Tuesday, February 05, 2008

Jeremy Leggett attempts to bend the logic of peak oil to secure more subsidies for renewables

OilderrickThe Guardian are still allowing Jeremy Leggett space to lobby on behalf of his industry - those renewable companies making big profits on the back of the Renewables Obligation that pushes up energy prices. His new article is about peak oil.

First, he accuses oil firms of profiteering because Shell and ExxonMobil are making big profits. That's a bit rich coming from a renewables executive (see link above) and only part of the picture. Not all big oil companies are enjoying soaring profits. Just today British Petroleum announced dissapointing figures. That means all the rest of Leggett's rhetoric about oil firms pocketing the cash rather than investing in new exploration is a little empirically weak.

From then on he starts arguing that peak oil is going to ruin us and lambasting complacent economists:

"Economists tend not to see the problem. As the oil price goes up, they assume more cash will be available for exploration, the oil majors will duly explore, and they will find more oil."

It is reasonable to assume that oil exploration spending will increase with a higher oil price - and that does appear to have happened. In just one year, from 2004 to 2005, oil exploration budgets increased by 31 per cent. Leggett argues this kind of statistic is misleading:

"Moreover, the International Energy Agency has described recent apparent increases in exploration spend as "illusory" because of inflation in costs in the far-flung places where the industry is now forced to look for new oil."

So they are spending more money looking for oil. It's just that those colossal amounts of money are being spent to find oil in increasingly remote and challenging places to drill, where oil production hasn't been nationalised - most of the world's productive oil fields are off limits.

Of course, oil won't magically appear from the ground when the majors increase investment. While there is still a lot of oil there - rising prices are still dependent upon OPEC holding down supply - it will be increasingly difficult to meet rising demand. While that contradicts the straw man assumption set up by Leggett - that economists think oil production will always rise to meet demand - it doesn't really create the need for panic he seeks to establish. The economy is filled with rational actors who don't want to pay higher energy bills who have plenty of other ways to respond to rising fuel prices.

If incentives to discover more oil - high oil prices - don't create an increased supply then resulting high energy prices will create other incentives. Incentives to use energy more efficiently; to seek out new economical sources of power; to shift towards other existing sources of power such as nuclear. All this will be done without subsidy. That means there isn't a need for new taxes and Government attempting to pick winners. Shortages in a particular resources encourage innovation, economy and substitution. That is why economists do not expect high oil prices to create a long term crisis, although there may well be costs in the short term.

Those short term costs will be larger if the rise in energy prices is faster and smaller if it is slower. It is more costly to adapt to rising prices more quickly. What that implies is that the correct policy response to peak oil would actually be to do everything we can to slow rises in energy prices - and give the economy longer to adapt - that would imply dumping measures like the Renewables Obligation. That way we could replace subsidies now with a more gradual rise in energy prices. That would allow time for market incentives to encourage investment in alternative sources of energy that aren't subsidy junkies like wind farms.

Not quite the policy conclusion Leggett had in mind?

Photo by Flickr User neilharmer used under a Creative Commons License.

Cross-posted from the TaxPayers' Alliance blog.

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