Slippery road ahead

That oil production will peak at some point is a foregone conclusion. The only question is at what level it will do so. Data indicators of extraction levels and prices coupled with pleas for increasing extraction indicate that we have very likely peaked. A peak in oil extraction is all the more imminent given the recent Financial Times story previewing a critical finding of an International Energy Agency study: 8220;Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent.8221; It is worth noting that extra investment may delay the peak, that too insignificantly.

That price volatility accompanies the attainment of peak production had been forecasted in 2003 by Ken Deffeyes in his book, Beyond Oil: 8220;Queuing theory predicts that queues behave in a noisy and chaotic manner when demands approach the system capacity8230; Instead of energy prices rising to a new stable level, wild price oscillations will result from short-term changes in demand. There will be a tendency, the first time that prices go down, to announce that the crisis is over and oil and gas are now cheap and abundant again.8221;

Armed with this fundamental, unavoidable truth and its demonstration over the last year plus, it is immeasurably foolish to design energy policy around market determined rates of oil. Energy markets are not going to give clear or stable signals via oil prices of the approaching crunch times that we are going to face on the energy front. Markets fail when it comes to non-renewable resources, just as they fail when it comes to accounting for the cost of pollution and carbon emissions on climate, in our quest for economic growth.

Economists know and study market failures. Market failures that have been happening until now, have not had measurable economic impacts simply because they have not been studied carefully enough. The melting of the Arctic ice or the Himalayan glaciers being just two prominent examples. Also, the timescales of these changes and consequent impacts are different from the timescale in which we measure prominent economic indicators 8212; quarterly. Living under the assumption that they are not happening is no different from an ostrich burying its head in the sand, at its own peril.

Every time oil prices soar for long enough periods, we will have other commodity prices rising too, including food. Speculators can only amplify underlying market shortages. Intelligent policy formulation dictates that one insulate oneself from this roller-coaster ride. The cost of not doing so is unnecessary hardship for the least privileged and the most vulnerable.

Let8217;s say, my neighbourhood watchman decides to buy a fossil-fuel driven vehicle based on the lowered prices. What does he do when oil is back at 150? Who is responsible for the piece of steel that rusts away in front of him, eroding in value constantly? The farmer seeing abundant, cheap fertiliser decides to postpone his efforts at going organic. Who is the loser? Who is responsible?

Volatility in energy prices will also endanger the viability of alternative energy projects and their funding. It will also entail volatile commodity prices as was witnessed in the last three years or so.

Just a few months ago, there was talk about differential pricing of diesel for luxury cars versus public transport vehicles. We have now forgotten that. We humans are not tuned to respond to dangers that are far out on the horizon. We have evolved over millions of years to react to immediate dangers. Is this where our myopic policy formulation stems from? We cannot afford a fight/flight/freeze reaction to the current scenario; it calls for intelligent responses. Almost all such responses will seem painful today, but time will bear those out to have been wise, thoughtful choices.

I have not used self-censorship and hence the views expressed may seem maverick. But here is what Robert Shiller, Yale economist, one of the early whistleblowers of the housing bubble had to say in The New York Times regarding the costs of using self-censorship recently: 8220;From my own experience on expert panels, I know firsthand the pressures that people 8212; might I say mavericks? 8212; may feel when questioning the group consensus. I was connected with the Federal Reserve System as a member the economic advisory panel of the Federal Reserve Bank of New York from 1990 until 20048230; In my position on the panel, I felt the need to use restraint.8221;

I therefore reiterate, while refusing to succumb to the perils that come with 8220;groupthink8221;, that crude distillates8217; prices should not be reduced, regardless of such pleas and calls from leaders of all hues.

The writer is a Hyderabad-based economist and oil watcher

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