Peak Oil…Again

I just found James Hamilton’s weblog. I should have looked for it earlier as I have his excellent text book, Time Series Analysis which is an very good text for time series analysis (although the notation is pretty dense in places so don’t buy it as an introductory text). Anyhow, in this post Prof. Hamilton has a very nice response to much of the peak oil commentary that has been going on. The gist of the post is in the following,

Suppose you told me that, as a result of a careful examination of oil reservoirs, you were certain that annual oil production was just about to plummet, and would be 30% below its current level in two years. I realize that’s a more extreme example than anybody is advocating, but perhaps you’ll bear with me in examining its implications for a few minutes before turning to a more subtle scenario.

Let’s see if we can first agree on how society ought to respond to these facts that you would be giving us. I would say that the first thing we should do is curtail current oil consumption drastically. Oil is going to be an incredibly valuable commodity in two more years, and we’ve got to stop wasting it now. By leaving more of the oil in the ground now, we could stretch out the time available to us for developing alternative sources from oil sands and coal and to make radical changes in our transportation systems. And we would need to start immediately making huge investments in those alternatives.

Now let’s consider what would happen if the government doesn’t make any policy response. Oil is going to become extremely valuable under this scenario in a very short period of time. Let’s say for discussion we’re talking about $200 a barrel two years hence. Then I would like to make the observation that, if the facts were indeed as we just conjectured, oil surely could not continue to sell for $60 a barrel today. Anybody who pumps a barrel out of a reservoir today to sell at $60 could make three times as much money if they just left it in the ground another two years before pumping it out. The same is true for anybody with above-ground storage facilities– they’re throwing away money, and lots of it, for every barrel they sell at $60 that they could have instead stored for two years and sold for $200. If oil producers did respond to these very strong incentives by holding back oil from today’s market, the effect would be to drive today’s price up. This profit-seeking wouldn’t drive the price all the way up to $200, because you have significant interest, storage, and idle capacity expenses from trying to wait around a couple of years before getting your profit. An economist would expect the end result of this profit-seeking to be that the price today is lower than what it will be in two years by an amount that reflects these interest and other expenses, but certainly far less than the difference between $60 and $200 a barrel.

Suppose, again for sake of discussion, that the outcome of this profit-seeking behavior by oil sellers was to drive the price of oil to $180 a barrel today, (that is, supposing that $180 plus two years worth of forgone interest equals $200). What effects would that have? For one thing, it would be a very powerful and effective incentive to force today’s users of oil to reduce their consumption immediately. It would likewise be a very powerful incentive for investing heavily in oil sands and alternative technologies. And, of course, it would leave us more oil in the future to keep the economy going as we make the needed transitions. In other words, the consequence of oil producers trying to sell their oil for the highest price would be to help move society immediately and powerfully in the direction that we earlier determined it ought to move in anticipation of what is going to happen in the future.

I know that many physical scientists feel that economists have a misguided, mystical faith that “markets will always solve everything.” Though I understand how outsiders might get this impression, I would guess that more than half of the published research in economics has to do with how the market can misallocate resources rather than how it always does a perfect job. But one thing in which most economists do place a great deal of faith is the powerful forces that are unleashed, for good or ill, by people’s efforts to make themselves richer. The argument I’m making here is not an abstract, mystical claim about the market, but rather a very specific claim about the particular matter of interest. The claim is that profit-seeking works strongly in this instance to make the oil price rise now rather than wait until production actually declines, and that this force further works to produce the kind of changes that society needs to make now in order to prepare for the coming production decline.

So, if you thought you were right about the physical scenario, and yet saw oil selling today for $60, how could you explain the situation to an economist, who says that, if you’re right, oil should be selling for $180? One thing you might argue is that, in some of the oil producing countries, the rulers have a precarious hold on power, so they just want to pump all the oil they can right now rather than wait a few years, even if the extra profits from waiting might be enormous. That’s a good argument to make to economists, one we can understand and listen to. But, we would respond, what about private oil companies operating in market economies? Why would they throw away enormous profits?

Here I have heard some conspiracy- or incompetence-based arguments that frankly are difficult for an economist to follow. But rather than get into those, let me just observe that, even if every single oil producing government and every single oil company in the world had no desire or is too stupid to reap the huge profits that, under the scenario we’re discussing, could be theirs for the taking, that still wouldn’t be enough to account for the current price structure. The reason, as I’ve explained here and here, is that you don’t need to control a single barrel of oil in order to profit quite handsomely, if what we’ve conjectured so far were true. If today’s price is $60 and in two years oil will sell for $200, anybody with any money to invest could profit enormously by purchasing oil futures or options. And we don’t see $200 oil, not in spot prices, not in options, not in futures.

Prof. Hamilton goes on to also discuss the n-year scenario where the drop in oil production he is talking about occurs n-years in the future. He notes that we should see an increase in the price of oil as the date of the peak draws closer and closer. Further, that as the price rises in increases the incentives to look for alternatives. I’ve blogged about this before and have been meet with obstinate refusal to believe this. There seems to be some sort of complete refusal to think that people want to get rich. Which is exactly what we are talking about. The increasing incentives are basically the opportunity to get rich. Imagine the price of gasoline is $120/barrel and you come up with a way to get 200 mpg with a revolutionary hybrid engine. You’d probably become very, very rich…or at least the company you worked for would stand to make lots and lots of money for their shareholders. But the people who don’t think that the market has any chance of finding a solution think that corporations and the people investing in them, working for them and the scientist they employ are all stupid and will not look for opportunities to make lots and lots of money. Basically people will pass by a ginormous pile of cash and not give it a second thought. Why this is, I don’t know.

In this post here Prof. Hamilton makes another point similar, I think, to one I’ve made before. That if we are uncertain about the future production of oil, then we should be equally uncertain about using government to look for a solution.

I would perhaps express it not so much as “markets are not a very good predictor” as “nobody’s a very good predictor.” It’s very hard to know for sure exactly when the peak is coming, for precisely the reasons that Robert gives.

But any such statement invites us to look at the underlying policy question…. I don’t see uncertainty about the world as something that would give us a good reason to prefer government intervention over market solutions; if the market is uncertain, then so should you be about what the best government policy would be.

In fact, the more uncertainty we have about these matters, the more I am inclined to turn to markets to assimilate that information for us. After watching the sausage-creation of the current energy bill before Congress, I have relatively little faith that Washington is going to figure out for us exactly which technologies are most promising. But the entrepreneur who brings a workable hybrid vehicle to the market will make himself or herself quite rich. The lure of earning such profits is, in my mind, a much more powerful and effective incentive than anything that the world’s leaders are likely to dream up and try to lead us to on their own.

This doesn’t mean there is no government based policy response, but we should be at least hesitant to run immediately to the government and beg for some sort of policy. Chances are that policy will be ham-fisted and will probably do more harm than good. I’m sure many readers will recall the price controls of the 1970’s (and no, I’m not saying that will happen again, but pointing to how government can really much things up).

So, to all those who think peak oil is a looming catastrophe for sure, why are the above arguments invalid?

FILED UNDER: Economics and Business, US Politics
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. Markah says:

    The markets cannot force things to happen that are beyond our means. As a silly example: the first person to find a cure for cancer will be rich, so why haven’t they done it already?

    Similary, what if scientists cannot develop a 200mpg hybrid in time to stop the economy from slowing as oil prices rise?

  2. Markah,

    Energy companies — and the government — are already looking for ways to mass produce hydrogen in an economical way. GM has a functioning prototype car that runs uninterrupted for 450 miles on a tank of liquid hydrogen.

    You’re hanging your hat on the fact that we can’t answer every question right now. We will in time and the human mind will be our guide.

  3. Albert Lawrence says:

    James Hamilton in the Wall Street Journal:

    “In so saying, let me be clear that I distance myself from those who might claim that there is nothing to worry about and markets will solve everything. I think there is plenty to worry about, and markets may or may not solve the problems. But what I am saying is that I see private incentives as our best hope.”

  4. Douglas says:

    I think it is doubtful that a barrel will reach two hundred dollars. Before that time there is no economy left! Worldwide many (poorer) countries will have abandonned much of their international trade before such a price hike. Since many (western) countries depend on the import/export system (with poorer countries as well) the whole thing will collapse because the (financial) system is based on eternal economic growth and we will see a huge shrinking instead. Basically we are f…ed!

  5. odograph says:

    for all our progress … hydrogen fuel cell cars have about the range they did 30 years ago. true experts in the field tell us we should expect to wait “several” more decades, and that success is not sure even then.

    i think this is indeed a case where people might instintively “trust” the market, when the “engineering” is harder than mere trust.

    for what it’s worth, i think we do have options. the things to trust are those that have already been deployed and work in the real world. don’t must trust press releases, or the self-serving predictions of technology proponents. they are, of course, “selling” their technology strategy … in place of true products.

    (if all else fails, we know electric cars work. they don’t compete with cheap gas … but we are talking about what to do when gas gets truly expensive.)

    back to market signals and peak oil … we only have to wait a little while to see if current prices are “signal” or “noise” …

  6. Markah says:

    You’re hanging your hat on the fact that we can’t answer every question right now. We will in time and the human mind will be our guide.

    You are making the classic “technology will save us” argument.

    I agree it is possible that technology will save us, but it is also possible that it will not. The odds would be more in our favor if we start some gov’t incentives now.

  7. Herb says:

    Being just an ordinary citizen and a consumer of gasoline for the few automobile trips I can afford to make, and, trying my best to live on a fixed income, this entire oil price situation is nothing more than one big ripoff to the public. Over the past few years, I have heard so many excuses for increasing the price of gasoline that even I am confused as to who or what is truthful.
    What I do see though, is that every time the price of gasoline goes up, the oil companies post a very large increase in their quarterly profits.
    It is indeed strange that we base the price of gasoline on the “futures market” that has more than its fair share of gamblers”(speculators) that are driving the price of oil skyward while the ordinary guy gets it stuck to him and the oil companies enjoy oil prices much lower that the speculated price of the futures market.

    As for alternative fuels, WOW, we have been working on this source for twenty five years and we are no closer to solving this problem than we were twenty five years ago.

    And, what about the formula for synthetic oil that Nazi Germany ran the war on for about two years, whatever happened to that???

    No, for me, I see this entire oil price thing as just one more ripoff by the gamblers and suppliers condoned and promoted by the government who willing accept large “campaign dollars” from the oil companies.

    And “The oil companies get richer”
    And the poor get poorer

  8. odograph says:

    herb, the nazi synthetic oil was made from coal. we could do that again. the south africans did it during their embargo. the “risks” are the degree to which the process needs water and natual gas, and the degree to which carbon dioxide can be captured. from a global warming perspective, coal to oil, and burning oil, is some fraction “worse” than just burning oil (while it lasts).

    there is also the factor that coal-to-oil plants cost billions and take years to construct. we are back to the discussion of how much preparation is needed, and how quicly high prices will arrive.

    being conservative, i think coal-to-oil will work to power big trucks and heavy equipment, and consumers will be driving electric cars … unless the big-government hydrogen boondoggle has an unlikely success.

  9. odograph says:

    btw, oil from tar sands present a very similar situation. they also require lots of water, generate lots of pollutants (traditional types as well as CO2), cost billions for plant costs & etc.

    that’s not to say we won’t use them … but it is silly to think they represent a continuation of “cheap oil.”

  10. TJIT says:

    Markah,

    You said

    “I agree it is possible that technology will save us, but it is also possible that it will not. The odds would be more in our favor if we start some gov’t incentives now.”

    1. That assumes a bunch of pork shoveling politicans (see the energy bill for a good example of this) would actually fund useful research and not pork.

    2. If the government uses incentives to advance the wrong technology we will be in much worse shape then if the government did nothing at all.

  11. bruce says:

    As to why we are not seeing $180/ barrel prices now:

    That is contrary to the law of supply and demand. If you hold your oil, it will make prices rise and someone will have incentive to sell. Witness $60/ barrel oil. Does anybody remember the price 2 years ago? Oil doesn’t get significantly more expensive to get out of the ground until you are down to a significantly lower level than half so production costs haven’t changed so much as to more than double the cost of oil.

    Also, $200 barrel oil has a far more limited consumer base than $60. Also, the oil majors work in close conjunction with governments and there is a large political dimention to energy.

  12. RJN says:

    I can not imagine governments allowing the economic conditions of Prof. Hamilton’s example to play out. Governments will take action; they always do. We will have invasions of oil producing nations proportional to their vulnerability, their quantity of oil and their locations.

    I can’t be wrong about this. China is presently inching its way into Venezuela, and we won’t let them seize that oil. China will certainly make a large move west through Afghanistan into the Mideastern oil fields. Europe can still assemble a formidable force to acquire the oil it must have. Japan may very well aid China, and India will act in its interests.

  13. odograph says:

    … but TJIT, the government IS using incentives to advance the wrong technologies. They are pushing hydrogen as a much shorter-term solution than it ever can be, and they (by subsidizing oil/gas) are hastening depletion. And then there is the whole ethanol thing … and the Enron-style energy scams.

    The question, for the pragmatic among us, is which is more possible in the real world … to redirect those government efforts toward more practical projects, or to actually get them to stop pretending and back off?

    I’d say that we’ve currently got a lot of dysfunction in “energy policy” … and that dysfunction will probably stay there until the next “emergency” energizes the public mind. At that point the public will probably “demand action” …

    I’d rather see that inevitable “action” be real, rather than more of the same.

  14. Steve Verdon says:

    Well so far I don’t think anybody has answered the question. Oh and Bruce, you are quite wrong about the laws of supply and demand and Prof. Hamilton is quite right.

    Markah,

    The markets cannot force things to happen that are beyond our means. As a silly example: the first person to find a cure for cancer will be rich, so why haven’t they done it already?

    No, not a silly example, but a blindingly stupid analogy. Nobody is arguing for a cure/solution right now, but that increasing prices will provide an increasing incentive to find the answer.

    Similary, what if scientists cannot develop a 200mpg hybrid in time to stop the economy from slowing as oil prices rise?

    Then that would be bad if that was the only possible solution. And if no solution at all is found, that would be bad too.

    By the way, I assume you are buying up oil futures as fast as you can, right?

    Albert,

    “In so saying, let me be clear that I distance myself from those who might claim that there is nothing to worry about and markets will solve everything. I think there is plenty to worry about, and markets may or may not solve the problems. But what I am saying is that I see private incentives as our best hope.”

    Nice selective quoting there buddy. Why don’t you post up the final comment from Hamilton where he believes that the best hope lies in private incentives (i.e., the market) and not much in public incentives (i.e. government)? Probably because that wouldn’t support the position you like?

    I can not imagine governments allowing the economic conditions of Prof. Hamilton’s example to play out.

    I think you are right to some degree here. That governments will try to prevent this will increase the likelihood of catastrophe, not reduce it. I see the biggest problem to peak oil being government.

    The question, for the pragmatic among us, is which is more possible in the real world … to redirect those government efforts toward more practical projects, or to actually get them to stop pretending and back off?

    I’d say that we’ve currently got a lot of dysfunction in “energy policy” … and that dysfunction will probably stay there until the next “emergency” energizes the public mind. At that point the public will probably “demand action” …

    Funny, I think you’ve nailed it as to the current problem, but fail to see the very real possibility that the current problem is due to government activity. We live in a democracy and hence the politicians and policy makers are going to be vulnerable to lobbying groups and special interests. You don’t seem to be willing to consider the claim that it isn’t possible to make government work well.

  15. odograph says:

    i think you underestimate my cynicism. i don’t think i’d take any bet on government working “well.”

    the pragmatic question is which path leads more quickly and easily to it working “less badly.”

  16. odograph says:

    oh, i don’t think we should skip the bit about the public “demanding action.” that’s what they do, and what politicians (of all strips) cater to.

  17. TJIT says:

    Bruce,

    You said a couple of things
    “Oil doesn’t get significantly more expensive to get out of the ground until you are down to a significantly lower level than half” Actually it depends on the reservoir, and I would not feel comfortable making a blanket argument like that.

    “so production costs haven’t changed so much as to more than double the cost of oil.” You completely ignore the other half of the equation demand. I think production has gone up but consumption related to growth in China, India and other countries has exceeded the growth in production which leads to higher prices.

  18. Alan says:

    > what about private oil companies operating
    > in market economies?

    It seems unlikely to me that the CEO of a private oil company could convince his shareholders to take a 50-75% cut in current revenue based on the possibility that the oil might be sold for more in future years. Plus, what’s in it for the CEO? Will he get paid more if he makes short term revenue drop? Why would he even propose such a thing?

    Investing for future income is one thing, but foregoing current income for the possibility of future income is not something most businesses are willing to do.

  19. TJIT says:

    Odograph,

    The simple solution is not to get the government involved. The energy bill was a pork bloated disaster that everybody would be better off without. At least they did not do anything terribly stupid with taxes or regulations to harm the search for new oil and gas.

    Oil companies try and maintain a balanced portfolio of drillable prospects. When oil prices go up they will generally spend at least a portion of that money to do more exploration and development. When the price of oil started going up this time the oil companies tended to use it to pay down debt, or take other actions to improve the balance sheet. There was not a lot of new drilling started right away.

    I think drilling was delayed for three reasons. 1. Most oil companies did not believe the oil price would stay up as long as it has. 2. Many oil companies had been badly burned by the two boom bust cycles that occured in the 90’s and they did not want to experience those problems again. 3. There had previoulsy been a substantial amount of consolidation in the oil business. A mergers first result is to stop most new drilling and exploration activity. This occurs because they have to build new exploration teams from the explorationists in both companies. And since they are combining two prospect portfolios they have to look at the unified portfolio and re rank their drilling priorities

    Drilling is taking off leading to a shortage of available rigs. The price companies are paying to contract drilling rigs have reached record highs. Only time will tell if prices are going to stay this high.

  20. odograph says:

    simple to say “not to get the government involved” maybe … pretty outlandish to achieve.

    my core philosophy probably isn’t so far out of tune with this audience, i just look at building a strategy with the timber we’ve got. our timber is obviously crooked. on a dollar basis, we are trusting industry (the government is active in a small fraction of energy transactions), but at the same time, the government spins its stories of programs and solutions. those programs (surprise) are the ones most lobbied-for by industry.

    it would be one thing if the government both got out of those pork-projects, and told people “you’re on your own.”

    instead, the government helps everyone pretend in a strange contradiction – that we’re not running out of oil, but we are spending billions of dollars to achieve replacements.

    fwiw, i think we are getting much closer to “permanently tight” oil supplies, and that this massive game of “lets pretend” sponsored by industry and government only delays the reckoning.

  21. odograph says:

    by the way, if you believe as i do, that oil will become “permanently tight” then it becomes a much more difficult question – how soon should we use up the last of our domestic supplies?

    do you drill ANWAR (etc.) before or after people give up their Hummers?

  22. Jack Crapse says:

    Actually we already have a model for what will happen. The same thing that happened when oil peaked in the US in 1973. Long lines, high prices and the economy will erode. This time it will get a lot worse because there is no Iran or Saudi Arabia to run to for oil. Most don’t even remember the OPEC embargo and how quick we had to come to terms. No, I’m not buying oil futures for $200 but I’m sure buying the heck out of Iraq Dinar.

  23. Steve Verdon says:

    Investing for future income is one thing, but foregoing current income for the possibility of future income is not something most businesses are willing to do.

    Foregoing current income for future income is precisely what investing is. So CEO’s doing this is not not out of the question, but expected of them to varying degrees. Next.

    Actually we already have a model for what will happen. The same thing that happened when oil peaked in the US in 1973.

    Well only if the politicians make the same mistake the politicians did back in 1973. Those lines weren’t the result of a decrease in the supply of oil due to the actions of a cartel, but a direct response to the price controls that were put in place. Prices are a rationing mechanism and they ration without lines save for when politicians set the price by fiat below the market clearing price.

    This sure is turning into a elementary economics course. Anybody care to actually answer the question? Why wont the rising price as we draw closer to the peak be a strong incentive to look for an alternative to oil/gasoline? I’m still waiting and so far not one person has answered the question. I’m begining to think that nobody can answer that question.

  24. Since Nature is Taking It’s Own Sweet Time

    Changing World Technologies, Inc. They make oil. They make oil from garbage, old tires, anything that can be cooked into oil. The process is thermal depolymerization, and their facility with ConAgra Foods is producing 200 barrels a day. They have…

  25. Jack Crapse says:

    This sure is turning into a elementary economics course. Anybody care to actually answer the question? Why wont the rising price as we draw closer to the peak be a strong incentive to look for an alternative to oil/gasoline? I’m still waiting and so far not one person has answered the question. I’m begining to think that nobody can answer that question.

    Rather obvious, people do not like change and will only change when forced. A majority of the public does not believe there is a shortage of energy but only price gouging. The public has been led to believe that there is a abundent supply of cheap energy that will be available when the price can be exploited. There is no cheap alternative and most ventures will be unsucessful. The only real alternative to cheap energy at the moment is nuclear and that is political uncorrect. There is too much misinformation, energy science and education is lacking, and decisions are made for political purposes.

  26. kaz says:

    The argument is pointless.
    Production of oil will peak in the next 1-20 years (within most peoples lifetimes)
    Technology can not make more oil but extract what is already there.
    Most big fields have the latest hi tech equipment except Iraq.
    No new big fields discovered since the 60’s
    The oil age will be over soon and there is currently no viable economic altenative which can be implmeted for widespread use.
    So our whole future as a energy consumeing population is now resting on someone coming up with it an implementing a solution in the next few years.
    It is possible but is it likely. What adds would you give it. 2-1 100-1 1000-1 ?

  27. Steve Verdon says:

    Rather obvious, people do not like change and will only change when forced. A majority of the public does not believe there is a shortage of energy but only price gouging.

    For this to be true, it must mean that investors and CEO’s are myopic and irrational as well. In other words, people who are told point-blank that the oil will run out disbelieve it. I’m sorry, this is just too much.

    The public has been led to believe that there is a abundent supply of cheap energy that will be available when the price can be exploited. There is no cheap alternative and most ventures will be unsucessful.

    Sure, there currently are no alternatives, but this isn’t the issue now is it? The question is will an increasing price of oil create an increasing incentive to find an alternative?

    So our whole future as a energy consumeing population is now resting on someone coming up with it an implementing a solution in the next few years.
    It is possible but is it likely. What adds would you give it. 2-1 100-1 1000-1 ?

    And as I have pointed out, we haven’t gone through a complete depletion cycle for anything yet. Sure this could very well be the first time, but human ingenuity always seems to come through. And I didn’t ask what are the odds but, will an increasing price of oil create an increasing incentive to find an alternative?

    I’m begining to get the feeling that the doom-n-gloomers know the answer is, “Yes”, but just can’t bring themselves to say/write it.

  28. Uncle Albert says:

    There cannot ever be a free market because money is power. Successful marketeers always use their power to distort the marketplace. Peak oil is not theoritical, but free markets are.

  29. Steve Verdon says:

    So…Uncle Albert, I presume the answer is, “Yes.”

  30. M1EK says:

    The more interesting government-related question is this:

    Can we continue the current subsidies to suburban sprawl which make the single-occupant motor vehicle the only real option for most people? Any building built today has at least a 20-year life (even the suburban crapshacks). So if oil’s going to be a lot more expensive within that timeframe, shouldn’t we at least stop subsidizing that style of development?

    Unwinding the suburban metastasis of the 20th century in this country is going to be a process which might rival the Great Depression. There’s simply no way to retrofit mass transit on the exurbs, and there’s no solution (within the realm of physics, to say nothing of economics) to allow that style of development to continue a few more decades.

  31. Relayer says:

    People and companies have already been working on the replacement for oil.

    BP bought out Amoco just before the turn of the century and in the process changed the official name from British Petroleum to Beyond Petroleum. Tell you anything?

    Amoco already owned one of the largest makers of solar cells and there are numerous other program underway. All of the majors have been looking into alternatives. They now, and have for some time, consider themselves Energy companies, not just oil companies.

    Why hasn’t a clear a cut solution appeared yet? Because there is a bit of a problem. It’s the scale of energy use that cheap oil has allowed. Oil production has been hovering around 84 million barrels per day (bpd) since last March or so.

    Let that number soak in…

    Myself, I have looked at everything I can get my eyes on for some time now. My background is the oil business, 31 years, so it helps me understand things maybe a bit easier.

    I believe we are at peak right now. The present price increase is most likely caused not so much by speculators, but by buyers jockeying for contracts.

    We have not been able to hit 85 million bpd and we have had months to do it in. The declines of production from existing fields just is not being met fast enough with additional projects coming on line. The Saudis are stuck where they are. They continue to mouth platitudes to keep a strong front up, but it seems to be without substance. Ghawar, the largest field in the world by far, seems to have hit peak. They continue to punch new holes into it, water flood, tree existing wells, etc. but they are having trouble just keeping up with the production decline from existing wells.

    Keep your BS meter finely tuned when reading anything they put out. Watch closely, this winter is likely to be the beginning of some huge problems. There is no easy solution around the corner because there is none. The huge scale of the energy usage now in place is insurmountable.

    Look at all the possible alternatives closely. Do not listen to what the politicians are saying. Do your own digging for facts and make up your own mind.

    We have a huge problem staring us in the face. We need to curtail our energy usage drastically NOW.

  32. odograph says:

    Why wont the rising price as we draw closer to the peak be a strong incentive to look for an alternative to oil/gasoline?

    Of course they’ll be a strong incentive. The interesting question is how quickly prices (and incentives) will increase, and how quicly alternatives can come on-line.

    If it takes 10 years for gas to reach $10, things will probably be fine. That’s a lot of time to switch to (improved) hybrids.

    On the other hand, if gas reaches $5 in 2 years … what are you going to do with that “incentive?”

  33. albert says:

    Steve,

    Here’s the problem layed out in economic terms: http://www.energybulletin.net/6244.html

    Important idea for you all: if “human ingenuity” is so great, why didn’t we come up with all this technology thousands of years ago? What took so long?

    Why didn’t the Easter Islanders or Myan societies “human ingeniuty”-ize their way out of _their_ respective scenarios?

    Bottom line: I’m not a believer in this flouted idea of “human ingenuity.” If anything: greed, jealousy, envy, malice, murder, hate, sexual immorality. It goes on and on at each and every level.

  34. Steve Verdon says:

    Important idea for you all: if “human ingenuity” is so great, why didn’t we come up with all this technology thousands of years ago? What took so long?

    Because oil is cheap right now. As for 1,000 years ago oil had no value. You seem to have a complete misunderstanding of economic and progress.

    Why didn’t the Easter Islanders or Myan societies “human ingeniuty”-ize their way out of their respective scenarios?

    Could it because the incentive structure was screwed up? Just a thought?

    Bottom line: I’m not a believer in this flouted idea of “human ingenuity.” If anything: greed, jealousy, envy, malice, murder, hate, sexual immorality. It goes on and on at each and every level.

    Ahhh, a misanthrope. Are you a member of the Voluntary Human Extinction Movement?

  35. Steve Verdon says:

    By the way Odograph, I think you got the answer right. They will provide an incentive, but that incentive may not be enough. But the idea of lowering the price of gasoline via some artificial means is not a good idea.

  36. Demosophist says:

    If someone attempted to hoard oil wouldn’t the hoarders, as the price goes up, be faced with something like the problem that a Rolex wearer faces in a bad neighborhood? Security would be at least as valuable as the oil, and pretty far from certain. Also, predictions about rising prices presume not only that the security problem is solved, but that the economy itself manages to bump along somehow, preserving sensible currency markets, a coherent collection of nation states, etc. Ultimately security trumps wealth (to the extent that it can’t simply be bought), and an insecure world is hardly one that’s likely to knuckle down and invent new solutions. As Bucky Fuller observed on many occasions, it’s best to have the solutions already prototyped and ready for production if you’re expecting catastrophe. Waiting for the catastrophe to motivate the solutions just won’t cut it.

    In other words, one might expect Hamilton’s scenario to work reasonably well as long as the crisis is singular and not too great, but the odds that any significant crisis would be compounded by other factors (terrorism, for instance) are pretty good.

    Humans don’t tend to think anticipatorily about problems they haven’t experienced unless, ironically, inspired by charisma.

  37. M1EK says:

    The key to remember here is that economics cannot trump physics. Many societies, when forced into transitioning from one model to another, don’t make it. Some others barely made it (Europe crashed a couple of times moving into the modern era).

    All the ingenuity in the world can’t solve the energy density problem of hydrogen. Either cars get a LOT lighter and people drive a LOT less, or we crash. The question is – when do we suck it up and do what we need to? I don’t see any evidence that the Republicans will ever be willing to face up to the fact that the SUV/suburb days are coming to a close, forever; and I hold little hope that the Democrats can do so and win an election in the process.

  38. […] Link […]

  39. Demosophist says:

    The key to remember here is that economics cannot trump physics.

    Innovation can “trump” physics in the sense that we learn to do more with less, a trend that’s been going on for quite a long time. Anyway, if everyone is so short-sighted then all you need to do to control things once the refuse hits the fan is to have something in place that mitigates the crisis somehow. Anticipate a little. If no one else does, then Bob’s your uncle.

  40. odograph says:

    I don’t think that’s a “trump” – conservation is a recognition of physics more than anything else.

  41. james says:

    We’re using four times more oil a day than we’re discovering. The end of increasing production is therefore nigh, as it were. Also, he idea that ingenuity and markets will fix this, a common misconception of economists, ignores the unique merits of fossil fuels. They contain vast amounts of stored energy, unlike anything else on the planet except perhaps uranium. It’s a one-off bequest from Mother Nature, and no amount of leveraged futures profits are going to change that. Hydrogen isn’t an energy source, either, it’s a method of transmitting energy from solar/oil/gas/wind/wave/nuclear sources. It’s no more going to save us than batteries will.

  42. Mike says:

    It isn’t just one innovation that is needed, there are a myriad of problems that we are facing.

    All forms of transportation will become more expensive, flights, trucks, ships, cruiseships, boats, cars, trucks, trains, busses… Not all of these can benefit from the same innovation.

    As travel becomes too expensive due to fuel costs, tourism will suffer and as tourism suffers what innovation will all of the tourism workers use when they are out of work? They’ll sell any assets they have, and what will that do to the market?

    As those laid-off employees are spending less and less on shoes, clothes, bikes, cars, and all other consumer goods, this, combined with higher fuels costs to ship consumer goods, will put some retailers (Walmart first!) out of business. What are all of these additional unemployed people going to do? Sell assets just to survive? What now happens to the stock market?

    Baby-boomers in various parts of the western world are starting to retire and will continue to do so just as the peak of oil is hitting us, the redemption of their retirement funds compounds the problem of the market illustrated above. Is this a way that the market will solve the peak oil problem, by failing? What kind of innovation will be put in place to fix the market?

    Devastating climate change activities will continue, especially once coal starts to be used on larger scales to replace oil, causing billions of dollars of damage, requiring enormous amounts of energy to repair… what kind of energy?
    -energy to ship replaced or repaired items
    -energy to fuel all fixing machines

    What kind of innovation will be used to fix all of the soil in the agri-business world that has been made useless by oil-based fertilizers? What agri-business methodology innovation will come about to produce as much food as is produced using current oil-based fertlizer methods? What kind of innovation will be used to continue to ship out of season fruits across thousands of miles?

    What kind of innovation will be able to replace oil-based plastic in the scale that oil-based plastic is currently used? I don’t think the market or an innovation can answer this one, considering how much plastic is around us at all times.

    Hydrogen and Nuclear, as far as innovations are concerned, are non-starters. Hydrogen requires an immense infrastructure upgrade which will require billions to trillions of dollars to implement and even more importantly will require inordinate amounts of energy to put in place. Hydrogen itself is not the source of energy to install this infrastructure, what do you think will be needed? Another innovation?

    What kind of fuel is needed to construct a nuclear power plant? What kind of fuel is needed to decommission a nuclear power plant once its lifetime has expired? What kind of fuel is needed to ship the spent uranium to places like that dug-out mountain in Nevada? Also, how soon is the uranium peak?

    I agree with you that government policy can be hit and miss, I disagree with you that the market can solve the peak oil problem. What is needed are grassroots communities that reduce their energy consumption and become as self reliant and sustainable as possible (in terms of food, water, housing, energy). Not everyone in the world is in a position to be a part of such a community.

  43. Demosophist says:

    Well, the reality is this. Innovation can probably “fix” the situation, in the sense that we’ll figure out how to adapt. If, however, we don’t engage in some sort of anticipatory design then the transition might be pretty nasty.

    I sort of marvel at the attitude of the Left that anything they view as capitalistic will necessarily be doomed, but the impulse to anticipatory adaptation is pretty new in the human experience, so don’t count on it being implemented without a hitch. The selective utopianism of the Left, which always presumes that the problem isn’t scarce resources but the appropriation of resources by the powerful, simply has no connection to reality. Malthus doesn’t predict that Godwin and Condorcet were right about their notions of the perfectability of man and man’s institutions, but that man is imperfectable and that Godwin and Condorcet were simply wrong.

    If you think that peak oil will create social and institutional disruption then the way to exert leverage is to solve the problems before they occur, and then sit around waiting for the demand for your solutions to rise. Your motivation might be economic or it might simply be the power to influence the future, but in either case it requires discipline, work, creativity and intelligence… which contrary to opinion aren’t in infinite supply.

  44. m.e. says:

    So, to all those who think peak oil is a looming catastrophe for sure, why are the above arguments invalid?

    Well, it took the Catholic Church 350 years to realize that they were wrong about Galileo Galilei. I predict we will run out of time long before we can stop Adam Smith’s congregation from believing in their wishes.

    I’m begining to get the feeling that the doom-n-gloomers know the answer is, “Yes”, but just can’t bring themselves to say/write it.

    No problem. I can say YES. By the way: Incentives are more related to passion and wishes than to physics and reality. Also, they won’t appear before you realize that there might be a problem.

    I have this strange feeling – after reading the article – that there might be a circular construction in mainstream economical beliefs. It goes like this: If there is a potential for a crises in short time then the oil price would be sky rocketing. Since the oil price is not sky rocketing there cannot be a potential crises, so don’t by oil for high prices. This might lead to sudden and unpredictable change in price – as reality sneaks into the circle.

  45. aaaaaaum says:

    The Earth has plenty of Gas Hydrates.

    Too Bad! This means more warming, growth, and human over population. How stupid?

    Search Google on:

    “Fuels Paradise”
    “Organic Carbon – Fire in Ice – Gas Hydrates”

  46. aaaaaaum says:

    Sorry that was “Fuel’s Paradise”

    http://www.wired.com/wired/archive/8.07/gold_pr.html

  47. Mac says:

    “Suppose you told me that, as a result of a careful examination of oil reservoirs, you were certain that annual oil production was just about to plummet, and would be 30% below its current level in two years.”

    Then I would have to succeed in convincing you 100%, before you took action. Clearly you do not believe the original premise, therefore you are not taking action, and therefore oil is not $200.

    (As I’m sure you appreciate, actual oil prices follow oil futures/shares/etc almost exactly.)

    Presumably however you will concede the possibility that you might be wrong when making a 3-year prediction. Then you might decide to partially invest your funds in oil, as a hedge. (Extrapolating to the whole market, some investors might believe it, and others might not.) What would we expect to happen then? We would expect the price of oil to rise steadily, as the news spreads and as people become more certain of the prediction; but not reach $200 until everyone is fully convinced. This is consistent with the fact that oil prices *have* risen steadily over the last few years, but are not yet at $200.

    Of course, I could also be wrong (we can only hope); and when that became apparent, oil prices would drop. I might decide to hedge against the possibility that I am wrong, because I would lose out if oil dropped to $40 tomorrow. So as a sensible investor, I would only invest partially in oil.

    I might even make up a rule to protect myself from getting carried away by dreams of huge profits; for example “sell when it reaches $60”. The effect would be that the market would tend to stabilise at $60, and fall back a little.

    However I will not gloat over my counter-argument. The market fluctuates according to what people believe will happen, rather than what will happen. It doesn’t somehow assign magical powers of prediction to investors. History shows that market crashes are not caused by crop failures or tsunamis, they are caused by entirely visible long term flaws in the economy, such as over-extended consumer debt – and yet the market doesn’t react “correctly” to gradually reduce the problem, it goes blindly on with business as usual.

  48. Justin Frankl says:

    So, to all those who think peak oil is a looming catastrophe for sure, why are the above arguments invalid?

    One problem I see is with the assumption that:

    Anybody who pumps a barrel out of a reservoir today to sell at $60 could make three times as much money if they just left it in the ground another two years before pumping it out. The same is true for anybody with above-ground storage facilities– they’re throwing away money, and lots of it, for every barrel they sell at $60 that they could have instead stored for two years and sold for $200.

    In this assumption lies the messianic faith of of the market to deal with all the complex results of the decision to hold back production or reserves at $60 and wait for the price to hit $180 before selling. As the overwhelming majority of the world is dependent on oil for transportation of its people and its products to power its economies, and as we are already stuggling to meet demand, if only one major producer tried this profit-taking strategy, there would be immediate and real shortages of oil worldwide.

    While many products are produced from oil (cosmetics, fertliziers, pesticides, pharmaceuticals, plastics, asphalt), the immediate effect of a shortage of oil almost invariablly is that there is not enough gasoline available for everyone. Not enough available to get people to their jobs, not enough available for the trucks to deliver the products to the stores. As witnessed in France in late 2000, when a three-day blockade of the Channel Ports resulted in a shortage of oil, the effects were felt over a wide area of Europe for weeks. Hospitals went on red alert. Schools were closed. Supermarkets rationed bread. And, not surprisingly, governmental approval ratings plummetted. In a worldwide real shortage of oil, we can expect more of the same.

    I think a major flaw in Hamilton’s argument is that when he goes from someone holding back production to the price reaching $180, he dismisses the effects of a tripling in he price as

    [being] a very powerful and effective incentive to force today’s users of oil to reduce their consumption immediately. It would likewise be a very powerful incentive for investing heavily in oil sands and alternative technologies. And, of course, it would leave us more oil in the future to keep the economy going as we make the needed transitions.

    Our economies, worldwide, are not now powered by people, and they haven’t been for about a hundred years. Our economies, and the ability of our economies to expand, are powered and enabled by cheap energy, the majority of which comes from oil. An increase from, now $65.40 for Nymex Crude, to $180 means that a lot of people and businesses no longer have either the fuel they need, or the money to spend elsewhere. That is not a “powerful and effective incentive”. It is instead a very real and almost unimaginably large blow to the worldwide economy.

    Without the available capital, without cheap energy, and with a global economic depression, from where will the ability and resources come to globally transition away from oil while we maintain our ability to feed, clothe, shelter, and maintain order among six billion people (through all the various businesses, industries, and governments)?

    It will not be at all feasible to do all of the things (feed, clothe, shelter, and manage) to the degree to which we have become accustomed. As a result many, if not most, people will not be getting what they need. On a worldwide scale.

    When large groups of people can’t easily get what they need, they tend to riot and fight for it.

    As for why the market has not yet priced oil at $180 or higher in recognition of the impending shortage and “demand destruction”, never underestimate the power of a person to delude him/herself if such delusion maintains their way of life and their lifestyle.