Saturday, December 05, 2009

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. Even Paul ("I sold my soul to become a wanker") Krugman would credit this scenario.

But we ignore econ 101. And so we get this debacle. Ethanol was bad enough when it was just inefficient to produce and wasting more energy than it created. But we actually went further and bought too much of the stuff.


(Nod to Anonyman)


Anonymous said...

You forgot to mention the best part: This was advocated and passed by a R administration and congress (although mandates were increased after Ds took over congress).

So much for Rs protecting the free market from gub'mint interference.

Anonymous said...

I agree with your point about peak oil being false.

However, isn't it also econ 101 to say that externalities may exist in the use of oil? Could it be in the social interest to start the search now for alternative fuels that could be cheaper socially (i.e. taking externalities into account)?

Anonymous said...

I am certainly not an economist, but this is a point that I have been passing around the water cooler for some time. It just seems so obvious to me that as oil resources dwindle, alternate resources become more viable. It's nice to see that my thought process is validated.

Anonymous said...

I don't think the reason we want to use ethanol has anything to do with running out of oil. Seems to me like it's about reducing dependancy on foreign oil.

Anonymous said...

If foreign sources have a comparative advantage in producing oil, why are we wanting to reduce our "dependence" on this low cost source of supply?

Chris said...

One problem with the "it's impossible to run out of oil" argument. It discounts the possibility of nationalization.

If governments took ownership of the oil supply it is highly likely that we would run out of oil.

Angus said...

Um, Chris: who do you think "owns" the oil supply of Mexico, Saudi Arabia, Iraq, and Venezuela to name a few prime examples?

Thats right, sir, the oil industry is nationalized in each of those countries (and many more).

And yet the great satan still gets its oil.

Anon 8:46, our ethanol policy has a lot more to do with domestic politics than energy policy. Fear the farmer!

Mark said...

I agree that we won't run out of oil, but that isn't what "Peak Oil" refers to. "Peak Oil" refers to the point where we reach maximum oil production. I think that we will clearly reach a point where oil production hits a peak. However, I don't think that this will present much of a problem, since the market will adjust in the three ways that you mentioned (which is something that I have believed for many years now.

soldierf said...

Yes, you are right there still is oil a plenty in the gorund still, and coal and gas. But as the 'easy oil' runs out it means the remaining oil left is harder and harder to extract, pushing prices up massively! That's when everyday items such as Food get prohibitively expensive, ie £5 for a loaf of bread! £3 a litre of petrol etc etc.... This is the point that society begions to melt down and its much closer than you think!

MikeB said...

Sir, there's a problem with "Econ 101": it's based on the fallacy of an infinite world.

There's a physicist, Albert Bartlett, who teaches this topic from the point of view of basic mathematical literacy. Watch his video, "Arithmetic, Population and Energy"

It shakes false assumptions about the whole nature of the economics or resource extraction.

Anonymous said...

Someone needs to explain to me how the Econ 101 supply/demand apparatus (regardless of good or service) is based on the assumption of an "infinite world."

Anonymous said...

I didn't watch the entire "Arithmetic, Population and Energy" series, but it seems very much like the stuff produced by systems analysts in the early 1970s. Chief among these contributors were Forester (and Forester) and Meadows in "World Dynamics," and "Limits to Growth." It's basically a bunch of exponential functions projected into the future without adequately accounting for changes in prices and the attendant responses of produces and consumers as they respond to incentives. I don't think many people take this stuff very seriously any more after the weaknesses of the work was exposed.

suradasa said...

Uhh...seems to me that you've just made an excellent case that peak oil is important. That is, once oil production peaks and it becomes more and more costly to extract it, the price goes up massively and everything become more expensive. Our economy is built on cheap oil. That already started happening before the subprime mortgage crisis destroyed everyone's economy and it will presumably come back after it recovers.

As for "1. More fuel effcient cars, better insulation on houses, etc." reducing demand, I think the "etc" needs to make a huge contribution, otherwise "2. Prices would rise" will kill us. I'm not a subscriber in the "everything's gonna be alright" school of economics. Luckily, there is a lot of work being put into alternative energy (mainly because of government action), so it may actually be ready when we need it.

Antho said...
This comment has been removed by the author.
Antho said...

Yes, as the price of oil goes up it will make alternative forms of energy more competitive, but alternative energy will only be relatively cheaper. To me it seems that overall prices still rise, meaning we will consume less stuff.

As for the argument that we will develop better alternative fuels as we are forced to and everything will work out... Well we better hope that technology has been developed by the time we need it. Just because there will be a huge financial incentive to develop more cost-effective alternative energy doesn't mean it will happen overnight.

Anonymous said...

"Luckily, there is a lot of work being put into alternative energy (mainly because of government action), so it may actually be ready when we need it."
I'm sure the people of countries who went hungry because their crops were diverted to bio-fuels may not agree. Government does not know how to invest with any discretion or efficiency--their investment strategy is essentially: blindly throw money at the flavor of the day. Alternative fuel investments have been completely inefficient. Government has essentially taken over such a large sector of the R&D, that much of the R&D is dependent upon subsidies. These are investments decided by politicians, often aimed at inefficient and idealistic projects that sound good to the voters but aren't very practical in reality. "But the consumer's know no better; they are greedy" one might say. Pure Arrogance; any real "change" on the market must come through consumers' valuations as they are demonstrated in pricing (yes, consumers ultimately determine supply and demand). Alternative fuel research is a calculative investment; and who knows how to invest better for marketable goods? Government or profit seeking entrepreneurs not dependent on gov't? (Note: Banking, Health Insurance,US Automobile industry, etc. do not fit into this category).

Anonymous 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."

There's two things wrong with this sentence: (1) The definition of peak oil is that production will hit a peak, then never reach that peak ever again. It does not mean that we'll ever run out of oil, just that flow rates will decrease. (2) There are some things we have run out of such as Dodo birds, and there are probably other things that we'll run out of in the future.

Anonymous said...

Lets say you want an apple rally badly, so much you're prepared to pay 10$ to get it. Now if you really, really needed an apple you might even pay 100$. But you would never pay an apple to get an apple.

My point is that it takes energy to get energy, exploration, production, refining and distribution all require energy to function.

Yes there is a lot of shale oil, unfortunately it might as well be on the moon, extracting it will require more energy to go in than you get out.

Anonymous said...

Your argument shows a clear lack of education regarding peak oil. There is no alternative that even remotely scales to meet world energy needs.

Also, as oil gets too expensive and nobody can afford it, the entire system will collapse. There's a reason oil is referred to as our lifeblood.

Rolo Tomasi said...

1) Economics is the study of scarce, not infinite, resources. So attacking the assumption of an infinite world is pretty wrong headed.

2)"Peak Production" of oil is pretty meaningless. Under Prof. Munger's 1-2-3 listing, production could rise, fall, or remain the same. Supply and Demand are different concepts from production and consumption.

3)Alternatives to current resources could come in a hurry. When I started work at an energy firm, in late 2007, everyone was talking about how the U.S. was going to be dependent on LNG and that "natural gas supply would be tight" and $10/mmBtu gas was here to stay. Now, less than three years later Shale Gas has not only become economical but is cheaper than conventional gas! And we tacked on another 90 years of reserves. Holding technology constant, moving to shale has would have been more expensive and yielded diminishing returns in gas production. However, technology changed. Why? see Munger's #2.

4)Dodo birds, yes, I remember in history class reading about how civilization was destroyed because of their demise. I suggest you eat more buffalo burgers.

Anonymous said...

Lets hope the author is correct.

If he is not, then it's game over when the price of oil hits $200 - $300 bbl and there is no increase in output because peak oil was correct.

Either way, I'll be ready and hope others will be too should civil society collapse.

Alice Finkel said...

There are over a dozen working definitions for "peak oil", which allows any number of idiots to find their niche.

The one thing in common among peak oil true believers is the absence of an innovative or creative bone in their bodies.

Blame that on modern educational systems, run by public sector union drones.

VangelV said...

None of the arguments above is a valid argument against Peak Oil because they admit that oil production will peak.

Yes, demand will adjust after oil production begins to go down. Yes, some people will look for alternatives. But most of the alternatives will not be any cheaper and will not scale up easily.

Let me note that there seems to be some confusion about 'shale oil'. Those massive reserves are not the tight oil that we see now produced in shale formations from $10 million wells that produce less than 100 bpd after a year. They are kerogen, which needs to be upgraded before it can be useful to refineries. We have had the technology to do that for more than 70 years and are still waiting for the economics to work. They don't because the energy density in shale is so small that it winds up taking more energy to extract and transport the oil than the energy that is contained in the oil.

I suggest that before someone criticize a position it is important to know what that position really is.

VangelV said...

However, I don't think that this will present much of a problem, since the market will adjust in the three ways that you mentioned (which is something that I have believed for many years now.

It is not that simple. The world needs a great deal of oil at this time and the transition needs a slow decline. The problem is that the new technology has front-loaded the extraction by using enhanced recovery techniques and horizontal drilling. This means that the back end of the decline curves won't be as benign as what we saw in Texas but are more likely to resemble what we saw in Yemen or Mexico. This means that the transition will need to be made faster but given the wasted capital in the shale, wind, and solar sectors there is no easy way to reach the other side of the energy abyss.

I am hoping that sanity will prevail and that the government will get out of the way. We need a lot more coal, nuclear and some private research into methane hydrates. Mexico and most OPEC nations should have a lot of conventional natural gas fields that have yet to be found. That might help with the transition but it is almost a certainty that most of the governments that could help by getting out of the way are going to make things worse.