Peak Oil and U.S. Consumption

Prof. Hamilton has a very good introductory post on U.S. oil production and how it is in decline, has been in decline for the past two generations and will likely always be in decline. What I found interesting was the final portion of the post that discusses who benefits from rising U.S. demand while at the same time U.S. production is on the decline. The short answer is oil rich/exporting countries, many of whom have links to terrorism. Also, what would happen if the U.S. could significantly reduce or even stop importing oil; the price would drop radically.

Prof. Hamilton even turns to past, present and hopeful leaders of our country including Richard Nixon, Jimmy Carter, George H.W. Bush, George W. Bush, and Hillary Clinton. They all sing the same tune, more or less, that being less reliable on foreign oil would be a good thing. If so many different high ranking leaders all agree how come nothing is done?

Prof. Hamilton notes that achieving this goal is painful, but that is about as far as he goes. The reason why it is expensive is that right now all other options are at least as costly as continuing to import oil from other parts of the world. The way to think of it, and it is surprisingly simple, is that if it were cheaper to switch to alternative sources of energy we’d have done it already. You can’t have every increasing prices and people passing up substantial savings. That $10 billion a quarter that ExxonMobil is earning, those are the savings that people are passing up by sticking with oil if in fact it would be cheaper to run cars off of used vegetable oil.

This point is often lost on people who advocate switching to alternatives and they argue as if these costs are either don’t exist or they are neglible. Even the argument in for more research is suspect since there is already quite a bit of incentive to find an alternative. All those billions and billions of dollars in profits the oil industry have been taking in, that is the incentive for more research.

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Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Dave Schuler says:

    If so many different high ranking leaders all agree how come nothing is done?

    It’s no more difficult to explain the behavior of politicians than it is to explain the behavior of flatworms: they move towards things that give them pleasure and away from things that give them pain.

    Let’s just say totally for the sake of argument that politicians have no convictions whatever and behave completely rationally and in their own best interests. Under those extremely unlikely circumstances they would do just what our real life politicians are doing. They get credit for mouthing pious generalities about energy independence. They have no intention of doing anything in that direction because that would mean they might have to share the pain of the public reaction to the measures that would be required.

  2. Bithead says:

    If so many different high ranking leaders all agree how come nothing is done?

    1: NIBMY.
    2: Owl Gore and such.
    3: Even assuming we had more crude, where to REFINE it? We have a serious lack of refining capacity… and for the reasons for THAT, see points one and two.

  3. Anjin-San says:

    Well we can cling to gas/internal combustion, a technology that is what, 100 years old? Or we can hire a President who does not jump when the oil companies holler, and look towards the future.

    Interesting to note that Bush is twisting the arms of the government to pass an oil giveaway into law. But of course the war is not about oil…

  4. Garth says:

    “Peak Oil” generally refers to the decline in global, (as opposed to US), oil production. Depending on who you ask, world oil production has a). already peaked and we missed it, b). will peak in the very near future, c). will peak in the more distant future, or d). will never peak due to the constant production of new oil by deep subterranean microorganisms.
    What everyone agrees on, except possibly the members of the “d” camp, is that declining world oil production will drive up the cost of oil and cause a host of problems for the US. At least partly because we consume far more than our fair share of the pie.
    What seems to get missed in the story is the fact that due to supply/demand driving the cost of oil up, alternative fuels and other strategies to reduce consumption will begin to look much more attractive. Several technologies are on the cusp of becoming cost-competitive: hybrids, clean diesel, solar, wind power, composite materials and fuel cells to name a few. Nuclear power seems to be an awakening giant. We are also likely to see significant improvements in the energy efficiency of motors, lights, refrigeration and other electrical equipment.
    It seems quite likely that long before the last barrel of oil is discovered and pumped, our consumption of oil will have plummeted.
    Crisis = Danger + Opportunity

  5. Rick DeMent says:

    The reason why it is expensive is that right now all other options are at least as costly as continuing to import oil from other parts of the world.

    Well as long as you don’t bother to figure in the subsidies, tax breaks, and other giveaways into the equation. Also if you figure in the cost of our military that is required to protect the flow of oil then you get a different number. And how about other externalities that never show up in the price of oil, like the increase in particulate matter that increases respiratory and other health problems? All that stuff adds up, not to mention that every day we go without any efforts to transition our economy to lower energy inputs is simply another addition to the costs down the road. What people don’t seem to understand in that there is an energy cost to the transition and the longer we wait, the higher that cost will be.

    This point is often lost on people who advocate switching to alternatives and they argue as if these costs are either don’t exist or they are negligible.

    No one with listening to says anything like thing, everyone I know knowledgeable on the subject says that the costs right now are enormous both in terms of $$$ and energy.

    Even the argument in for more research is suspect since there is already quite a bit of incentive to find an alternative.

    Not for the oil companies who look at profits by quarter hell no. As the price of oil goes up they will be profitable for then next century no matter how high the price goes. It’s the rest of us that will be sucking wind. There is no incentive for anyone under 40 to even give a rats ass.

  6. Tlaloc says:

    The way to think of it, and it is surprisingly simple, is that if it were cheaper to switch to alternative sources of energy we’d have done it already.

    Sounds like someone is unfamiliar with the concept of lobbying. There’s about a million things we do here that we could do far cheaper but don’t in large part because somebody makes a lot of money playing the system.

    Oil is certainly one of those things. Healthcare another. Transportation in general is another.

    This point is often lost on people who advocate switching to alternatives and they argue as if these costs are either don’t exist or they are neglible.

    You can build a house that costs no more than a usual house and yet uses little to no electricity and water from utilities. Look up “earthships” as an example. All it requires is the choice to do so. Imagine if half the US switched their domestic energy use to solar collected right on site. The energy savings would be enormous. The costs WOULD in fact be trivial.

    So what stands in the way? Inertia. Ignorance. Conformity.

  7. Tlaloc says:

    or d). will never peak due to the constant production of new oil by deep subterranean microorganisms.

    That theory is pretty much a joke. Nobody credible gives it any lip service.

  8. Tlaloc says:

    What seems to get missed in the story is the fact that due to supply/demand driving the cost of oil up, alternative fuels and other strategies to reduce consumption will begin to look much more attractive.

    This is the danger of applying basic economics to real world situations. Yes alternative sources will look attractive until you figure in the trillions of dollars of oil only infrastructure we have in place.

    Replacing all the cars alone will cost trillions of dollars (in 1995 we had 136 million cars, 4 million motorcycles, 700 thousand buses, 65 million trucks- even if we could rfeplace all of those at $10k a pop you are talking $2 trillion)
    http://www.fhwa.dot.gov/ohim/1996/in3.pdf

    By the time we’re far enough down the Hubert peak for people to really pay attention we’re not going to have a hundred years to change everything gradually. We won’t have the trillions of dollars available to change it fast because the oil we need will keep inching up and up. This is the classic boiling frog scenario where you slowly increase the temperature. What happens when it stops being cost effective to ship food stuffs from our centralized farming to our extended populations?

    And that makes no mention of the social instability (both national and international) that will erupt when it becomes clear that the days of cheap energy are over. There will undoubtedly be resource wars to control the remaining oil fields in the name of national security. Iraq could be thought of as an opening gambit (a particularly unsuccessful one).

    And if we couple a trend up in energy prices with global warming climate changes you get all kinds of fun interactions for a populous that has designed their architecture on the notion that energy will always be available to heat and to cool.

  9. Bithead says:

    That theory is pretty much a joke. Nobody credible gives it any lip service.

    I seem to recall similar things being said on other topics.

    Leeches, anyone?

    Ya know Tlaloc, for someone who screamed about staying with 100 year old technology, you seem pretty willing to sit with YOUR 100 year old technology, and unwilling to climb on board the new bandwagon. Very selective, huh?

    Or just obvious in your bias?

  10. Steve Verdon says:

    Garth,

    At least partly because we consume far more than our fair share of the pie.

    That is not really relevant, it doesn’t matter who consumes the pie, but merely that the pie is being consumed.

    As for the rest of your post, I largely agree. Rising prices make the alternatives look better and the higher profits make people interested in looking for alternatives to try and cash in on those profits via competition.

    Rick,

    Yes, I know all those wonderful subsidies, but at the same time there are policies that do things like increase the price. Taxes directly on gasoline work exactly the opposite as subsidies. Boutique blends restrict competition and increase prices. While refinery capacity has increased, the number of refiners hasn’t–i.e. ologopolies tend ot lead to higher prices. So, unless you have some pretty impressive evidence that these subsidies and such are greater than the above effects I’m not going to agree to your point here. You might be right, but I’ve seen the “but the subsidies, you forgot the subsidies” argument many times with little or no evidence suggesting that such subsidies are larger than the above effects I noted.

    Tlaloc,

    Sounds like someone is unfamiliar with the concept of lobbying. There’s about a million things we do here that we could do far cheaper but don’t in large part because somebody makes a lot of money playing the system.

    You can’t do oil here as we have reached out peak in terms of production. Energy intensiveness is already underway. Check it out, gasoline makes up smaller and smaller portions of the household budget.

    This is the danger of applying basic economics to real world situations. Yes alternative sources will look attractive until you figure in the trillions of dollars of oil only infrastructure we have in place.

    Yes, large priced capital items will delay the switch, but it doesn’t mean that the switch will never happen.

    Sorry Tlaloc, your views are just plain wrong. Eventually other sources of energy will come into play. Nuclear, solar, wind, and others will gain in popularity as the price of fossil fuels continues to rise, and the technology for the alternatives improves.

    You can build a house that costs no more than a usual house and yet uses little to no electricity and water from utilities. Look up “earthships” as an example. All it requires is the choice to do so. Imagine if half the US switched their domestic energy use to solar collected right on site. The energy savings would be enormous. The costs WOULD in fact be trivial.

    Again, if this were the case, then we’d see more solar panels on people’s houses. The technology just isn’t there. You know, one of these days I’ll go out at 9 AM and photograph our solar powered fountain as it burbbles away. I’ll photograph it at noon with its moderately high fountain, and then again at 7 PM as it is perfectly placid.

    We are supposedly doing something like this in CA by the way, and it actually was due to the powerful green lobby and the solar industry in this state. So yoru “lobby theory” just doesn’t do much for me.

  11. Anjin-San says:

    Bit,

    Actually, it was I, not Taloc, who mentioned 100 year old technology. But Taloc’s post had some pretty long sentences in it, so I can see why you might have been confused. Why not just kick back, tune in to Rush, and let him tell you what you think?

  12. Michael says:

    And that makes no mention of the social instability (both national and international) that will erupt when it becomes clear that the days of cheap energy are over. There will undoubtedly be resource wars to control the remaining oil fields in the name of national security. Iraq could be thought of as an opening gambit (a particularly unsuccessful one).

    Which is exactly why it makes strategic sense for us to exclusively use foreign oil as long as possible. It makes sense to consume now what you may not have access to in the future, rather than consuming now what we will likely still have access to in the future (ANWR).

    I know this is an odd analogy, but it’s the best I can think of at the moment:

    Alice likes Chocolate ice cream the most, Vanilla is her second favorite, and she doesn’t like Strawberry.

    Bob likes Strawberry the most, Vanilla second, and does not like Chocolate.

    Given a quart of Neapolitan ice cream to split, if Bob wants to get the most ice cream (that he likes) that he can get without conflict, he should eat exclusively Vanilla while it exists.

    Worst case scenario, Alice does the same, and they evenly split the Vanilla, then each consume all of their favorite, and each gets 50% of the quart. However, if Alice indulges in her favorite first, Bob will have consumed all of the Vanilla while she consumed all of the Chocolate, leaving only Strawberry. Since Alice doesn’t like strawberry, Bob can consume it without conflict. That gives Bob 66% or the ice cream without having to fight over it.

  13. Bithead says:

    Actually, it was I, not Taloc, who mentioned 100 year old technology.

    I stand corrected, Anji. Your ideology is so alike, it’s hard to tell you apart.

    But Taloc’s post had some pretty long sentences in it, so I can see why you might have been confused. Why not just kick back, tune in to Rush, and let him tell you what you think?

    Nah, I prefer to tell HIM what to think.

    It’s interesting; The very same folks who have been telling us we’ve passed this mythical ‘peak oil” are also the ones who… to a man… have been preventing us from drilling for it domestically. An excellent example of the self fulfilling political prophecy.

    It’s apparently easier to deal in insult than to actually think, which you would have to do to answer the question posed.

  14. Michael says:

    The very same folks who have been telling us we’ve passed this mythical ‘peak oil” are also the ones who… to a man… have been preventing us from drilling for it domestically. An excellent example of the self fulfilling political prophecy.

    Maybe it’s just me, but I don’t see anything wrong with their position. The US oil reserves are not large enough, even fully developed, to make much difference as to when we reach (global) peak oil. The argument against native drilling was never that there is enough foreign oil, it was that native oil wasn’t a solution to the problem.

    Oil dependency is like a ship taking on water. Sure bailing out cup fulls at a time will slow the sinking for maybe a couple minutes, but it won’t make much difference besides leaving you too tired to swim.

  15. Rick DeMent says:

    That is not really relevant, it doesn’t matter who consumes the pie, but merely that the pie is being consumed.

    Only if we can maintain the current % of the pies flow to us. If we see a decrease in the overall pie to us and other nations are getting it instead then we lose.

    Yes, large priced capital items will delay the switch, but it doesn’t mean that the switch will never happen.

    The question is will it happen fast enough to sustain our current level of industrialization and avoid a complete collapse. So far there is no evidence beyond the economic text books that assume all you have to do is show up at a window with cash to get more oil to suggest that it will.

    Every dollar created represents wealth that cheap energy in general and cheap oil in particular has produced. The higher the energy costs go the lower productivity. Try to deliver goods at wal-mart prices without cheap transportation fuels. every thing we consume in this economy, every business process, every single thing we create is dependent on cheap oil. when oil is no longer cheap we will be limited to the wealth that can be sustained by what little energy is available and on a per capita basis it will be a tenth of what it is now.

    Sorry Tlaloc, your views are just plain wrong. Eventually other sources of energy will come into play. Nuclear, solar, wind, and others will gain in popularity as the price of fossil fuels continues to rise, and the technology for the alternatives improves.

    Steve it’s your who are way off the mark. The only way this can be right is if the other technologies can create the same amount of energy for roughly the same price. I have seen no math that even begins to explain where the energy will come from to even sustain our current world wide levels of consumption let alone offer opportunities for growth. I wold love someone to give me a hint beyond vague exaltations of “the market will proved” to explain where the replacement energy is coming from.

    Even if we embarked on an Apollo like program to build as many nuclear plants as we can we will fall far short of sustaining current demand at current prices. You have no concept of what you are blithely saying here, you have no ability to comprehend the amount of energy provided by the 22 million barrels of oil per day we consume. Sure the change will take place, the discussion is will it will take place before the global economy collapses and millions of people die.

    The reason they aren’t building any more refineries is because by the time new capacity comes on line the amount of crude that is available will be lower and the grade of crude will be of a lower quality rendering many refineries useless without a major overhaul. Anyone who buys the whole “Boutique blends restrict competition and increase prices” line simply doesn’t know what they are talking about. it’s useless to argue. Refineries have to be built to sue different grades of crude, It ain’t all light sweet crude, more and more is heavier and that will start to become more common. Deeper drilling for lower yields, more oil infrastructure costs for less yield, the amount of energy that will need to be replace is literally beyond comprehension.

  16. Christopher says:

    Steve,

    I hate to tell you this, but Richard Nixon is dead (keep up!). And you call Carer and Clinton “hopeful” leaders? What r u smokin?!?

    The US has gobs and gobs of oil. Liberals keep us from getting at it. Case closed.

  17. Michael says:

    The US has gobs and gobs of oil.

    Now don’t get all technical on us Christopher, I can’t calculate “gobs” to “gallons” in my head you know. By the way, how many “gobs” of native oil would we need to produce daily in order to sustain our current energy demands?

  18. Bithead says:

    Maybe it’s just me, but I don’t see anything wrong with their position. The US oil reserves are not large enough, even fully developed, to make much difference as to when we reach (global) peak oil. The argument against native drilling was never that there is enough foreign oil, it was that native oil wasn’t a solution to the problem.

    I don’t think that’s correct, but let’s go with it, just for laughs, for a moment.

    If that is really the objection, then why do we prevent speculators from trying to find some? If we end up with dry holes, that’s not going to be much of an environmental threat, now, is it?

  19. Michael says:

    If that is really the objection, then why do we prevent speculators from trying to find some? If we end up with dry holes, that’s not going to be much of an environmental threat, now, is it?

    Um, these aren’t small holes dug by one guy with a pickup truck you know.

    This is kind of like saying you should allow your doctor to perform exploratory surgery looking for cancer, and if he finds none, well they you’re no worse off right?