I’m not joking. Read this interview transcribed on Grist. In this first installment, Klein makes two arguments: (1) Because of low oil prices there is less investment in unconventional oil, Arctic oil and fracking, and (2) Low oil prices give us a convenient opportunity to introduce carbon taxes because people are used to high prices.
The first is crazy. The main reason for low oil prices is the expansion of supply in a decelerating global economy. If supply expands in region A and this crowds out investment in expanding supply in region B, supply still expands. It is more supply and more fossil fuel consumption that will fuel climate change. There is a slight benefit from substituting less carbon-intensive sources, like conventional oil deposits, for more carbon-intensive ones, like the Alberta oil sands, but the difference is hardly sufficient to qualify as progress against climate change. I suppose Klein thinks declining economic growth in the continuing aftermath of 2008 is a good thing, but that’s another argument I've already thrashed out.
Ah, you say, but with lower oil prices and less investment in new sources of supply, eventually supply must stop growing, and prices will go up again. Yes, of course. This is a normal investment cycle, and it will put us back to where we were when oil prices were high. In the meantime we will have had this hiatus of lower prices and higher-than-otherwise consumption.
The second is only slightly less crazy. First, there is no real-world evidence that the price of oil plays a role in the political ability to introduce a carbon tax or permit system. In fact, insofar as high oil prices (when they’re high) represent scarcity rents, a tax or auctioned permit functions in part as a transfer of that rent from fossil fuel companies to the public, so you could make a case that high prices are politically beneficial. Of course, there’s no evidence for that either.
The deeper point is that the fossil fuel consumption patterns we saw in the world during the period of high oil prices were not nearly sufficient to put us on a path to avoid catastrophic climate change. We will need much higher costs to consumers to do that. Will people be happier about $15 a gallon gas if the starting point is $2 rather than $4? Your call.
12 comments:
"I'm not joking...
"The first is crazy...
"The second is only slightly less crazy...
"Your call."
Yep... Without getting embroiled in what Klein said or whether or not she was right, I find the "crazy, crazy" rhetoric unpersuasive.
What makes you so sure this is a "normal investment cycle"? Do you have any evidence for that assertion or do you simply believe it is self-evident?
Rhetoric: it should match the content. Crazy is as crazy says.
Investment cycle: Unless you want to assume rational expectations (my guess is you don't), you should expect to see cycles of over- and under-investment fluctuating around long term growth paths. Specifically regarding oil, the logic I was spelling out was a classic investment cycle: if current investment in new oil production is too low to meet future demand, then prices will rise, which will stimulate new investment (which might cause a glut etc. etc.). Are you arguing against this or just coming to the defense of Klein?
No, I'm not defending Klein. I don't pay much that attention to what she writes. I am disputing your classical or neoclassical assumption that price is simply a mechanically cyclical reflection of the self-adjusting interplay between supply and demand -- with overshoot.
Yes, you can have those kinds of cycles but sometimes the "correction" has to be imposed from the outside by policy and sometimes even the policy tools can't fix the disequilibrium.
Ever hear of "war"? Ever wondered what it is good for? That's how the state makes the adjustments that can't be made but must be made.
In theory yes, but I was considering just this one specific case. First, oil prices have fallen because of expanded supply and slowing demand. Do you disagree? Second, the argument I responded to was that less investment today would make the price go back up later. I wrote it down because I've been hearing it. Put the two together and you have an investment cycle. I am sure you can find other markets where different processes occur.
Incidentally, wars are not necessarily economic in motivation; they frequently result from strategic rivalry (see Varoufakis on this) as well as pure irrational hatred.
I think I can see the logic here. A lot of the new oil (deep water, fracking, tar sands, arctic etc) needs a high price to attract investment (see recent large drop in active rigs in the US). But once the investment is in place, these sources will keep producing even if the price drops again (easier to write off debt than close down an operation which is at least meeting its costs plus a bit). So if low prices remove capacity to drill and develop, then less oil will be extracted if - big if - a low-carbon economy can be built alongside.
Did I say wars were "necessarily economic in motivation"? Not that I can see. Wars are motivated by the drive to hold onto political power in circumstances that threaten that hold on power.
"oil prices have fallen because of expanded supply and slowing demand"
Oh come on. Why not just come right out and say "oil prices have gone down because the price of oil is lower than it was before." A tautology is a tautology is a tautology and by any other name will smell as tautological.
The "fundamentals" are not the supply and demand of the icky, slimy hydrocarbon stuff. It's liquidity all the way down. Don't pay any attention to the man behind the competitive devaluation curtain! The strength of the U.S. dollar is a five-letter word that begins with "p."
Meanwhile...
"HONG KONG — As demand dwindles, steel prices in China have fallen 12 percent in the first five weeks of this year, almost as much as in all of 2014.
"The tonnage of China’s imports of rubber, oil, iron ore and other industrial materials also fell sharply in January. And the global market for bulk freighter charters is in free fall, already below levels in the worst days of the global financial crisis in late 2008 and early 2009.
“In the past two months, it has been more or less a vertical correction, and this is a proxy for China,” said Basil M. Karatzas, a Manhattan ship broker."
Oh, wait.
Somebody posted Klein's interview to facebook, so I read her answer to first question:
"It is not preordained that low oil prices will either hurt or help the climate movement."
So you're just making shit up. Wow. No, you're not joking -- you're making shit up out of thin air.
Klein doesn't make the two points you claim she makes. She says "we find ourselves in this kind of reprieve. It’s not permanent. What goes down can go back up, and will go back up. But I think what this has given us is a little bit of breathing room..."
So what you've done is drained her interview of nuance and qualification and replaced it with "CRAZY! CRAZY!"
Is Fox News looking for an economist to present the fair and balanced "liberal" point of view?
Calm down, S-man. I read Klein's transcript (linked to it too) and have verbatim quotes to back up what I said. In fact, the two quotes you provide from her support my commentary. It's remarkable, actually, that you can't see this.
I think, far from being a "reprieve", it is preordained that low oil prices hurt the climate movement, since a fundamental goal of the movement is to make oil prices very, very high. Perhaps you have a different idea about how we're going to cut fossil fuel consumption way back, one that doesn't require the use of economics.
Really, if you think I'm doing a Fox number on Klein there's not much we can talk about.
I'll just leave it at this, Peter:
You think the outcome is preordained. Klein says the outcome is not preordained. That is the basis of your disagreement with Klein. One of those positions is rigid and dogmatic. Take your choice.
What would damage the oil industry, assuming the external "market forces" are to be relied on, not deliberate policies, would be neither high or low oil prices, but high y/y volatility in the price. The specs don't set the supply and demand dynamics of the oil price, but they accentuate the swings, which makes them, inadvertently, our allies.
Re: "It is more supply and more fossil fuel consumption that will fuel climate change. There is a slight benefit from substituting less carbon-intensive sources, like conventional oil deposits, for more carbon-intensive ones, like the Alberta oil sands, but the difference is hardly sufficient to qualify as progress against climate change..."
Fracking is releasing a much more potent greenhouse gas, methane. This industry may be a much more potent climate change actor than the conventional oil industry.
I don't know how significant the difference is but it could be very great.
Once fracking has opened the cogs and released methane into the atmosphere can this tap be turned off?
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