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Faith-based economics in two graphs

It took a French newspaper to unearth information put out by the U. S. government more than one year ago that provides a worrisome projection for world oil supplies from an agency that for years said such supplies would be no problem for the foreseeable future. Glen Sweetnam of the U. S. Energy Information Administration acknowledged in an interview that total liquid fuel supplies could actually fall between 2011 and 2015 "if the investment [in new capacity] is not there."

While this report has been circulating on peak oil sites in the last week, it is a graph which accompanied Sweetnam's 2009 presentation (PDF) which I found particularly illustrative. (See below.) It reveals in stark relief the dangers of running the world using the ideas of what I call faith-based economics.

Let me back up for moment. I use the term faith-based economics to refer to the pathology we currently call neoclassical economics. The Encyclopedia of Earth does a very nice job of explaining the origins of neoclassical economics and why it is complete nonsense to rank it among the sciences. So if it is not science, then what shall we call it? I suggest that it is a religion because its basic precepts are not subject to verification; and so, like a religion the tenets must simply be taken on faith. This wouldn't be so serious were it not for the fact that neoclassical economics as a system of thinking dominates policymaking and academic thought across the globe. And, it parades as a science that can help us determine optimal economic policies.

In 2007 the neoclassically inclined thinkers at the U. S. Federal Reserve forecast that the world might experience a slowdown in growth and said that the subprime loan problem was well-contained. Readers will recall that in order for something to be a science, it must be able to make accurate, verifiable predictions. We can verify that assurances of a limited credit problem and a soft landing were dead wrong. And, it's not clear, in my view, that anyone can consistently make accurate predictions about the direction of anything so complicated as the world economy--lucky guesses, yes, but consistently accurate predictions, no.

It is an often rehearsed claim among neoclassical economists that market forces will allow society to extract whatever it needs from the biosphere. The EIA was once explicit in its concurrence with this view. In its 1998 Annual Energy Outlook (PDF) it details a series of adjustments to its forecast for oil supply and then explains: "These adjustments to the USGS and MMS estimates are based on nontechnical considerations that support domestic supply growth to the levels necessary to meet projected demand levels." Here's the translation: The projected supply growth was fudged to meet projected demand growth. The magic of the marketplace is supposed to make resources we don't know about or cannot currently extract appear.

Now, let's look at a graph from a 2006 release from Cambridge Energy Research Associates (CERA), the archcornucopians of the energy consulting business.

The impression the graph gives to the uninformed observer is that we--that means some humans somewhere on this planet--know exactly where all the oil supply depicted will come from. The truth is more unsettling. Much of what is included in this graph has not yet been discovered or has no demonstrated technology which can extract or produce it economically.

Now to the graph that so aptly demonstrates the gulf between what neoclassically inclined thinkers (like those at CERA) tell us and what we actually know.

Sweetnam's graph shows us what EIA currently recognizes as known sources of oil that we have the technology to extract. It then shows us the gap between that and what we think we will need. It rather charitably calls this gap "unidentified projects." I would call these faith-based projects. I have no doubt the oil industry will identify new projects in the future and successfully develop many of them. What I have less faith in is that these "unidentified" projects will be sufficient not only to overcome the relentless depletion of existing wells, but also to cause a substantial increase in the rate of production.

Sweetnam's graph--the first of its kind from EIA--shows us exactly how much faith it takes to practice faith-based economics. To be a true believer one has to wager the entire future of our oil-dependent civilization.

What do you think? Leave a comment below.

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