Sunday, December 06, 2009

Econ 101: Why Peak Oil is Peak Idiocy

Related to these two recent CD posts about peak oil and how we never run out of natural resources, Mike Munger provides some excellent commentary on his KPC post "Peak Idiocy":

Of all the idiotic things that people believe, the whole "peak oil" thing has to be right up there. It is literally impossible for us to run out of oil. We have never run out of anything, and we never will.

If we did start to use up the oil we have (though, counting shale oil, we still haven't used even 10% of the total KNOWN reserves on earth, and there are lots of places we haven't looked) but suppose we were on our way to using it up. Three things would happen.

1. Prices would rise, causing people to cut back on use. More fuel effcient cars, better insulation on houses, etc. Quantity demanded goes down.

2. Prices would rise, causing people to look for more. And they would find more oil, and more ways to get at it. Quantity supplied goes up.

3. Prices of oil would rise, making the search for substitutes more profitable. At that point (though not now!) alternative fuels and energy sources would be economical, and would not require gubmint subsidies, because they would pay for themselves. The supply curve for substitutes shifts downward and to the right.

This is Econ 101.

26 Comments:

At 12/06/2009 10:41 AM, Blogger PeakTrader said...

Which is a form of gasoline efficiency? (pick any or none):

A. Your Hummer getting 11 instead of 10 miles to the gallon.

B. Stop driving your Hummer (creating an idle asset), because gasoline prices are too high.

C. Switching from a Hummer to a Smart car.

I would say only A is really a form of gasoline efficiency.

 
At 12/06/2009 10:42 AM, Blogger Colin said...

Well, yes. There is simply no economic justification for government involvement in the energy sector. These people are nothing but a bunch of busy-bodies, looking to justify their existence and tilting at various mindmills while crying market failure.

There is no market failure in energy, only government failure. If governments around the world were to desist from their continued nonsensical interventions the price of oil would plunge.

 
At 12/06/2009 11:51 AM, Blogger PeakTrader said...

Of course, it depends on cost. Increasing miles per gallon can be cheap, e.g. inflating tires or a tune-up. Technology advances can be cheap when distributed to many autos. However, being forced into fewer and smaller assets and goods may not be a form of efficiency.

 
At 12/06/2009 12:06 PM, Anonymous Anonymous said...

You can believe what you want, Mark, but as someone who has twenty-seven years experience working for the oil industry, I can tell you the world is not heading to a good place in the years ahead. Not when the IEA finally straightened out and admitted depletion rates are dangerously high at 6.7%. Not when ExxonMobil is willing to pay the Ghana government $100 a barrel for a quarter access to the Ghana Oil Field (again, this doesn't even cover costs to develop the 1.2 billion barrel field). Not with rapidly emerging economies that will need high volumes of oil in the years ahead to fuel their expansion. Not when the average age in the global oil industry is among the highest in the world, and the US will see a dangerously high number of petroleum geologists and engineers walking out the door in the next ten years, and there's too few young prospects to fill in the holes. If nobody wants to believe me on the third one, I'd just suggest for one to simply walk into an energy conference and you'll see.

Remember, America was the Saudi Arabia long before Saudi ever got that title. A few pessimists came along and warned US oil production would peak and decline sooner than anyone would think, but they were laughed at. But then came 1970 and King Hubbert was vindicated.

"The difference between a pessimist and an optimist is that the pessimist is usually better informed."

 
At 12/06/2009 12:07 PM, Anonymous Anonymous said...

The fourth comment was made by me, Daniel.

 
At 12/06/2009 12:28 PM, Anonymous Anonymous said...

My ex-boss told me an interesting story about 15 years ago. He was in Texas with one of the locals back in the mid-1980s, and noticed there wasn't any pumping happening at many of the oil fields they passed. "The wells are all capped," the local said. "Because they're all dry?" my ex-boss asked. "Nope," the local said. "Then why aren't they being pumped?" my ex-boss asked. "We're just waitin'," the local replied.

 
At 12/06/2009 12:36 PM, Blogger Bloggin' Brewskie said...

One area I've been following a lot more lately is emerging EOR techniques. A friend of mine who is working on a S Illinois oil field has been keeping me posted on a new chemical technique his company is using. To describe it simply, the stuff basically functions like Dawn Dish Soap in that it breaks up the hard surface of oil still locked in place. He's says they're doing this with a production cost of $25-$30 a barrel, it's the real stuff (light sweet crude), and his team believes this may raise recoverable reserves in applicable oil fields by 10-15 or even 20% (though I won't go that far yet).

I also have a lot of interest in Chevron's steam-injection program with heavy oils in the Middle East, though we won't know the full outcome of this for a few more years.

 
At 12/06/2009 12:41 PM, Blogger Bloggin' Brewskie said...

Daniel,

While I'm of differing opinion on matters of peak oil in contrast to you, one area I am in agreement with is the aging workforce of the oil industry - and not just that, but the average age of scientific personnel throughout America as well.

As a rather young engineer myself - one who is rather familiar with the bald heads and grey hairs that are a familiarity in America's industries, and the few young candidates coming up to replace them - I find myself trying to scratch my head for answers to this looming problem. I so far can't come up with any.

 
At 12/06/2009 1:29 PM, Anonymous Lyle said...

To answer Blogging Brewski, there is a simple market solution to getting more into science and engineering more pay and more job security.The oil industry went on a job cutting binge from 1985 till about 2000. Essentially no hiring was done, so those that were hired in the late 70s and early 80s and are left are now of retirement age. It sort of amazes me how management can trumpet the free market but not believe it to be a solution to the shortage of skills. It is working somewhat when a starting reservoir engineer gets nearly 100k a year. One could put golden handcuffs on the folks to keep them, i.e. long term payouts of part of compensation. Oh you say they don't justify that level of pay because its more than management is paid? Then you don't really believe in the free market (sauce for goose is sauce for gander).
The way the workforce in oil was treated leads me to say it is a good field for those from oil exporting countries, but short of the changes cited not a good field for americans due to the lack of security. (Now if you get to an independent you get overriding royalties essentially a commission, so that works well, and there is much less overhead in an independent.)

 
At 12/06/2009 2:26 PM, Blogger rjs said...

whether we reach peak oil or not, we're on a curve of diminishing returns...the first oil extracted from texas cost one energy input for every 90 units of energy output; the current ratio energy input to energy output to extract new oil is now one to three...

 
At 12/06/2009 3:04 PM, Blogger PeakTrader said...

There's no viable substitute for oil. When the price of steak rises, people can switch to fish, chicken, etc. However, when the price of oil rises, you go without or consume smaller portions.

 
At 12/06/2009 3:26 PM, Anonymous Lyle said...

There are viable substitutes for oil except today for aviation. Natural gas powered vehicles have existed for a while, electric railroads exist in parts of the us, while not done there is no reason one could not build a natural gas powered ship.
There are transition costs involved some of which may be large, but high prices pay for the transition costs very nicely. A supertanker may take a while to turn but it will turn and the more power (money in this case) you put on a side thruster the faster it will turn.
Essentially peak oil says the oil market is so special that the laws of economics have made an exception for it. There may be some pain, it may cost a good bit of money we might have wanted to spend on something else but the transistion will be made if needed.

 
At 12/06/2009 5:21 PM, Blogger Colin said...

I think some of you are missing the post's point. The argument is not that we will never run out of oil, it's that it doesn't matter. If oil is running out it will encourage both a shift in behavior as the price runs out as well as encourage investments in new technologies. When oil runs out we will have already shifted to a new source to meet our energy needs.

 
At 12/06/2009 6:06 PM, Anonymous GORE LIED said...

Colin is right. I suppose that there is indeed some finite amount of oil in the earth, but from an economic standpoint that is completely irrelevant.

Here's a link to Julian Simon's The Ultimate Resource II, Chapter 11 "When Will We Run Out Of Oil? Never?"

http://www.juliansimon.com/writings/Ultimate_Resource/TCHAR11.txt

 
At 12/06/2009 6:38 PM, Blogger CausticMango said...

Dude, you might want to actually figure out what peak oil is before you go off like that. Makes you look kind of silly.

 
At 12/06/2009 7:30 PM, Blogger juandos said...

"We're just waitin'," the local replied...

Throwing the B.S. flag on this comment...

It costs to pump, sometimes the cost of crude on the market doesn't cover the cost of pumping and moving it from some places...

The 'Idle' Oil Field Fallacy

Democrats Support Higher Oil Prices (and Higher Taxes)

 
At 12/06/2009 10:24 PM, Blogger PeakTrader said...

Colin, that's obvious. However, what have been the mechanisms adjusting to Peak Oil or high oil prices so far, and what do you expect over the next decade or two?

 
At 12/06/2009 10:37 PM, Blogger Kevin C said...

Your article is perfect, except it leaves out EROI (or energy return on investment). It will cost more to get future oil than current oil due to diminishing returns. You also do not include the geopolitical conflicts that will also naturally spring up. Unless those left with less oil will be "okay" with their economies left in tatters.

 
At 12/07/2009 12:56 PM, Anonymous Cooper said...

"Twilight in the Desert" does a godo job of explaining Peak Oil. Mind you, the original post does look bad, because peak oil does not say we will run out of oil, ever. If Follows the same economic principles that any other product would. Think of the analogy to Peak "hourse and buggie". Eventually it is not economically viable to extract high cost oil grom tar sands/ shael, because as the price goes up consumption will get cut back.

 
At 12/07/2009 4:06 PM, Blogger VangelV said...

Of all the idiotic things that people believe, the whole "peak oil" thing has to be right up there. It is literally impossible for us to run out of oil. We have never run out of anything, and we never will.

I hate to break it to you but the peak oil argument has nothing to do with running out of oil. It simply points out that we will reach a daily production peak from which we will be unable to move higher.

If we did start to use up the oil we have (though, counting shale oil, we still haven't used even 10% of the total KNOWN reserves on earth, and there are lots of places we haven't looked) but suppose we were on our way to using it up. Three things would happen.

We have looked in most places where oil could be found. The places that are left are extremely expensive to explore and develop and would require a massive increase in price that will come after Hubbert's Peak is reached. Of all of the conventional oil that we have found and is recoverable humans have taken about half out of the ground. Unconventional sources could provide more oil but will require a huge amount of capital that will not appear until after prices move up sufficiently to justify the investment risk.

1. Prices would rise, causing people to cut back on use. More fuel effcient cars, better insulation on houses, etc. Quantity demanded goes down.

Correct. But you still have peak production.

2. Prices would rise, causing people to look for more. And they would find more oil, and more ways to get at it. Quantity supplied goes up.

People have been looking for oil over the past 150 years. To suggest that they missed huge reserves of easily recoverable petroleum is naive. There is plenty of oil still to find but you cannot find it fast enough to offset production declines.

3. Prices of oil would rise, making the search for substitutes more profitable. At that point (though not now!) alternative fuels and energy sources would be economical, and would not require gubmint subsidies, because they would pay for themselves. The supply curve for substitutes shifts downward and to the right.

While this is a better argument it is also naive. Given the fact that energy is a cost that goes into the production of alternatives an increase in the price of fossil fuels means an increasing cost base for alternative production. What is needed is a breakthrough like the ability to exploit methane hydrate deposits economically. If we could do something like that we could produce enough oil to keep production at an acceptable percentage of the peak and would have to develop ways to squeeze marginal demand out of the system. I hate to say this but I see no promising substitute being able to offset depletion from existing fields.

What this means is that oil price weakness will only come because of the demand destruction side. As the real economy weakens and people cut back oil could fall as long as the supply side does not fall faster than demand. The problem is that the longer the demand side stays quiet the less investment will go into the energy sector and the worse the price shock coming out of any demand recovery will be.

Eventually, something will have to give. The best candidate could be the USD as countries in need of reasonably priced energy stop buying treasuries and let the US and EU go into a decline. As their own currencies rise their populations will be able to enjoy more of the goods and services that they produce at our expense.

 
At 12/07/2009 6:29 PM, Anonymous Anonymous said...

"We have never run out of anything, and we never will"

How are we doing on north Atlantic cod?.

Buffalos?

Whales?

I mean technically we didn't run out, but couldn't sustain the harvest.

What alternative to oil is there with similar EROI? I guess natural gas till we peak in that too.

 
At 12/08/2009 11:21 AM, Blogger jeppen said...

As I have pointed out before: Peak Oil is not in itself a theory of doom! It just says that conventional oil production will follow sort of a bell-shaped curve.

We will find ways to cope post-peak - there will be no doom. But it is a relevant to ask ourselves what the costs of alternatives will be. To high a cost may hamper global trade and economic development. It may also hurt some significant assets - what if the US urban sprawl start looking less rational, for example?

The approach advocated here is simply the old "wait and see - the economy will continually optimize resource use rationally". This may very well be the right approach - we do get increasing resources and better tech as we go.

But I do have this nagging doubt - that the economic boost we get today from our laid-back attitude to the waste of limited resources may not be enough to counter the extra and earlier effort we may need to put in to replace the flow of those resources and to adapt to costs of alternatives.

Mark - do you have any such doubts? If not, why?

 
At 12/09/2009 10:15 AM, Blogger VangelV said...

As I have pointed out before: Peak Oil is not in itself a theory of doom! It just says that conventional oil production will follow sort of a bell-shaped curve.

I think that Mark missed this part of the argument. He assumes that the Peak Oil argument is about running out of oil.

We will find ways to cope post-peak - there will be no doom.

Careful here. If we are not prepared for the transition you will see massive changes that will mean doom for the standard of living for most people.

But it is relevant to ask ourselves what the costs of alternatives will be.

It is a lot more than that. What matters is the energy return on energy invested. Alternatives must offer a good return on the energy invested in order to keep civilization from going into a severe decline. That is why corn based ethanol is such a loser.

To high a cost may hamper global trade and economic development. It may also hurt some significant assets - what if the US urban sprawl start looking less rational, for example?

It will look a lot less rational unless we can find a replacement for gasoline or get the zoning laws changed so that people can live a lot closer to where they work.

The approach advocated here is simply the old "wait and see - the economy will continually optimize resource use rationally". This may very well be the right approach - we do get increasing resources and better tech as we go.

But I do have this nagging doubt - that the economic boost we get today from our laid-back attitude to the waste of limited resources may not be enough to counter the extra and earlier effort we may need to put in to replace the flow of those resources and to adapt to costs of alternatives.


The problem comes down to government regulations and taxes that get in the way of producing more energy and from coming up with alternative sources that make sense.

 
At 6/07/2012 8:02 AM, Blogger Titus Pullo said...

What a complete bunch of soft science nonsense this piece is, the kind that maintains baseless cornucopian doubt that peak is real and delays response for a geological certainty already knocking at our door. As if these clowns know more than the IEA, the Pentagon, the US Dept of Energy and countless other entities who've ALL admitted peak is here by 2015. I guess those guys are all just mired in "peak idiocy."

I'm so utterly tired of economists asserting that net energy doesn't matter, and that the market will just fix everything. Here's a newsflash: cheap, abundant energy dictates to your "market forces." Not the other way around. Sorry.

One thing these cultists of finance never seem to acknowlege is: what happens when the price of oil gets too high for the average consumer to afford? Chaos is what happens, and we're already seeing it begin. Still think the credit crash of 08 had nothing to do with peak? Look closer.

It takes 30 years to change world infrastructure to run on some "alternative." And that's even if we found some magic battery pack as quick as today. There IS no substitute.

The arrogance of economists is precisely why the world is IN this mess. Time to pass over the magic 8-ball, all you junior Nostradamuses out there. We think you've had your chance.

 
At 6/08/2012 6:44 PM, Blogger VangelV said...

It takes 30 years to change world infrastructure to run on some "alternative." And that's even if we found some magic battery pack as quick as today. There IS no substitute.

There may be a substitute. We could run vehicles on liquid ammonia and use the current set of pipelines to transport that ammonia. But to do that we need a massive increase in our electricity generation capacity, which means many new coal and nuclear facilities being built very quickly, something that will not happen as long as the unfounded claims of the empty suits keeps getting most of the publicity.

We have already seen demand for crude in the EU and US collapse to around late 1990s levels. Expect this trend to continue after the peak production reality becomes evident.

 
At 2/14/2013 8:01 PM, Blogger Notbuyingthebs said...

I seriously doubt you work for the oil industry... You are just another negative nancy looking to tear down a promising future in oil and gas. Pessimists always look for the worst in every situation and they do this best by keeping their eyes closed, fingers in ears saying la la la la la la la I don't want to know. 1970 came about because the Saudi's held oil hostage over our support for Israel. You, sir, are an embarrassment to those of us who actually "do" work in the oil industry.

 

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