When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants (11 page)

The
New York Times
article totally flubs the economics time and again. Here is one example from the article:

The consequences of an actual shortfall of supply would be immense. If consumption begins to exceed production by even a small amount, the price of a barrel of oil could soar to triple-digit levels. This, in turn,
could bring on a global recession, a result of exorbitant prices for transport fuels and for products that rely on petrochemicals—which is to say, almost every product on the market. The impact on the American way of life would be profound: cars cannot be propelled by roof-borne windmills. The suburban and exurban lifestyles, hinged to two-car families and constant trips to work, school and Wal-Mart, might become unaffordable or, if gas rationing is imposed, impossible. Carpools would be the least imposing of many inconveniences; the cost of home heating would soar—assuming, of course, that climate-controlled habitats do not become just a fond memory.

If oil prices rise, consumers of oil will be (a little) worse off. But we are talking about needing to cut demand by a few percent a year. That doesn’t mean putting windmills on cars; it means cutting out a few low-value trips. It doesn’t mean abandoning North Dakota, it means keeping the thermostat a degree or two cooler in the winter.

A little later, the author writes:

The onset of triple-digit prices might seem a blessing for the Saudis—they would receive greater amounts of money for their increasingly scarce oil. But one popular misunderstanding about the Saudis—and about OPEC in general—is that high prices, no matter how high, are to their benefit.

Although oil costing more than $60 a barrel hasn’t caused a global recession, that could still happen: it can take a while for high prices to have their ruinous impact. And the higher above $60 that prices rise, the more likely a recession will become. High oil prices are inflationary; they raise the cost of virtually everything—from gasoline to jet fuel to plastics and fertilizers—and that means people buy less and travel less, which means a drop-off in economic activity. So after a brief windfall for producers, oil prices would slide as recession sets in and once-voracious economies slow down, using less oil. Prices have collapsed before, and not so long ago: in 1998, oil fell to $10 a barrel after an untimely increase in OPEC production and a reduction in demand from Asia, which was suffering through a financial crash.

Oops, there goes the whole peak-oil argument. When the price rises, demand falls, and oil prices slide. What happened to the “end of the world as we know it”? Now we are back to ten-dollars-a-barrel oil. Without realizing it, the author just invoked basic economics to invalidate the entire premise of the article!

Just for good measure, he goes on to write:

High prices can have another unfortunate effect for producers. When crude costs $10 a barrel or even $30
a barrel, alternative fuels are prohibitively expensive. For example, Canada has vast amounts of tar sands that can be rendered into heavy oil, but the cost of doing so is quite high. Yet those tar sands and other alternatives, like bioethanol, hydrogen fuel cells and liquid fuel from natural gas or coal, become economically viable as the going rate for a barrel rises past, say, $40 or more, especially if consuming governments choose to offer their own incentives or subsidies. So even if high prices don’t cause a recession, the Saudis risk losing market share to rivals into whose nonfundamentalist hands Americans would much prefer to channel their energy dollars.

As he notes, high prices lead people to develop substitutes. Which is exactly why we don’t need to panic over peak oil in the first place.

So why do I compare peak oil to shark attacks? It is because shark attacks mostly stay about constant, but fear of them goes up sharply when the media decides to report on them. The same thing, I bet, will now happen with peak oil. I expect tons of copycat journalism stoking the fears of consumers about oil-induced catastrophe, even though nothing fundamental has changed in the oil outlook in the last decade.

John Tierney wrote a
great
New York Times
column
in response to Peter Maass’s
Times
article about peak oil that I criticized. Tierney and the energy banker Matthew Simmons, who is the point man for the peak-oil team, made a $5,000 bet as to whether the price of oil in 2010 would be above or below $200 a barrel (adjusted for inflation to be in 2005 dollars).

The bet was designed in the spirit of the famous
bet between Julian Simon and Paul Ehrlich
, which the economist Simon won when the five commodities that Ehrlich said would rise in price actually fell substantially.

I am a betting man. And when I see that the NYMEX December 2011 crude oil future is priced under $60 a barrel, under $200 looks like a pretty good price to me! So I asked Simmons if he wanted any more action.

He was kind enough to write me back. As it turns out, I wasn’t the first economist to offer him some more action. He declined to take my bet but he stuck to his guns in his belief that oil is priced way too cheaply, and that “real economic pricing will soon end almost a century of fantasy prices.”

One thing that Simmons is definitely right about is that oil and gas are mighty cheap by volume compared to other things we consume. Imagine that a brilliant inventor came along and said he had invented a pill you could drop into a gallon of distilled water to turn it into gasoline. How much
would you be willing to pay per pill? For most of the last fifty years, the answer is next to nothing, because a gallon of gas usually costs about the same as a gallon of distilled water.

But one place where I think Simmons’s logic goes awry is that he seems to be arguing that because a gallon of gas is so valuable relative to say, a rickshaw driver, it should be as expensive as a rickshaw driver. In reasonably competitive markets, like the ones for gas and oil and presumably rickshaws, the determinant of price is how much it costs to supply the good, not how much consumers are willing to pay. That is because the supply of the good is close to perfectly elastic over some reasonable time horizon. If there were huge profits to be made at some price, firms will compete away the profit by lowering price. How much consumers like the good just determines the quantity consumed when supply is perfectly elastic. That is why water, oxygen, and sunshine—all incredibly valuable products—are virtually free to consumers: it is cheap or free to supply to them. And that is why we use a lot of gas and oil, but not many rickshaws at current prices.

If the cost of supplying oil suddenly jumped, then prices would certainly rise, more in the short run than the long run, as people figured out how to substitute away from using gas and oil. (Rickshaws, most likely, won’t be the primary form of substitution, at least not in the U.S.) Whether we should care about “peak oil” boils down to: 1) Will the cost of supplying oil jump; 2) If it does jump, by how much; and 3) How elastic is the demand?

John Tierney won his bet: the year-average price in 2010 for a barrel of oil was eighty dollars, or seventy-one dollars adjusted to 2005 dollars. Sadly, Matthew Simmons died in August of that year, at age sixty-seven. “The colleagues handling his affairs reviewed the numbers,” Tierney wrote, “and declared that Mr. Simmons’s $5,000 should be awarded to me.”

There is so much noise these days about obesity that it can be hard to figure out what’s important about the issue and what’s not. To try to keep track, I sometimes divide the obesity issue into three questions.

1
.    Why has the U.S. obesity rate risen so much? Many, many answers to this question have been offered, most of them having to do with changes in diet and lifestyle (and, to some degree, the changing definition of
obese
). An
interesting paper
by the economists Shin-Yi Chou, Michael Grossman, and Henry Saffer sorts through many factors (including per capita number of restaurants, portion sizes and prices, etc.) and concludes—not surprisingly—that the spike in obesity mostly has to do with the widespread availability of very cheap, very tasty food. They also find that a widespread decline in cigarette smoking has helped drive the obesity rate. This seems sensible, as
nicotine is both a stimulant (which helps burn calories) and an appetite suppressant. But Jonathan Gruber and Michael Frakes have written
a paper
calling into doubt whether a decrease in smoking indeed causes weight gain.

2
.    How can obese people stop being obese? This, of course, is the question that sustains a multi-billion-dollar diet and exercise industry. A quick look at Amazon.com’s top fifty books reveals just how badly people want to lose weight: there’s
Intuitive Eating: A Revolutionary Program That Works; The Fat Smash Diet: The Last Diet You’ll Ever Need;
and
Ultrametabolism: The Simple Plan for Automatic Weight Loss.
All these books make me think of the argument that every story in human history, from the Bible up through the most recent Superman movie, is built from one of seven dramatic templates. (FWIW, Superman and the Bible are plainly cut from the same template: baby Superman and baby Moses are both rescued from certain death, sent off by their desperate parents in a rocket ship/wicker basket, and are then raised by an alien family but always remember the ways of their people and spend their lives fighting for justice.) This seven-template theory is even more true of diet books. They are pretty much all the same idea with some scrambled variables.

3
.    How dangerous is obesity? This is, to me, the toughest question of all. The conventional wisdom holds that obesity is like a huge wave that is just starting to break across the U.S., creating an endless swamp of medical and
economic problems. But there is a growing sentiment that the panic over obesity may be as big a problem as obesity itself. Among the proponents of this view is Eric Oliver, a political scientist at the University of Chicago and the author of
Fat Politics: The Real Story Behind America’s Obesity Epidemic
.
Oliver argues that the obesity debate is rife with lies and misinformation. The book purports to show, as the jacket copy says, “how a handful of doctors, government bureaucrats, and health researchers, with financial backing from the drug and weight-loss industry, have campaigned to misclassify more than sixty million Americans as ‘overweight,’ to inflate the health risks of being fat, and to promote the idea that obesity is a killer disease. In reviewing the scientific evidence, Oliver shows there is little proof either that obesity causes so many diseases and deaths or that losing weight makes people any healthier.”

Well, even if Oliver is right, and putting aside for a moment Questions 1 and 2, obesity seems to be the culprit in at least twenty recent deaths. Last October, a tour boat carrying forty-seven elderly passengers sank on Lake George in upstate New York, and twenty of them died.

According to a National Transportation Safety Board report, this happened because the boat was badly overweight: the tour company used outdated passenger-weight standards to determine how many passengers the boat could safely carry. It wasn’t over the passenger limit, but it was very
much over the weight limit. And when the tourists crowded to one side of the boat to take in the view, disaster struck. According to
The New York Times,
the tour company had been using the old standard of 140 pounds per passenger, which the NTSB had already warned was no longer valid, and which Governor George Pataki has now updated for New York State, setting the new average-passenger weight at 174 pounds.

The legal wrangling has already been intense, with everybody looking to blame everybody else for the accident. The tour group has called the accident “an act of God.” Others blame a company that modified the boat. Now it seems only logical that someone will step up to try to sue McDonald’s for putting all those extra pounds on the passengers in the first place.

One of the first times I met Danny Kahneman was over dinner, just after
SuperFreakonomics
was published. “I enjoyed your new book,” Danny said. “It will change the future of the world.” I beamed with pride. Danny, however, was not done speaking. “It will change the future of the world—and not for the better.”

While I’m sure many people would agree, he was the only person who ever said it to my face!

If you don’t know the name,
Daniel Kahneman
is the non-economist
who has had the greatest influence on economics of any non-economist who ever lived. A psychologist, he’s the only non-economist to win the
Nobel Prize in Economics
for his pioneering work in behavioral economics. I don’t think it would be an exaggeration to say that he is among the fifty most influential economic thinkers of all time, and among the ten most influential living economic thinkers.

In the years since that dinner, I’ve gotten to know Danny quite well. Every time I am with him, he teaches me something. His particular brilliance, I have decided, is being able to see what should be totally obvious, but somehow no one else manages to notice until he points it out.

Now he has written a fantastic book aimed at a popular audience:
Thinking, Fast and Slow
. It is a wonderfully engaging stroll through the world of behavioral economics—the kind of book that people are going to be talking about for a long, long time. Danny has generously agreed to answer questions from Freakonomics blog readers, which are paraphrased below. Here are his replies.

        
Q
. A lot of research by you and others in the field proves that we often make irrational decisions—but what about research finding ways to be more rational? Have you tried this too?

        
A
. Yes, of course, many have tried. I don’t believe that self-help is likely to succeed, though it is a pretty good
idea to slow down when the stakes are high. (And even the value of that advice has been questioned.) Improving decision making is more likely to work in organizations.