Peak Newsweek? We Can Only Hope

April 16, 2009

That’s a Newsweek cover from 1979, predicting some degree of doom and gloom for energy consumers.

Newsweek has carried an extended op-ed as its cover story this week which claims of oil that “if it’s in the ground, it can only go down.” Pricewise, that is. Its writer, Ruchir Sharma argues that, although the economic boom is over, shattering what he sees as widely held (if utterly insane and childish) notions “that global growth had moved to a permanently higher plane and housing prices from Miami to Mumbai would rise indefinitely.”

But for Sharma, one notion remains inviolate. Apparently, while they drowned in champagne and sent their subs off to Bernard Madoff’s criminal empire, the world’s elite were tormented by the realization that “commodities like oil, copper, grains and gold are all destined to rise over time.”

It’s this view, esentially that there is such a thing as a peak in world oil production, and that reaching this peak will push prices upwards, that Sharma tackles for the magazine (whose editorial staff chose to give his writings the tagline “Cheap oil forever” to give a flavour of how seriously they took their jobs). Sharma’s lucky his work even came out readable.

And to his credit, it’s not a badly written article. The problem is, that Sharma is basically wrong.

While he argues rightly that commodity prices have been trending downwards since the 1800s, he is dead wrong to carry this argument forwards into the future. In Sharma’s view, “new technologies, greater efficiency in extraction and the substitution of one commodity for another” will keep energy prices falling.

Until now, he writes, “the fact is that the major bear markets in oil have been demand, rather than supply led. And when demand eventually picks up, there’s usually some new alternative (nuclear energy, natural gas, green technologies) waiting to pick up some of the slack.”

But what of the future? That period of falling commodity prices coincided with the harnessing of massive, easily extracted reserves of fossil fuels – coal, gas and oil alike – which were coupled with technological advances which allowed them to be used increasingly efficiently. Until 1980, the world’s oil companies continued to find more oil every year than was extracted from the ground, adding to proven reserves and providing a cushion against rising prices. Since then, however, such discoveries have petered out. As Sharma himself admits, “many of the world’s biggest and best oilfields are tapped out.”

What he doesn’t admit, is that they haven’t been replaced. This is a fairly large gap in his argument. But he also argues that efficiency will mitigate against any supply problems, which is true, but only to a limited degree. When you use a resource more efficiently, it is often the case that the resource will then be used more, which is particularly likely with fuel oil. This will offset many gains from efficiency.

On the other side of the equation, when you make the extractive process (such as drilling for oil) more efficient, you increase production per unit of energy expended, and get more out, but you don’t necessarily extend the life of the oil field. What you may do is increase the rate of depletion, worsening the peak and decline when it arrives.

This makes Sharma’s barbed comment that “[the] long-term price decline is due mainly to the constant discovery of new fields and greater energy efficiency, making nonsense of the idea that the world is rapidly running out of oil” more than a little irritating.

He should know, and indeed probably does know, that the discovery of new fields is not a given, or even a likelihood, and that efficiency is a double edged sword.

Another whopper that Sharma tells is that “As countries get richer, their per capita consumption of commodities declines. It’s a myth, then, that the boom in China and India will inexorably drive up oil and other commodity prices.”

This is, again, a childish piece of rhetoric which is dead wrong. Clearly, as the United States, or Germany, or the UK have developed, they have used more energy per capita. The case is the same for China and India, and it is hard to imagine how Newsweek allowed such a clanger to pass unnoticed. Editorial standards slipping in a recession I suppose. But it’s a ridiculous assertion, and needs challenging.

What Sharma may be alluding to is the plateauing of energy consumption in developed societies in recent years due to energy efficiency, different forms of power generation and population growth declining. But this has occured in circumstances of per capita incomes far above India or China, whose economic growth Sharma seems to be defending. If that is his goal, then he should choose his intellectual armaments more wisely.

Newsweek is not a minor magazine. It has global reach and is read by hundreds of thousands of people, many of them influential within their respective societies. So it’s worth looking at who Ruchir Sharma is, and questioning why he should have such a potent mouthpiece.

Well, it turns out that he is the head of emerging markets at Morgan Stanley, a bank which was rescued from collapse last year by Chinese capital, and has huge interests in Asian markets more generally. He’s hardly a disinterested observer of market trends but Newsweek doesn’t make this at all clear.

Sharma has also made some rather embarassing predictions in the past which seem to challenge the veracity of his crystal ball. For instance, in 2006, he predicted that “While [Hugo] Chavez does seem to rekindle a certain romantic Western nostalgia for Latin American guerrilla movements, the underlying trends point in the opposite direction.”

Well, Hugo Chavez is still president of Venezuela, continuing to win elections comfortably. Evo Morales remains in power in Bolivia and Rafael Correa in Ecuador, not to mention the Castros in Cuba. El Salvador recently elected the Leftist FMLN to power, Daniel Ortega is back in Nicaragua, a left-leaning archbishop has been elected in Paraguay and social democrats in Argentina, Chile and Brazil. In fact, its very hard to find a Latin American leader who promotes “orthodox” economic policies.

Sharma’s economic nous is questionable as well. In 2007, he judged that “This boom has been extremely broad” and told Newsweek that “We’ve been very optimistic about the Eastern European countries” which had “built very good institutions, the quality of human capital is very good and they’ve been very successful at attracting a lot of FDI.”

Eastern European countries have been decimated by the financial crisis, having become dependent upon cheap credit from western banks and dismantled local institutions that might provide a counterpoint. They now all exist hand to mouth, dependent upon subsidies from the European Union and the IMF, hardly an economic triumph.

Sharma has also exhibited some confusion on the matter of Europe. On the one hand, in 2007 he fulsomely praised European economies, saying that “An intense focus on increasing productivity has helped Germany’s export sector become highly competitive” and that “With projected growth for 2007 in the 2.5 to 3.0 percent corridor, Euroland will likely outperform the U.S. economy for the first time in recent history.”

Yet a few months later, he was arguing that “The real disappointments in the global economy are Japan and Europe,” judging that “when the U.S. declines, those economies merely follow…The real big declines have taken place in Japan and Europe.”

What are we to make of a commentator who exhibits such a variable sense for economic events and lets his antipathy for progressive figures cloud his prognosis for developments in the political sphere?

Not very much, I would recommend.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: