Broback's Blog

Headlines today include “Gas drops below $2 in Oklahoma, prompting price war.” and WTI Crude closed at $66.46 a gallon. Inflation adjusted, that equates to $54.67 in 2005 dollars. 2005 is when The Oil Drum launched, and according to their own earliest writings, $55.00 a barrel was the going rate. Bottom line, the price of oil is lower than when these guys started claiming “decreasing supply at ever increasing prices.”

Over a year ago I blogged triumphantly about how the scientistic, Mathusian worldview had again suffered a crushing defeat against the those who think like economists.

I’ve always thought it odd that those embrace a field defined as the study of the allocation of scare resources are viewed as being at some kind of disadvantage over those who study what a resource is made of/how it’s extracted.

This thinking was illustrated by peak oiler Dave “Heading Out” Summers way back in 2005:

I think this is where we see the basic disagreement between the economists who predict based on theoretical models and historic behavior, and the scientists and engineers who realize that you cannot legislate or theorize the presence of oil that is not there, and have it show up on the market two weeks later.

Plus this little gem from Summers — classic denial of how supply and demand (not to mention incentives) work:

Do you think that $4/gal would actually change some habits? I truly doubt it.

Riiiiiight. The elasticity of demand for gasoline is… zero. Try -0.26.

Thanks for playing.

Well, here we are nine years later, and we got to test how $4/gal worked. As some of us already knew, demand is highly responsive to oil price changes. As one Saudi oil minister put it: “My main worry was that if we increased the price of oil too much we would merely reduce the demand for it in future.”

So, as Econ 101 dictates — the price went up, the amount demanded went down, substitutes were sought, and innovations were pursued. Once again, the economist trumps the scientist.