In a front page New York Times article this morning, David E. Sanger quotes a senior U.S. intelligence official's assessment of Ahmad Chalabi's information on weapons of mass destruction, which was distributed so avidly by the Times itself in the run-up to the Iraq war: "useless at best, and misleading at worst."

...And in today's Times editorial: "Before the war, Ahmad Chalabi told Washington hawks exactly what they wanted to hear about Saddam Hussein's weapons of mass destruction ... Much of the information Mr. Chalabi had produced was dead wrong. He was one of the chief cheerleaders for the theory that Iraq had vast quantities of weapons of mass destruction. ... But he can't be made a scapegoat..."

One would never know that the Times itself once relied on him heavily for its "scoops" on Saddam's WMD stockpiles. In fact, one must painfully recall the now famous May 1, 2003, e-mail to the paper's Baghdad Bureau Chief John Burns from star Times reporter in Iraq, Judith Miller, who wrote: "I've been covering Chalabi for about 10 years, and have done most of the stories about him for our paper. ... He has provided most of the front page exclusives on WMD to our paper."

Oh, how quickly the Times forgets its friends, Chalabi must be thinking today.

After nearly five decades in academia, and five and a half years as a dean at a public university, I exit with a three-part piece of wisdom for those who work in higher education: do your job; don't try to do someone else's job, as you are unlikely to be qualified; and don't let anyone else do your job. In other words, don't confuse your academic obligations with the obligation to save the world; that's not your job as an academic; and don't surrender your academic obligations to the agenda of any non-academic constituency — parents, legislators, trustees or donors. In short, don't cross the boundary between academic work and partisan advocacy, whether the advocacy is yours or someone else's...

One would like to think that even the exaggerated sense of virtue that is so much a part of the academic mentality has its limits. If we aim low and stick to the tasks we are paid to perform, we might actually get something done.

If it isn't one thing, it's another. A bull market climbs a wall of worry, so there's always something to worry about. Right now it's oil.

So let's stop worrying and start thinking.

First, today's high price of oil and gasoline isn't going to strangle the economy. Sure, when the price of gasoline goes up and stays up, people have to adjust in various ways. No one likes to be forced to adjust. But adjustments don't have to be negative.

One of the first ways people adjust to high gasoline prices -- if they are gasoline buyers, that is -- is they use less gas. That means they may shift some of their economic activity from things that involve driving long distances in an SUV to other things that involve driving shorter distances in a normal car. Now why should that hurt the economy?

Another way people adjust to high prices -- if they are gasoline sellers, that is -- is they find ways to produce more gas. They drill more oil wells. They open new refineries. Now why should that hurt the economy?

Are you seeing a pattern here? When prices rise, buyers try to buy less. Sellers try to sell more. And what do you know -- as a result of both those things, pretty soon the price starts to fall. No, it's not magic. It's basic economics. It works every time.

This isn't the 1970s or the 1980s. Today we're not seeing radical price increases as the result of the sudden cut-off of supply. There's still plenty of oil to go around -- and it's just getting a little more expensive at the moment.

How much more expensive? That's a matter of perspective. Sure, it grabs your attention when regular gasoline tops $2 a gallon for the first time. "Record gas prices!" the headlines scream. But the reality is that when you adjust for inflation, a gallon of gas cost almost 50% more in 1981 than it does today.

And here's an even more amazing statistic. Over time, thanks to technology, we've gotten much more efficient in the way we use gasoline, oil, and energy of all kinds. In 1974 when the first "oil crisis" hit, it took over 17 quadrillion BTUs of energy to produce $1 million of gross domestic product (measured in constant year-2000 dollars). Today it takes less then 10 quadrillion BTUs.

One more statistic: in 1978 the US consumed over 18 million barrels of oil every day, when annual GDP was $5 trillion. Today we use only 10% more oil every day than we did then, but GDP has more than doubled to almost $11 trillion.

The bottom line: oil is important, but it just doesn't matter quite the same way that it used to.

And don’t worry about the scare stories about China, and its voracious appetite for oil pushing up world prices forever. To the extent that China increasingly takes on energy-intensive manufacturing work from the US, much of the extra oil it uses will be oil we no longer need to use anyway. They're welcome to it, as far as I'm concerned.

Besides -- everyone in the world is made wealthier when a billion people are lifted out of poverty and start contributing to the global economy. If that raises the world oil price, so be it -- we'll be all be so much richer we won't even notice.

And another thing: we're not about to run out. Nowadays it's suddenly fashionable for the eco-freaks who predicted doomsday in the 1970s and 1980s to once again remind us that oil is a finite resource, and that someday we're going to use it all up. Hogwash.

The reality is that the more oil we use, the more oil we seem to discover. One more amazing statistic will prove it. In 1982, proven world oil reserves were 696 billion barrels. Since then the world has consumed 452 billion barrels. So how much oil is left?

Surprise! Proven world reserves are now over 1 trillion barrels.

No, it's not a miracle. Again, it's simple economics. Over time, technology improves. Today we can extract oil that we always knew was there, but just couldn't get at. A century and a half ago when people talked about "oil" they meant whale oil. If you told the skipper of a whaling ship that someday we'd be able to set up a platform mid-ocean and drill miles into the sea-bed and bring up billions of gallons of something that would do everything whale oil can do, and more -- he'd think you were nuts.

Yes, technically there is a finite supply of petroleum (though the supply may be an unimaginably vast amount). But there is not a finite supply of energy, and that's all that really matters. Over the last twenty years petroleum has already lost market share to a number of energy alternatives.

Even other fossil fuels have arisen to steal some of oil's dominance -- especially natural gas. Prices for natural gas are high today, too, but that will only spur new technologies to open up new supplies of it.

For example, the US Geological Survey estimates that gas hydrates -- methane trapped in water molecules on sea-beds -- contain twice as much carbon resource as all other fossil fuels combined. The USGS says that just two small deposits off the east coast contain almost as much natural gas as the US uses in an entire year.

You want something to worry about? Worry about the risk that some politician running for office this year will come up with some dumb idea to "solve" the oil problem -- like slap price controls on it, or lay a new tax on it. Those are sure ways to cause real shortages. As with most things in the economy, the best thing to do is nothing: the economy will take care of itself.

In the meantime, if you’re really worried that oil prices are going higher and staying higher, then as an investor it's pretty straightforward what you should do. Invest in energy and energy service companies. High prices make oil inventories more valuable, and spur increases in exploration, extraction and processing. Aren't markets great? There's always a way to make money -- even from your worst worries.

Correction 5/22/2004: The paragraphs about cumulative oil consumption since 1982 and residual reserves contained errors as first released. Consumption was originally stated in trillions, while it should have been billions. Reserves were stateed in quadrillions, while they should have been trillions. The point of the argument is not changed, but the statistics were inadvertently all multiplied by a factor of 1000. I guess Graydon Carter isn't the only guy who can make a mistake like this. Thanks to sharp-eyed readers including Jon Ravin for pointing out the error.

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Thursday, May 20, 2004

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