Coyote Blog

I realize I did not comment on the Joe Romm oil price bet per se.  Here are two reasons I don't like the bet:

1.  Romm is making a catastrophic forecast (ie oil >$200) but wins his bet at $41, what one might consider a fairly normal current oil price.  This is very equivalent to Romm forecasting a 15F increase in world temperatures in the next century (which he has) but making a bet that he would win if temperatures go up by only 0.1F.  Clearly, a 0.1F increase over the next century would be considered by all a thorough repudiation of catastrophic anthropogenic global warming forecasts.  So why should he win the bet at this level?

2.  The bet, particularly in the next few years, has more to do with the current government's actions than Exxon's or Saudi Arabia's.  To bet that oil prices will stay low in nominal dollars, one must bet that Obama's deficits won't destroy the value of the dollar, that the Fed's expansionist monetary policy won't lead to inflation, that Congress won't pass some kind of legislative restrictions making oil production more expensive, and that the world won't sign a treaty to restrict carbon.  In short, Congress will have more effect in the near term on oil prices than flow rates in Saudi fields, and I am certainly not going to make a bet in favor of Congressional or Presidential restraint.

Postscript: Here is what you have to believe to accept Romm's 15F global warming forecast.   Here is how I opened that post.  It is interesting how similar the forecasting issues are:

For several years, there was an absolute spate of lawsuits charging sudden acceleration of a motor vehicle "” you probably saw such a story:  Some person claims they hardly touched the accelerator and the car leaped ahead at enormous speed and crashed into the house or the dog or telephone pole or whatever.  Many folks have been skeptical that cars were really subject to such positive feedback effects where small taps on the accelerator led to enormous speeds, particularly when almost all the plaintiffs in these cases turned out to be over 70 years old.  It seemed that a rational society might consider other causes than unexplained positive feedback, but there was too much money on the line to do so.

Many of you know that I consider questions around positive feedback in the climate system to be the key issue in global warming, the one that separates a nuisance from a catastrophe.  Is the Earth's climate similar to most other complex, long-term stable natural systems in that it is dominated by negative feedback effects that tend to damp perturbations?  Or is the Earth's climate an exception to most other physical processes, is it in fact dominated by positive feedback effects that, like the sudden acceleration in grandma's car, apparently rockets the car forward into the house with only the lightest tap of the accelerator?

Joe Romm of Climate Progress is a leading climate alarmist, telling the world that burning fossil fuels will increase CO2 concentrations by 0.04% of the atmosphere over the next century and thus destroy mankind.  As such, he is a supporter of the current cap-and-trade bill in Congress, whose purpose is to raise the price of fossil fuels (either directly as a tax or by restricting their supply) so that less will be used.

On a different but related topic, Joe Romm is also apparently a peak oil alarmist.  As I have written, I suspect real oil prices will rise steadily over the coming decades, but we aren't going to fall off some cliff and see a sudden hyperinflation of oil prices (temporary spikes are a different story).  He writes

The IEA's work makes clear that for oil to stay significantly below $200 a barrel (and U.S. gasoline to be significantly below $5 a gallon) by 2020 would take a miracle

I tend to doubt it, in part because I have seen so many very similar predictions ever since the mid-1970s, but I suppose some day someone will be right with one of these.   I wonder if there is some kind of psychological profile that causes people to see positive feedback-driven accelerating curves everywhere.

But here is my confusion -- he is absolutely convinced that oil is going up by $140 a barrel or more.  Let's look at this in the context of Co2.  The CBO estimates the clearing price for a ton of Co2 emissions under the current bill will be between $20-$30 a ton.  Since a barrel of oil creates about a third of a ton of CO2 emissions, this implies the cap and trade bill might increase the price of oil by $7-$10 per barrel.  But if Romm think oil is going up by natural market forces by $140+, why even bother?  Why not just put a tax on coal and be done with it?

I congratulate Mr. Romm, however.  If he is so sure of 2020 oil prices, there are all kinds of fabulous ways to become ridiculously wealthy with this knowledge.

Postscript:  There are two reasons why people have been making this same forecast for 30 years and have been wrong most of the time.

First, there is a very human tendency to assume current conditions and trends will go on forever.  Everyone is subject to this bias, even the smartest analysts.  Romm might argue that these are savvy, detail-oriented commodities analyst, but I only have to point to the recent behavior of savvy detail-oriented debt security analysts.

Second, analysts tend to apply current understandings of what technologies and substitutes are economic at $60 oil to a world where oil is priced at $160.  It just doesn't work that way.   The market for petroleum and its substitutes is enormously multi-variate and complex.  A $100 bump in prices will do things that are sometimes hard to predict in detail to the markets for exploration, new technologies, substitutes, conservation, etc.  But in all this complexity, the one thing we do know is that time and again, such changes have occurred quickly and decisively in response to rising oil prices, and have acted to mitigate and reverse price increases.

One ironic way of looking at it, since this is Joe Romm, is to say that there are negative feedbacks that cut in to slow and even reverse sharp rises in oil prices.  Romm seems to reject these negative feedbacks, in favor of a price model that rapidly accelerates.  This is all ironic, since this issue of negative vs. positive feedback is what separates climate alarmists like Romm from many climate skeptics like myself.