Monday, August 22, 2005

High Oil Prices and Global Recession? Unlikely

Conventional wisdom holds that oil supplies are running out fast and that our economies ought to prepare for sky-high oil prices by developing alternative fuels (often presenting a chance to argue for cleaner more environmentally friendly fuels as well). I often hear the argument presented by idiots (say Peak Oil: Life After The Oil Crash) and this NY Times story Peak Oil is no different. That it's a sophisticated well-written argument doesn't change the fact that those who make these arguments don't understand how markets work. It's not just me, a young libertarian with a 5th form understanding of economics who is saying this but a Professor of Economics at Chicago University. I suppose leftists won't be impressed with that, as Chicago is where Milton Friedman and the 'Chicago boys' (who made Chile's economy what it is today) came from. Anyway, as he says:

the author just invoked basic economics to invalidate the entire premise of the article

Thus once again, leftists show they don't really understand how markets work, which is why they don't believe in their power. Even if reserves were dwindling rapidly and prices did sky rocket, people would respond by using alternatives. The main reason alternatives aren't be used at the moment is because of price. World demand is not a constant and it will not necessarily keep increasing for the next 50 years. China and India may be increasing their consumption radically but it will not always be this way. China is undergoing a massive program to build hundreds of nuclear power plants which is an example of it looking elsewhere for energy supplies. With initatives like the one by Californian (5th largest economy in the world, biggest american state etc) Governor Arnold Schwarzenegger which pushes for a hydrogen highway, the likelyhood of America gradually weaning itself off oil is highly likely. I think Instapundit summed up the situation best when he said most we are facing is 'peak cheap oil'.

Having said all that, I do think there is one reason to be opposed to an economy built entirely around oil. The reason: National security means we can't be dependent on oil that comes from not only statist economies (Russia, Venezuela) but Islamist tyrannies (Iran, Sudan). The best example is Saudi Arabia, which is home to Wahhabism (a fundamentalist version of Islam) and is also prone to instability (people have been predicting its downfall for years as the alliance between the monarchy and fundamentalists becomes uneasy). For decades it has exported its brand of fundamentalism (through the 1980s it funneled money into Afghanistan and competed with Iran for who was the true Muslim state with Khomeini arguing monarchies are unIslamic) throughout the Muslim world. This has had a significant effect by eliminating local traditional forms of Islam that were known for tolerance and replacing them with a strict puritan version of the faith. This is the reason we ought to wean ourselves off oil, as the dangers of supporting these states have become all too clear.
In short, I do not see a global depression as forseeable let alone one that comes from a scenario where oil suddenly increases in price (hey over the last 2years its gone from something like $28 a barrel to $65? and we're still doing okay). I do see one coming from the overthrow of Saudi Arabia or an invasion of Iran.

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