The Michael Lynch Power Hour Interview

[Editor note: Alex Epstein of the Ayn Rand Institute is one of the bright young lights of energy rationalism. His four-part post at MasterResource, Energy at the Speed of Thought, can be found here (Part 1, Part 2, Part 3, Part 4).

“Man does not live on a raft with one bottle of water. He lives on earth, which gives him infinite resources—and it is up to him to get them. His proper conduct and morality must be based on this fact.”

– Letter from Ayn Rand to Rose Wilder Lane, in Michael Berlinger, ed., Letters of Ayn Rand (New York: Dutton, 1995), p. 354.

The most recent episode of “Power Hour”–my monthly interview podcast on energy issues–featured oil forecaster Michael Lynch, President of Strategic Energy & Economic Research, who examined the controversial theory of Peak Oil. Lynch writes opinion-page editorials for the New York Times , interestingly (see his recent Drilling for an Oil Crisis and his earlier Peak Oil’ Is A Waste of Energy.)

‘Power Hour’ Podcast

The goal of Power Hour is to bring in today’s top energy experts to today’s top energy issues. Guest Michael Lynch is a sought-after expert in oil forecasting, and thus a student of energy reality. Unlike a number of his opponents who preach Peak Oil (the idea that world oil production has peaked or is about to), Lynch’s decades of studying how oil markets actually work has led him to a more open-ended view of the resource world. At the same time, he is excellent at breaking down complex issues of oil forecasting, as known by readers of MasterResource.

One of my goals in the interview was to give listeners–and me–a basic understanding of proper oil how forecasting and market analysis is done. Too often, Peak Oil discussions start midstream, making claims about reserves and future production without naming the methodology being used. I asked Lynch what variables properly go into forecasting the future of oil–and his answer illuminated where Peak Oil advocates traditionally veer off the tracks.

Forecasting Insights

One thing Lynch stressed is that oil production doesn’t flow automatically from geology–geology is an essential part of the picture, but so are economics, technology, and politics.

With changes in economics, technology, and politics, production can either skyrocket or plummet in the same field. Thus, when we hear that production in some country has “peaked,” it may well be that there is plenty of oil to drill, but that, say, high taxes made it uneconomic to drill there (Lynch cited Argentina as an example of this phenomenon).

The economics and politics of the market impact whether it’s worthwhile to prospect for oil, whether it’s worthwhile to explore a given field, whether it’s worthwhile to drill a given field, whether it’s worthwhile to invest in new technology to get new forms of oil like Canada’s enormous tar sands. Politics can and often does make it much more expensive or even impossible to find and drill for oil in a given area–and an increase in political freedom can lead to a flood of new oil.

And yet, Peak Oil advocates claim, despite the evidence, that oil production inexorably follows a bell-shaped curve–even though, as Lynch pointed out, there are myriad concrete instances that refute this.

We covered a lot during the hour, and I hope MasterResource readers get a chance to listen to the whole thing [link], but here are some other highlights.

• • The role of government monetary policy and political instability in recent oil price rises.
  • The backgrounds of most Peak Oil research proceeds from a handful of basic papers, and is usually conducted by those who have no specialized expertise in the economics of oil production–including geologists who don’t understand the role of prices in stimulating or retarding oil production.
  • The proper use and misuse of Marion King Hubbert’s graphs–and other popular graphs among Peak Oilers.
  • The enormous potential for more oil production were it not for political limitations–particularly those by National Oil Companies.
  • I asked Lynch about all the major arguments of Peak Oil I could think of–Matthew Simmons’s argument about the decline of Saudi oil, the argument that “all the easy oil is gone,” the argument that small fields cannot replace the production of supergiant fields, the argument that production is outpacing discoveries, and many more. What I found interesting in all Lynch’s responses is that the quality of Peak Oil scholarship is low, and that there is a profound lack of respect for how intelligent individuals under capitalism innovate and adapt. There is an assumption that however things are done today (e.g., supergiant fields) must be the only way and therefore if humans face challenges finding more oil going forward we will fall off an economic cliff. History shows that nothing could be further from the truth; the cliff only comes when government prevents production, innovation, and adaptation (as it did in the 1970s).

Other Podcast

The podcast can be accessed here [link], and those with iTunes can subscribe to it here. Be sure also to check out the first episode, with Robert Bryce, where we discussed the relationship between energy and power, the role of power in human life, “energy independence,” and “green energy.”

Expect more interviews with leading lights of the energy realism/free market movement.

I welcome readers’ comments on either episode, either in the Comments section or by emailing me at aepstein@aynrand.org.