Thoughts on Peak Oil

[dteowner]

http://www.bp.com/liveassets/bp_int...s/pdf/table_of_world_oil_consumption_2007.pdf

There's the most recent numbers I can find. US consumption barely dipped from 2005 to 2006 (less than China increased) and world consumption overall increased. So, in response to your statement, "Therefore, you'll never see a shortage in a reasonably well-functioning market: some buyers will simply be priced out of it, which means that everyone who's able to pay the going rate, will be able to buy it.", where is the guy that has been priced out of the market? And for that matter, if a guy has gotten priced out of the market and goes home empty-handed, doesn't that pretty much stipulate a shortage for whatever sector that guy represents?

 

[Prime Junta]

There's the most recent numbers I can find. US consumption barely dipped from 2005 to 2006 (less than China increased) and world consumption overall increased. So, in response to your statement, "Therefore, you'll never see a shortage in a reasonably well-functioning market: some buyers will simply be priced out of it, which means that everyone who's able to pay the going rate, will be able to buy it.", where is the guy that has been priced out of the market?

It's more subtle than that, dte. For example, if I decide not to take a road trip because I feel that I'll be able to have a better vacation by spending the cost of the gas on something else, I will have been priced out of that market. It's not that I went to the gas station and they didn't have any gas to sell me. It's as if I went to the gas station and offered to buy 100 L of gas for 100 euros, and they said "Sorry, no can do -- that'll be 150 euros," and I said "Fine, I'll do without it then." Only I never went to the gas station, because I know they don't negotiate; I just did the arithmetic and decided to spend that 150 euros on something else instead, or take a shorter road trip and only buy 66 L of gas for the 100 euros I was willing to spend on it.

(That's about ten bucks a gallon for you Amurricans, btw.)

And for that matter, if a guy has gotten priced out of the market and goes home empty-handed, doesn't that pretty much stipulate a shortage for whatever sector that guy represents?

That's a pretty non-standard definition of "shortage." By that definition, there's a serious shortage of Ferraris as well as gasoline, since I can't afford one of those either.

 

[dteowner]

Not so. You're switching from commodities to luxury goods. You've got 100 guys that show up in Dubai each morning with a wad of cash in their hand. Each of them has a specific need for oil, or else they wouldn't show up. If they go home empty because their wad of cash was too small, then whoever sent them there has to do without until they send a bigger wad of cash. That's where your Ferrari analysis breaks down--luxury goods only result in shortages to individuals, which, as you point out, is a rather non-standard definition.

You're saying that there's enough oil produced to satisfy 100 guys. Some of those guys are Americans buying for refineries. Some are Americans buying for plastics production. Some are Russians buying for fuel oil. Some are Euros buying for their communes . You're saying that, with China and India going thru rapid industrialization, there's now 105 guys in line. Since the supply hasn't gone up and the requirements of the first 100 guys hasn't gone down significantly, you end up with 5 guys that go home empty (though, in this case, it doesn't appear to be the 5 newcomers). That's your shortage. Where's the 5 guys?

 

[magerette]

I thought he was saying all 105 guys go home with oil, just less of it for the same amt of cash they used 12 mos ago or whatever; but I'm not ace on the logic problems.

 

[Prime Junta]

Not so. You're switching from commodities to luxury goods. You've got 100 guys that show up in Dubai each morning with a wad of cash in their hand. Each of them has a specific need for oil, or else they wouldn't show up. If they go home empty because their wad of cash was too small, then whoever sent them there has to do without until they send a bigger wad of cash. That's where your Ferrari analysis breaks down--luxury goods only result in shortages to individuals, which, as you point out, is a rather non-standard definition.

But oil is a luxury good too -- in some of its uses. For example, if I burn 100 liters of it to take a road trip for pleasure, that's a luxury use of it -- something I can do without. In your example, some of your 100 guys at Dubai would be representing such luxury users of oil.

You're saying that there's enough oil produced to satisfy 100 guys. Some of those guys are Americans buying for refineries. Some are Americans buying for plastics production. Some are Russians buying for fuel oil. Some are Euros buying for their communes . You're saying that, with China and India going thru rapid industrialization, there's now 105 guys in line. Since the supply hasn't gone up and the requirements of the first 100 guys hasn't gone down significantly, you end up with 5 guys that go home empty (though, in this case, it doesn't appear to be the 5 newcomers). That's your shortage. Where's the 5 guys?

Your model would work if the demand elasticity of oil was zero. It isn't. It's low, but it's not zero. Think of it this way: some of your 105 guys in line represent demand-elastic customers -- for example, people who are willing to spend exactly 100 euros on the gas for their road trip, and are willing to shorten their road trip in order to meet their budgets. Others represent demand-inelastic customers, such as farmers who absolutely need 100 liters of fuel for their tractors and trucks in order to get the harvest in and onto the market: they'll buy their hundred liters no matter what the cost, and pass the extra cost along to their customers -- food buyers -- in the price of the potatoes they're producing.

In this scenario, the holiday road-trippers might still buy 100 euros worth of oil, but they'd get less of it, while the farmers would buy the 100 liters and pay more for it. That's what that 83 Mbbl/day means -- the consumption is constant, more or less, but the distribution of the consumption is changing: luxury uses of oil are declining at the expense of essential uses of oil.

So your answer to "who's going without" is the luxury buyers -- me, when I decided not to take that road trip, your neighbor, when she decided to car-pool with her neighbor rather than drive to work alone in her car, my wife's research group, who decided to hold a teleconference rather than getting everyone to fly to Dublin to meet face to face. Instead, the Chinese government is buying that gas to sell (at a loss) to its people, or the Midwestern corn grower is buying it to harvest corn that he can collect government subsidies on in order to turn it into much more expensive ethanol that he can sell to the road tripper.

Seriously, dte -- I'm a bit surprised you can't figure this out yourself; it's so utterly fundamental to how markets operate, and you're right bang in the middle of them, not to mention frequently banging away about how much wiser they are than the government. The logic is exactly the same, whether we're talking oil, Ferraris, or game consoles -- only the price, supply, and demand elasticities of the goods vary, which gives each of these markets a particular dynamic. You'll only see gas stations with dry pumps if someone fixes a price ceiling on it, or there's an extremely sudden disruption of supply that doesn't allow even the short time needed for prices to adjust (which is what happened in the 1970's oil crisis).

 

[dteowner]

That's OK. I was angling that at PJ's comment that the market should adjust such that certain potential customers couldn't afford to buy and went home. We can go with your angle, and the argument still holds. That means the everyone gets 100/105 of what they need, which still means inability to meet full production requirements, which means there should be roughly 5/105 gas stations in the US with "No Gas" signs hung out front.

 

[dteowner]

I understand the concept of elasticity, but it's actually irrelevant based on the numbers I've supplied. Overall requirements are increasing. It really doesn't matter how you wish to divide the pie up (raw material, "mandatory" energy, "discretionary" energy) because the overall consumption (aka demand) has increased, while we're all seemingly in agreement that overall production (aka supply) has remained static. So demand outstrips supply and you get shortages until price increases reduce the demand or Ahab cranks the wells up. Demand hasn't reduced (it has, in fact, continued to increase due to China and India); therefore, we must still be in the shortage phase of the adjustment. Where's the shortage?

 

[Prime Junta]

I understand the concept of elasticity, but it's actually irrelevant based on the numbers I've supplied.

Sorry, but clearly you don't. If you did, you'd understand why no gas station in the world needs to run dry even when demand is going up but supply is holding steady.

Overall requirements are increasing. It really doesn't matter how you wish to divide the pie up (raw material, "mandatory" energy, "discretionary" energy) because the overall consumption (aka demand) has increased,

Bruup, wrong. Try again. Consumption has not increased -- it cannot, because there's no way to consume more oil than is being produced! (OK, discounting stockpiles, which we can fairly safely do.)

Demand, however, *has* increased. If demand increases, either supply or price has to go up. Since supply can't or won't go up, price will. This will price out some buyers, which will balance out supply and demand, with no shortages.

Demand is not the same as consumption: demand is an abstraction that should be properly stated as "demand at a given price." The demand for oil at $20 a barrel is higher than for $100 a barrel, which is higher than for $200 a barrel. As supply diminishes, the price goes up; if there's not enough oil around to meet demand at $100 a barrel, it'll sell for $139, and those buyers who were only willing or able to pay $100 a barrel for it will drop out of the market (or, in reality, just buy less of it). Gas stations won't run dry; they'll just sell it at four bucks a gallon (in the US) or ten bucks a gallon (in Finland.)

while we're all seemingly in agreement that overall production (aka supply) has remained static. So demand outstrips supply and you get shortages until price increases reduce the demand or Ahab cranks the wells up.
Demand hasn't reduced (it has, in fact, continued to increase due to China and India); therefore, we must still be in the shortage phase of the adjustment. Where's the shortage?

Ah, but demand *has* reduced -- or, rather, the lower end of the demand curve has been priced out of the market. That's the beauty of it -- there is no "shortage phase of adjustment." There's just supply, demand, and prices moderating the two.

By the way, you're arguing against yourself too: earlier you blamed OPEC skulduggery for the high oil prices; nevertheless, you admit that OPEC doesn't control price, but only supply. Your question of "who's going without?" applies to this scenario exactly as well as to the one you're arguing against. The market doesn't care *why* supply isn't rising to meet demand, you know.

Once more, I'm genuinely surprised you don't understand the very fundamentals of market economics, given your very strong political views on its blessings. Have you ever asked yourself why people never queued for toothpaste in the USA, but had to do so in the USSR? The oil market works exactly the same way: there are no shortages, because prices moderate supply and demand. Naturally, this won't guarantee that rising prices won't cause hardship to people.

 

[Remus]

According to AP the average price of regular gas in US crept up to $4 a gallon for the first time over the weekend. The rise in oil prices is going to cause inflation and economic problems to many countries.

How long the rise would keep continue? Are we heading toward global economy crisis (on top of US economy slowdown) if the trend continue ? It's possible for oil prices to drop back to the levels as in early 2000s?

 

[curiously undead]

the costs will continue to go up, i wouldn't expect to see them drop ever again. it simply boils down to greed not supply and demand. the oil barons know there time is up so basically its like "supermarket sweep" where they are trying to milk as much money out of us as possible, not so much before 'peak oil' but 'peak demand' which the greed help hastens. unfortunately the government has not invested enough money/research in the alternatives so the few that can shift to alternatives have and can, but as for the rest of us, the oil companies are simply playing a waiting game 'til they lose enough customers then they will shift the focus of their mountains of wealth into other fuels that they can profit from. when renewable becomes more prominent you can expect the costs of electricity to rise as well, though my bet on the resource that is going to greatly increase, despite food of course, is water. which although it has been already, i imagine a definate water tier system in the future and if you want the good stuff its going to cost more than 30 cents more a gallon!

 

[Prime Junta]

According to AP the average price of regular gas in US crept up to $4 a gallon for the first time over the weekend. The rise in oil prices is going to cause inflation and economic problems to many countries.

Make the "all countries."

How long the rise would keep continue?

A quite a while yet. As I mentioned, some pretty mainstream analysts are predicting $200/bbl before the end of the year. If there is an Israeli (or American) rumble with Iran, expect the price to shoot (temporarily) way past that -- $500 wouldn't be inconceivable. (That would translate to about $16 per gallon at the pump in the US.)

However, as infrastructure adapts to an oil-scarce world and alternative energy sources start coming on-line, the price will start to fall again. Eventually it'll settle down to around whatever the average cost of producing those alternatives is. I wouldn't be surprised if it dropped back to around, say, $50/bbl when that happens.

The trouble is that this transition takes time -- the wind turbines, solar power plants, nuclear stations, coal liquefaction plants, biomass generation and conversion plants, electric cars, public transportation networks, denser urban agglomerations etc. need to be built. The time for this transition is between 10 and 30 years. Until then, it'll be a rough ride.

Are we heading toward global economy crisis (on top of US economy slowdown) if the trend continue ? It's possible for oil prices to drop back to the levels as in early 2000s?

Yes and maybe. I don't know what the cost of the oil replacement per barrel equivalent will be; nobody does for certain. But we have some ideas -- for example, with current technology it costs about $30 to $50 per bbl to exploit kerogen or bitumen, two of the most plentiful unconventional oil sources. That gives a ballpark idea of where we're going.

Edit: I took a quick peek at the oil futures market, and that's not expecting the price to fall -- futures are on an upward-sloping curve until 2015; the data past 2011 or so is pretty spotty though so I wouldn't read too much into it.

 

[Zaleukos]

I'm with the optimists. And there is plenty of (very expensive) oil available in the largely unexploited tar sands to cater for the non-transport oil needs. The transport issue will be fixed by price hikes.

When it comes to prices peak oil isnt the only factor either. As Asia gets richer the amount of people enjoying middle class standards has risen by hundreds of millions in the last 20 years, with an unprecedented rise of demand.

The old doom and gloom "what if the whole world enjoys a western standard of living" is coming somewhat closer, but a functioning market mechanism might make the transition somewhat less painful than expected by the old doomsday prophets of the 70s and 80s

EDIT: Regarding demand elasticity it might be worth noting that SUV sales have plummeted and some of the US automakers closed production of SUVs and pickups for 2008...

 

[Prime Junta]

@dte: since you appear to have some trouble swallowing my explanation since it's coming from a certified greenish-pink-Social-Democrat, perhaps you'll find the same more palatable if it's coming from the certified-Republican US energy secretary?

[ http://news.yahoo.com/s/ap/20080607/ap_on_bi_ge/oil_prices_bodman;_ylt=Aq5G0cB4yV8dEKvPxhdMojes0NUE ]

 

[Benedict]

* I'm in the Optimist camp -- not quite at the rosiest fringe, to be sure, but nevertheless pretty squarely there.

Count me there too, the scope for more efficient use of energy is so enormous that the decline of the cheapest and easiest energy forms is going to be offset by efficiency improvements in the long term. Might mean tough choices in the short term and having to rethink a few things but ultimately we'll adapt without it ruining our whole civilisation.

Just take a look at Great Britain : The proces there are in general[/i] much higher than here in Germany; a similar thing is for Switzerland.

About 70% of our (UK) prices are taxes . . . a lot of people are moaning about it but IMO that leaves us well placed, we've got way more scope to reduce taxes and soften the blow than most.

I think we're already seeing some of the effects of this--yesterday the Dow lost 400 points (prompted by high unemployment figures as well) and the poor people who bought into the bigger is better theory on the SUV's now can't even trade them in for 50% of their value, let alone what they owe on them. Many car dealers are not accepting them, period, because they can't resell them.

I'm not feeling any sympathies there. The purchase of such wasteful extravagances is unforgiveable IMO, there's just no need. They bought on the basis of "What I want is important and fuck you planet" and I'm very, very glad that it's coming back to bite them on the arse now. I hope that the chelsea tractor brigade (people driving massive 4x4s around London) suffers similarly.

 

[Benedict]

However, as infrastructure adapts to an oil-scarce world and alternative energy sources start coming on-line, the price will start to fall again. Eventually it'll settle down to around whatever the average cost of producing those alternatives is. I wouldn't be surprised if it dropped back to around, say, $50/bbl when that happens.

I do wonder the extent to which OPEC have strategised around this. Ultimately if they keep supply low enough now then the change away from oil happens far quicker, so they don't want to hoard supply that's valuable now for a point where it won't be nearly as valuable.

So the fact that they're not increasing supply suggests that they think that they'll not have that much left over by the time the global infrastructure changes are mature. But then the fact that they're not decreasing supply suggests that they don't see it running out for a while at least.

 

[Prime Junta]

I'm not feeling any sympathies there. The purchase of such wasteful extravagances is unforgiveable IMO, there's just no need. They bought on the basis of "What I want is important and fuck you planet" and I'm very, very glad that it's coming back to bite them on the arse now. I hope that the chelsea tractor brigade (people driving massive 4x4s around London) suffers similarly.

Unfortunately I kinda doubt it will. The much higher gas prices on this side of the pond means that you had to be if not rich at least pretty well-to-do in order to buy one in the first place; most of the people driving those won't have trouble affording the gas even at double, triple, or four times the price. This is rather different from the States, where Joe Average drives a truck.

Did you hear about the campaign some German activists have been doing lately? They're letting the air out of the front left and rear right tires of those "tractors," and leaving a polite note under the windshield wiper explaining that they would like you to change to a smaller car so they won't have to do that again. (When some people copied this in Finland, the cops determined that no crime was committed, since they didn't actually damage anything, and by emptying two tires made it impossible for the driver not to notice that something was wrong, i.e. they weren't endangering traffic either.)

 

[Benedict]

Unfortunately I kinda doubt it will. The much higher gas prices on this side of the pond means that you had to be if not rich at least pretty well-to-do in order to buy one in the first place; most of the people driving those won't have trouble affording the gas even at double, triple, or four times the price. This is rather different from the States, where Joe Average drives a truck.

Did you hear about the campaign some German activists have been doing lately? They're letting the air out of the front left and rear right tires of those "tractors," and leaving a polite note under the windshield wiper explaining that they would like you to change to a smaller car so they won't have to do that again. (When some people copied this in Finland, the cops determined that no crime was committed, since they didn't actually damage anything, and by emptying two tires made it impossible for the driver not to notice that something was wrong, i.e. they weren't endangering traffic either.)

Admittedly so Maybe in conjunction with £25 a day congestion charge fees (maybe remove any resident discount too) and higher road tax that'll help.

Fantastic! That's a good legal system, I'd be surprised if we could be so flexible over here.

On another note, this article seemed relevant.

The IEA called yesterday for "unprecedented" action to completely transform the way energy is produced, adding: "Our current path is not sustainable."

The total $45 trillion needed for investment in technology and deployment to overhaul the energy markets before 2050 equates to 1.1 per cent of average annual global gross domestic product over that period.

1.1% of average annual global GDP seems a small price to pay IMO.

 

[magerette]

I'm not feeling any sympathies there. The purchase of such wasteful extravagances is unforgiveable IMO, there's just no need. They bought on the basis of "What I want is important and fuck you planet" and I'm very, very glad that it's coming back to bite them on the arse now. I hope that the chelsea tractor brigade (people driving massive 4x4s around London) suffers similarly.

Oh I agree--I'm not oozing sympathy for them, any more than I am for all the real estate speculators in ocean-front condos in Fla. who have lost their shirts in the sub-prime crash. People who are programmed by the desires of someone else to make a buck off them will always lose. However, as Prime J points out. in areas like my semi-rural Oklahoma community, pick-up trucks are not a luxury item but how you get the chores on the farm done after you get home from your day job that let's you keep your great-grandfather's farm that you can't run for a profit anymore:

Rural US Takes Worst Hit

The disparity between rural America and the rest of the country is a matter of simple home economics. Nationwide, Americans are now spending about 4 percent of their take-home income on gasoline. By contrast, in some counties in the Mississippi Delta, that figure has surpassed 13 percent.

As a result, gasoline expenses are rivaling what families spend on food and housing.

“This crisis really impacts those who are at the economic margins of society, mostly in the rural areas and particularly parts of the Southeast,” said Fred Rozell, retail pricing director at the Oil Price Information Service, a fuel analysis firm. “These are people who have to decide between food and transportation.”

I think the blame needs to fall a bit on the manufacturers and promoters of these vehicles. Not everyone who bought them did so to ruin the planet. Just lack of choice and ignorance, mostly.

That's why I feel optimistic about the whole thing--people are going to have to be forced out of their comfort zones and *think* about what they're buying into.

 

[Benedict]

Oh I agree--I'm not oozing sympathy for them, any more than I am for all the real estate speculators in ocean-front condos in Fla. who have lost their shirts in the sub-prime crash. People who are programmed by the desires of someone else to make a buck off them will always lose. However, as Prime J points out. in areas like my semi-rural Oklahoma community, pick-up trucks are not a luxury item but how you get the chores on the farm done after you get home from your day job that let's you keep your great-grandfather's farm that you can't run for a profit anymore:

Ah sorry, I saw the bit where you referred to "the poor people who bought into the bigger is better theory on the SUV's" and read poor as you feeling sorry for them rather than as actual poor people.

From the article though:

But across Mississippi and the rural South, little public transit is available and people have no choice but to drive to work. Since jobs are scarce, commutes are frequently 20 miles or more. Many of the vehicles on the roads here are old rundown trucks, some getting 10 or fewer miles to the gallon.

Call me picky but IMO 20 miles each way is entirely manageable by bicycle. My girlfriend does about 12 each way and we live in a particularly hilly part of London, 20 miles each way across the flat swathes of the rural south is perfectly manageable, and would do wonders for the obesity crisis too.

 

[Zaleukos]

Call me picky but IMO 20 miles each way is entirely manageable by bicycle. My girlfriend does about 12 each way and we live in a particularly hilly part of London, 20 miles each way across the flat swathes of the rural south is perfectly manageable, and would do wonders for the obesity crisis too.

20 miles is at least a 1h cycling trip, I wouldnt want to do that during the rainy season