t understand the principal of net present value: a profit is a profit. Of course, EROEI is interesting because it shows how some forms of energy are more “dense” than others, and in some senses this means a higher return on investment. But any return is good, so anything greater than 1 is a net gain to the economy and the world. The wealth of high EROEI substitutes for oil is the most convincing case that Hubbert’s Peak is not the end of the world.

One example is oil shale, or kerogen, which Heinberg admits would solve the world’s energy problems except that it’s too expensive, at a production cost of $40 per barrel. But wait, at today’s $50-$60 per barrel pricing for oil, that sounds like a bargain! Of course, he correctly points out that such a substitute for cheap Gulf oil might carry devastating environmental consequences, but if given the choice between the end of life as we know it or a wasteland the size of Lake Ontario, which would a responsible society choose? And frankly, I don’t believe that the environmental problems are unsolvable; we just haven’t confronted them yet because so far it simply hasn’t been worth studying.

If indeed the world is headed toward an energy crisis, then a better analysis of the issues at stake would ask some economic questions that Heinberg’s math skills don’t allow him to pursue. First, let’s examine Hubbert’s Peak as applied to other non-renewable and essential commodities, like gold or silver, whose worldwide production peaked long ago. Far from creating an never-ending upward price spiral, the markets proved stable. People found substitutes for what mattered.

Another analysis I’d like to see is the price elasticity for oil, which though notoriously difficult is not completely inelastic. At $100 per barrel, the world consumes something less than twice what it consumes at $50 per barrel, and if lower consumption is tied to lower growth, tell me what the new growth rate will be. Contrary to Heinberg’s analysis, it’s not going to be negative or even zero. Simple international comparisons are enough to show that gas prices can go much higher without permanently threatening the American way of life. Canada, for example, has an economy and culture similar to ours but already has $4 gas. Europe and Japan have long lived with gas that is double or triple the U.S. price.

Finally, all this scary talk of oil ignores the opportunities around substitutes. Heinberg shows plenty of alternatives, some of which are economically viable at today’s oil prices. The future belongs to companies like Syncrude and its investments in shale oil, or the dozens of companies exploiting and improving on clean and renewable sources like wind or tide power. China, with its new economy can afford to leapfrog past the West’s expensive gas-powered infrastructure and  If you believe like Heinberg that growth is bad or immoral, perhaps these substitutes.  But it’s hard to stop improvements in technology and the inevitable real growth in productivity and prosperity that follows. Contrary to what Heinberg might hope, the party is just getting started.

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