Thursday, February 23, 2012

Market-driven idiocy

So, I came across this interesting article from Al Jazeera, which goes into some detail about "peak oil" possibilities and the suspicion that most OPEC members have been drastically overstating their reserves in order to expand their sale quotas. Cue Capt. Louis Renault...

I posted it on the board because someone had earlier asked about the current jump in oil prices. The usual cavalcade of responses followed: some grim agreement, some questions, and the usual market-driven refutations about the limited knowledge of so-called "scientists" to understand how a "profit-making" venture really works.

To wit:
If it was more profitable to hold resources than sell them, oil companies would not hesitate to do that. So really, this article asserts that it understands the oil business better than the oil companies. I'll believe that when I see it.
 No. That's not what it's saying. It's saying that oil, the very cornerstone of modern civilization, the substance that is used (or the byproducts of which are used) for everything from energy (oil, gasoline, kerosene, jet fuel) to lubricants to asphalt to plastics to resins to artificial fibers (nylon) to solvents will soon become harder to obtain and, thus, more expensive... which makes everything produced from it more expensive and/or more difficult to obtain. Understanding the oil business has little relevance to anything if there's less (or no) oil to be had.
If it was clear that supply really will be restricted, people would be acting accordingly. If you really believe what you say, you should research the oil companies with the highest proven reserves and buy their stock, because you believe those reserves are undervalued at current prices.
 OK. See, first off, I'm not saying anything. I'm passing along what Al Jazeera and geologists, government agencies, and the US Department of Defense(!) have all been saying for some time now: there's a problem a'comin' and it has enormous implications for society as a whole, the preparation for which has exactly zero to do with sticking one's head in the sand and suggesting that short-term profit anticipation would have reacted by now to a long-term problem (which is ridiculous even from a market-based approach.) I loved the suggestion that I should invest for the long-term, though. Forethought! Or maybe...
The market's not perfect. But least it's informed. They have engineers working the fields. They have an exploration and planning process. They are thinking about replacing supplies as they are used. If the market had a reasonable basis for believing that supply will fall substantially, the market would react in anticipation, just as it has reacted to the threat of war in the Middle East.

This makes me wonder about the breezy conclusion in the article that we know supply is going to plummet. At a minimum, that conclusion is not self-evident to market participants, no matter the degree to which it is an article of faith in much of the environmentalist community.
 Hm. How to put this simply...? Ah. Got it. Market no matter if oil no there no more. I realize there were two polysyllabic words in there but one has to make allowances when dealing with a complex topic.

To the market devotee (especially the "free" market devotee), everything is defined by short-term profits. To expect traders and their true believers to think beyond, say, tomorrow is folly. Their self-assured position that the unfettered market will react perfectly and rationally to all available information and, furthermore, convey that information in a perfect and rational way to all of society is absolute. This is Adam Smith's oft-misinterpreted "invisible hand" phrase pushed to the Nth degree. This is economics as science putting all lesser sciences (like, say, geology) to shame.  Except that economics isn't a science. It's a loosely understood set of supposed rules that depends largely on external factors that often can't be controlled. Like humans, most of whom are idiots and subject to whim and lack of information or the wisdom to know how to use it if they had it. Or, even more important in this case, greed.

Even better is the assertion that the market would react appropriately to an anticipation of lack of supply when the article is based on the idea that the producers of said supply are lying about that very issue and making profits based on that lie. If the market can only function perfectly with perfect information (something the aforementioned Smith mentions repeatedly and which is studiously ignored by most of his presumed disciples), then it can't react to the problem.

But that's OK because "They are thinking about replacing supplies as they are used." See, despite the fact that oil is a finite resource, the smart engineers and geologists that work for the oil companies are already thinking about ways to make it sustainable. The market clearly hasn't reacted, so it must be so. Paraffin candles for everyone!

1 comment:

  1. For what it's worth, REAL economics can definitely comprehend and model deception and the consequences of its revelation. If the oil producers have lied about their long term production potential/capacity, you could easily see prices spike dramatically should the deception become apparent.