Firstly, please don’t tell me you believe in that peak oil rubbish. Basic economics tells us that as price goes up, supply actually increases. Now the oil market has a few things going on like OPEC and nationalisation of oil assets that prevent it from behaving in an entirely efficient manner but it does not change the fact that as the price of oil increases it becomes viable to tap wells that had previously been considered too expensive to harvest. Believe me, if we are likely to run out of oil in the next 30 years then the oil companies would already know about it - they are in the best position to know of anyone. We would be paying a lot more than US$130 a barrel and BP, Shell and the like would be racing around buying up solar plants and wind farms. I don’t see that happening. ABARE have got their price forecast wrong, but using their error to legitimise the claims of peak oil is poor and irresponsible journalism. The current high price is vastly more likely to be a result of Chinese demand, supply bottlenecks and sovereign risk (that is government takeover of private oil assets now the industry is making serious money again) - not the fact that we have drained our last drop.

Secondly, last I heard, ABARE was primarily staffed by economists. Now say what you like about the quality of their economic work, one thing is for sure - they are not weather forecasters. If reliable long-term weather forecasts were available - farmers would be using them. The fact do not rely on long term weather forecasts indicates that they are extremely unreliable. Farmers generally plant hoping for the best and expecting the worst. If you were to forecast the wheat price for next year you would do so by looking at what is being planted in the ground now and then making some assumption about the weather. The safest assumption to make is that farmers get their average amount of rainfall. To make any other assumption suddenly puts economists in the business of being weather forecasters too, something they are unlikely to be trained in. Maybe their is an argument for ABARE to prepare their crop forecasts with input from BOM long range weather forecasters, but given the inherent inaccuracy of both practices I am not sure this would improve the outcome.

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I’m not suggesting that we don’t try to move away from our reliance on oil (and the high price of oil will be a vastly better encouragement to do this that government policy) but that running around crying “Peak Oil” is simply alarmist and not grounded in reality.

A better modelling technique is to use a technique that can be described by how we might model a termite nest. How do you model a termite nest? Well you do not use differential equations and overall relationships. What you do is to model each termite and define the rules of interaction between the termite, other termites, and the environment within it finds itself. How do you know if the model is correct. Well you can test it against the behaviour of termites in existing termite nests and see if it explains it.

If you were an economist then your model of a termite colony would be expressed as the relationships between food gathered, the number of baby termites, the amount of wood chewed, the rain that fell etc. This is a model but not a very useful one to predict what happens when termites suddenly develop the ability to communicate at a distance or termites discover they can eat concrete.

The best model we have of our economic system is the system itself and it is easy to model because it exists in an easily accessible form. Most economic transactions are now electronic and those that aren’t can be relatively easily added in. That is, what we can do is to make a copy of the existing system run it over a period of time and see if it reacts in the same way as the real system and if it doesn’t then we change some of the bottom level rules to make the model predict what happened. Our planning and predictions then become running the model with different sets of rules - such as adding in the idea of emissions trading.

Economists will say they already do this. Economists change their model but these are changes at an aggregate level not by changing bottom level behaviour. Aggregate models based on statistical relationships will tell you little about what happens when we get disruptive changes in bottom level interactions whereas models based on bottom level interactions can tell you a lot and better still they can be empirically tested.

So don’t blame ABARE for getting it wrong. They are using inadequate tools - but then so is Treasury.