Peak Oil and Political Economy

According to Ken Deffeyes of Princeton, the world just passed the peak of oil production on December 16, 2005. It will likely be some time before this assertion can be verified, although judging by increased US military attention to the Middle East, it would seem at least some policy makers are acting consistently with elements of this view. This however, doesn't make it true. The denizens of Washington DC have no monopoly on the truth, however much some of them might like that to be the case. Regardless, this argument assumes the main thrust of peak oil theory is true, by which I mean, the age of cheaply produced oil is, or is near to being, over, although petroleum will still be used for decades to come. Under the assumption of peak oil, what should an oil importing country like the United States do?

Sweden, for example, has formed a committee of industrialists, academics, car manufacturers, farmers and others. which aims to replace all fossil fuels with renewables before climate change damages economies and growing oil scarcity leads to price rises. According to the Guardian newspaper, a Swedish minister said oil dependency could be broken by 2020. In other words, the Swedish won't wait until rising prices force them to change their way of doing business, they will get to it now.

This, however, is not the way the United States is supposed to do business. In the illusion fostered, but certainly not created by Greenspan et. al. of a "flexible" US economy which exemplifies free market ideals and embraces creative destruction, the policy response is clear. Let the market process work its magic on the minds of entrepreneurs with as little intrusion as possible.

To me this would include keeping a tight rein on credit to make prices more responsive to changes in the real sector. The goal of monetary policy when faced with radical change in a classically liberal view of political economy should be price reality not price stability.

That price stability rather than price reality is the buzz word of Central Bankers the world over is evidence enough to me, not that I needed more, that classic liberalism as functioning philosophy among policy makers is dead. When Ben Bernanke proudly proclaims the flexibility of the US economy has kept petroleum inflation from manifesting through the rest of the economy, all I see are signs of a lack of flexibility. The word does imply change, does it not.

Am I advocating the Swedish response for the United States? Only in the sense that they practice their expressed philosophy of political economy. While some Swedes I've met have complained about the intrusiveness of the state in the economy, that it intrudes is accepted. In other words, there aren't many Swedes who believe they live in a free market economy.

There are, however, many US citizens who believe they live in a free market, or for our purposes, real price, economy. Yet, this has not been the case for decades. Thus the dilemma brought to us by the Fabians and other groups who operate in secret manifests. The Fabian method of weaning a culture from classical liberalism to state control was incremental and clandestine rather than revolutionary and overt. Over time though the gap between rhetoric and reality grows. In individuals this is sometimes called psychosis, a loss of contact with reality.

Perhaps the economic stress of peak oil on the US economy will act as a slap in the face, forcing the nation to admit it is much more centrally planned than the rhetoric would suggest. Perhaps I should use the present tense. The economic stress of peak oil on the US economy is in the process of exposing the central planning element of our current system. I'm not the first to note the Imperial Presidency.

Of course, not all psychotics reintegrate with reality. If the dream is more attractive or the reality too scary some psychotics simply shut down, rather than reintegrate. This to me will be the true test of American flexibility.

More troubling to me is the functionality of central planning in this case. The age of oil has been the age of centralization. Just as Roman roads created conditions where a much larger area could be centrally governed than was previously possible so too has oil fueled transport. It isn't just the information superhighway that makes this country work but the more mundane highways where goods and people are moved. If the age of cheap oil is over, less centralization and more local autonomy might be the best, albeit in most cases, least likely to be chosen, policy option. It seems to me in this case, the benefits of classical liberalism are especially clear.

For now though, it looks as if the psychotic game of claiming to be a free market economy while trying to clandestinely solve the problems in some central committee is still official, but secret, policy. I wish the current crop of policy makers well in their difficult task. The Soviet Union had oil, wasn't trying to hide the fact of central planning and yet they couldn't hold up the weight of their empire.

Freedom, why not, we've tried everything else.