Sic Semper Tyrannis

James Hamilton has an interesting post over at Econbrowser on whether there is any merit to the Peak Oil position (he concludes that there is, which I concur with). The discussion thread is interesting as well. I'm posting here just to echo a message post of mine from there:

I should also mention that there are two ways the significance Peak Oil is misconstrued:

1. Peak Oil is not about "how much oil is left"
2. Peak Oil is not even strictly about a peak in the rate of production.

The only meaningful sense of Peak Oil that matters (i.e. for prices) is the margin of supply over demand. It is the peak in this margin that signals the beginning of a steadily-higher price regime. Even if output grew at a steady 3% a year (i.e. no peak), a shift to global demand growth of 4% a year would imply a steadily shrinking supply-over-demand margin at some inevitable future inflection point.

#1 fails because production is not in-ground supply (reserves); if production manages to increase even when reserves are dwindling, there will be plenty of supply above-ground (on the market). This would imply low prices.

#2 fails because demand could slow down enough (or even fall), having the same effect: more spare supply on the market, thus lower prices.

Many critics realize that these two views of Peak Oil are flawed, and latch upon it, pointing out that in a recession, "demand will fall", which will create effective excess supply, which will cause prices to return to lower levels.

The problem with this view is it is based on a historical regime where US and Europe were the dominant sources of demand. Now, tons of demand growth is coming from Asia. This suggests to me it is unlikely that demand growth will slow enough to allow supply margins to grow significantly -- even in a recession.

(In fact, I think we're in a recession now.)