Budget day in the UK: a good day to think about economics and some of the more strident criticisms in the comments on my blog to date.

One reader calls on economics to explain why the peak oil argument is wrong. He is not alone among economists in believing that there are huge amounts of oil yet to be extracted. In fact, the whole debate can be crudely characterised as one dominated by economists on the side of a late peak in production and geologists on the early side.

An economist tends to believe in the price mechanism. As the price of oil goes up, so cash is generated, so exploration and production can be capitalised, so more oil will be found and historically marginal fields can be produced. All very simple. But there is a snag. The early-peak geologist tends to argue that economics can be blind to rocks.

To generate oil you need very special conditions underground. First, you need a source rock, a carbon-rich deposit of some sort that oil can be "cooked" from at the right temperature and pressure. The oil companies know where all the good source rocks are. Then you need a trap, a structure in porous reservoir rock that can hold oil like a sponge. This must be below a cap rock, which is completely impervious, holding the oil in the place in the reservoir. Traps tend to be quite obvious, like elephants under rugs. They tend to be found early in exploration programmes.

That is why 20% of the oil produced in the world today comes from just 14 oilfields, with an average extraction period to date of - wait for it - 60 years. That is why the industry in 2006 is exploring in the last far-flung frontiers of the world, like eastern Russia and the Arctic. That is why it is mostly finding mice, not elephants.

All the cash flow in Christendom, and Islam for that matter, will not find a good trap with oil in it if there are no source rocks, and if the region has already been well explored. The continents were fully mapped way back in the 60s. Seismic techniques mean that most other likely elephant habitats have been long since explored. I wonder how many economists understand this.

I have to admit it: I have my doubts about economics as it is traditionally practised. This is a science that, in general, puts no value on the environmental resources we will need to live on in the future, such as clean water, or clean air to breathe.

I recall a meeting of an intergovernmental panel on climate change (IPCC) committee on the impacts of global warming, in Vienna, during the mid 90s. Convened under one roof were eminent economists from all over the world. Their mission was to consider the economic impact of alarming increases in global average temperature being predicted then, as now, by the IPCC's climate modellers.

I attended as a participating observer. I watched economist after economist predict minimal impacts on gross national product. They all used linear damage functions, meaning that, as the global thermostat rose, the economic loss would rise in the straight line. It seemed obvious to me, as a PhD earth scientist, that this is not how nature would work.

The damage function would leap upward in steps on a slope that would become steeper and steeper with time. Impacts would synergise. Drought would cause food shortage, would cause civil strife, would cause lost income, would cause less resource for low-carbon abatement technologies, would cause more coal burning, would cause more drought. Steepened meridional thermal gradients would cause more severe windstorms, would mean cyclones hitting cities, would cause collapse in financial markets, would cause more coal burning, would cause more atmospheric heating, would cause more severe windstorms. So it would go on through the depressing catalogue of impacts.

I voiced these thoughts to the assembled economists, a lone environmental scientist among the professors from Yale and such places. A single delegate, from the Dutch environment ministry, supported me. The economists ignored us.

This is one anecdote among many. It seems to me that economists have to rethink some of their fundamental tenets, in the face of peak oil and global warming. As we mortgage our economic wellbeing to faith in growing supplies of oil, we need to understand what rocks tell us. As we gamble with fossil fuel addiction ever more each day, we need to attach value to the future.

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