As standard in this enormous literature, Yergin’s concerns are price prospects, the dangers of import dependence, and global warming. His treatments are defective throughout. The exposition fails adequately to support even his reasonable conclusions. Far too much space is devoted to peripheral matters. In short, the book joins the long list of nonsense writing on serious economic issues—but it exceeds many of them in disorganization.
For that reason, Yergin’s title, itself, is an inviting target. The prior quests that come to mind are great follies of history and literature: El Dorado, the Fountain of Youth, and Don Quixote’s jousts. Yergin is on a similar path.
Oil | The book is divided into six parts that differ radically in coherence, organization, and length.
Part One is a long, confused ramble through ill-assorted world oil issues. First comes a view of oil in post–Soviet Russia. Two chapters examine the effort to develop Caspian Sea oil. An uncharacteristically lucid review of oil company mergers follows. Next we hear of Hugo Chavez’s ruining the Venezuelan oil industry. The following chapter is a mélange of a discussion of the September 11, 2001 attacks on the United States, more Venezuela, problems in Nigeria, and the effects on oil of Hurricane Katrina. Even more curiously, Yergin moves to an extended denunciation of the invasion of Iraq.
A particularly messy chapter treating 21st century oil prices ensues. It starts with a typical digression about why West Texas Intermediate is the market-traded U.S. crude oil. Then Yergin argues that demand surged unpredictably rapidly in the 2003–2006 period due mostly to rising consumption in China and India. (Examination of the underlying data suggests some cherry-picking to exaggerate the importance of those years.)
Yergin’s next topic is the rise of oil futures trading—a topic that he totally botches. Having correctly stated that speculators survive only by correctly anticipating prices, he repeats the widespread nonsense that traders manipulated prices in the last decade, which is inconsistent with correct anticipation. This is interspersed with a scary fairy tale about oil supply tightening that he asserts was widely believed by traders. The tale consists of four different ways of stating that world oil production was about to peak plus concern about growing Chinese oil consumption. While this view has its exponents, it is implausible to assert that such fears drove short-term speculation in oil. He then meanders through the subsequent price collapse, pausing for no discernable reason to note that a 2007 U.S. energy bill required increases in mileage requirements for automobiles and trucks.
The section closes with two chapters on the rise of China.
Unconventional sources | Part Two purports to deal with exhaustion and insecurity issues. It starts with an inadequate discussion of the exhaustion issue. In another strange chapter, Yergin inserts a discussion of the Deepwater Horizon blowout into a discussion of unconventional sources of oil such as Canadian tar sands.
Two florid chapters follow on the security risks of oil imports.
Yergin moves to natural gas prospects. His first chapter on the subject discusses ocean transport of liquefied natural gas. It curiously begins and ends with discussion of Qatar’s big venture into liquefied natural gas and, in between, gives historical background. The section concludes with treatment of alternative sources of natural gas. Here he starts with the rise of extracting natural gas from shale in the United States and then turns to the earlier rise of Russia as a pipeline gas exporter.
Part Three tries to relate the history of electric power in 72 pages. Yergin devotes one chapter to the creation of the industry, turns to the push for nuclear electric power, moves on to the regulatory problems of the industry with stress on the California restructuring fiasco, and ends with a review of issues about future energy sources for generation. His treatment of California is uncharacteristically perceptive; he recognizes that the problem was government imposition of an unsatisfactory structure. Even here, he cannot refrain from the standard error of blaming a ban on long-term power contracts for part of the problem. Experience with contracting shows that when market conditions diverge drastically from those upon which the contract is based, economic realities imply that adjustment is needed to prevent default.
Environment | The rest of the book treats aspects of global warming. Part Four deals with the global warming problem itself. Part Five treats responses—mostly solar, wind, and conservation. Part Six then moves helter-skelter among alternative responses in automobiles; it starts with a review of biofuels that barely notices the role of crony capitalism. Yergin turns to the electric car; following his editorial quirks, he starts with the early 20th-century race among options for motor-car propulsion.
The chaos in organization unfortunately is outdone by the incompetence of the argument. Practically all the great myths about energy are accepted; the few that are rejected are inadequately discussed. The crux is that the author’s research strategy invites me to use such critical adjectives as “quixotic,” “bizarre,” “inadequate,” “incompetent,” and “insane.” The quintessence of the defect is that Yergin could find an article by Betty Freidan on global cooling but ignore most of the extensive theoretic and applied economics relevant to his subject matter. One could fill a book with citations of the essential literature that he ignores. He even botches the few citations that he does provide.
His treatment of global warming is particularly egregious. Yergin starts with three chapters rambling through history back to 1856 and on to the first major international meeting on global warming. These chapters are filled with his characteristic use of florid language.
He then provides a disastrous chapter on the theory and practice of emission control. As have many before him, Yergin starts with Ronald Coase’s celebrated 1960 article, “The Problem of Social Cost.” Yergin manages to make the worst botch of Coase of the many of which I am aware. Coase’s arguments center on the proposition that evaluation of the control of social costs—the impacts of economic activities on bystanders—must consider not only the costs imposed on such bystanders, but the further cost of designing and implementing correction. Coase termed these “transactions costs.” Several relevant points follow: First, either a properly designed subsidy or a tax could optimally correct the social costs. (“Properly designed” is my shorthand for warning that designing the right tax or subsidy is probably beyond the capability of political organizations.) Second, although taxes and subsidies clearly differ in their income distribution impacts, the worthiness of subsidy beneficiaries is not always clear in practice; for instance, some people choose to locate in harm’s way. Third, where the impacts are widespread, a centralized approach could be considered, which might lower transaction costs. Fourth, even here, the resulting lowering of transaction costs may not be sufficient to ensure that costs are less than benefits. Fifth, given the limitations of real-world governments, it is unclear that private solutions are inferior.
Yergin curiously argues that Coase was setting the stage for the introduction of tradable permits to pollute. To be sure, Yergin recognizes that Coase never considered that option, but he claims that it was tacit in Coase’s article. Yergin then cites two early efforts to propose tradable permits. This is a great misfire. Permits, as do pollution taxes and subsidies, still involve extensive government control. The market then adapts, trying to find efficiencies in light of whatever policy is adopted. However, contrary to Coase’s warnings, Yergin still trusts government uncritically to set the rules. Moreover, he totally ignores the profound problems of choosing among taxes, subsidies, and permits. Adding the permit option means increased confusion. In a U.S. context, the experience with global warming legislation makes evident the practical superiority of taxes: recent legislation that passed the House of Representative died in the Senate because of the bill’s convoluted allocation of permits, intended to buy off objectors.
Another failure of Yergin’s book is its neglect of the daunting problem of dealing with rising greenhouse gas emissions from China and India. Those countries argue, understandably, that if they are to restrain their environmentally harmful activities that are pulling much of their populations out of poverty, then they should be paid for doing so by the richer developed world. The developed countries show no willingness to provide those payoffs.
Yergin then turns to the myth of the success of a market solution to “acid rain.” He expectedly repeats the long-refuted claim that such rain was killing trees in Germany’s Black Forest. He proceeds tersely to note the success of a tradable-permit remedy to acid rain. As usual, neither the lack of cogency of the argument for acid rain controls nor the extreme command-and-control element of the permits is treated. The law establishing the program named the individual operating units at individual power plants that would receive permits and set the permit level.
The sins of the emission permits chapter become insignificant when compared to those of the last two parts of the book. In them, Yergin’s prior note of the drawbacks of command-and-control regulation is forgotten. This portion of the book roams through assorted ways to lessen fossil fuel use. In every case, he recognizes the existence of intervention in the form of direct subsidies, tax credits, and performance mandates. At no point does he reflect on the folly of such measures.
In contrast, the key defect of the remainder of the global warming section is its uncritical advocacy. Every problem in support of action is dismissed. This starts at the trivial level of admiration of questionable actors such as Al Gore. Most importantly, two critical aspects of the advocacy—the multiple reports of the Intergovernmental Panel on Climate Change (IPCC) and Nicholas Stern’s report to the British government on the economics of global warming—receive far less scrutiny than they deserve. In both cases, Yergin notes and dismisses important concerns. His discussion clearly recognizes that global warming research is predominantly government financed, yet it never occurs to him that this produces a bias to studies that justify intervention. Even worse, he accepts the embarrassing whitewashes of the scandals unleashed by release of leaked e‑mails among climate scientists. He notes only the source-data-manipulation aspect of the fiasco with the notorious “hockey stick” graph that showed a sharp rise in earth temperatures with fossil fuel use. He does not note that the result also depended on the use of a defective homemade program to analyze the data. The type of curve-fitting analysis attempted is standard, and the results disappeared if the well-established existing programs were used. Yergin also ignores the efforts to suppress dissent on the issue that were disclosed in the leaks.
Similarly, he is well aware that Stern’s results depend on uncritical acceptance of the IPCC’s projections coupled with the assumption of a discount rate far lower than most other economic analyses adopted. Yergin does not seem to realize just how tortured Stern’s analysis is. What is more, Yergin gives no attention to the belief among economists working on global warming that the Kyoto Treaty, because of its exclusion of developing countries, was a grossly unsatisfactory remedy.
Ignoring economics | Sadly, ignoring economic analysis is the underlying, repeated failure of the book. Return to Yergin’s treatments of exhaustion and security of supply. He gives no attention to the central work of M.A. Adelman. At best, a tacit hint of Adelman’s analysis appears in Yergin’s recognition in the depletion chapter that reserves are proved by their development, and thus that a lack of proven reserves for the long-term future simply means that extraction companies are not investing heavily in fields that they don’t expect to tap for decades.
Another example: he devotes most of the exhaustion chapter to review of alarms, with stress on the notorious pessimist M. King Hubbert. To his credit, Yergin does recognize Hubbert’s flaws, but he doesn’t adequately refute them for readers.
The handling of security of supply is even worse. A disconnected series of anecdotes replaces serious discussion of the dangers, their implications, and the best policy responses. Thus, Yergin presents so amorphous a problem that it necessarily has no clear solution. In this realm, Adelman is but the start of a vast literature on security. Several works have dealt directly with the security issue. It is widely agreed that possible macroeconomic impacts are the only policy-relevant problem. An extensive literature has grappled with determining whether or not such impacts actually arise. Yergin’s coverage is limited to an interview with a leading exponent of the view that the shocks are important. No literature, including that from the interviewed economist, is cited. Still another neglected literature treats the unsatisfactory theory and practice of oil stockpiling.
Conversely, only the peak oil portion of the alarmist literature is adequately cited. This ignores the mass of broader calls for action from a curious assortment of think tanks, ad hoc organizations, and various academics.
Few lesser myths miss inclusion. Most critically, Yergin ignores Adelman’s demolition of the demand shock and Arab-embargo explanation of the oil price increases of the middle 1970s. The oil-company-merger chapter uncritically reports the 1911 breakup of Standard Oil without recognizing that the shift of oil production from Appalachia to the U.S. South Central states and abroad was already undermining Standard’s position. His treatment of the early history of electric power incorrectly praises Roosevelt’s New Deal for breaking up public utility holding companies, starting federal power projects, and promoting rural electrification. The inadvisability of the last two is widely discussed in the literature. The holding company is less widely treated. Examination of the effects, however, shows that by concentrating on one form of organization, the Holding Company Act produced capricious reorganizations. (For an alternative, heavily annotated viewpoint on most of the issues treated by Yergin, see my “The Gulf Oil Spill: Lessons for Public Policy,” Cato Policy Analysis #684, released last November.)
A secondary but still maddening problem is Yergin’s inclusion of insulting explanations and useless information. It is hard to decide whether telling us that “doubling” means being twice as large (p. 164–5) or that Sonny Bono was once married to Cher (p. 599) is more condescending.
