Creative Destruction

April 16, 2006

Why “Peak Oil” Is Hooey

Filed under: Economics — Robert @ 1:26 am

…and other unorthodoxies.

Energy is complex, and I don't want to oversimplify, but I pretty much have to because I don't have the time to write and you don't have the patience to read the 200-page monograph that ought to answer claims "peak oil", energy shortages, and similar bugaboos.

First, some descriptions of reality.

Are petroleum reserves dwindling? Indubitably. Most likely Thomas Gold is wrong, and we're not laying down new oil beds constantly – so we will run out of oil someday if we pump it to the last drop. (We won't.)
Do we have 20, or 30, or 40 years of oil left, or whatever figure-of-the-day is being bandied about by doomsingers? Hardly.

The pace of oil discoveries is dwindling. This is because the low-hanging fruit has been found. Now it starts to get more expensive and more difficult to find each new field – but we are still finding new fields, albeit at a reduced rate.

Is China ramping up its oil consumption? Yes, tremendously so. This is actually probably a good thing in terms of the oil economy, as it means there is a new source of demand. The relatively flat level of consumption – we've all got cars, and how many miles can you drive in a year? – has meant stagnation in the development of new oil extraction technologies, because it looked like those technologies wouldn't be needed for a loooooong time. Now it looks like they'll be needed within the time frame that corporations can operate in, so I'd expect to see a big surge in oil shale tech research. (World oil shale and sand reserves are estimated at 14,000 billion barrels. The US has 2,000 billion. If the world uses 10 times the amount of oil it now uses, we run out of oil from shale around 2200 AD.)

So the sky is not falling.

But for fun, let's pretend that the sky is falling. Let's pretend that all the oil will be gone, not 34 years from now, but 10 years from now. Gas won't be $4 a gallon, it will be $12 a gallon. The moon will be red as blood, and dogs and cats will join in conjugal union. George Lucas will direct a movie that does not suck.

Big freaking deal. We find new fuels. Hydrogen vehicles are 5 years from commercially-feasible prototypes, maybe less. In 10 years – let alone 34 – they'll be economically competitive and then some. (In fact, the development of hydrogen technologies is likely to shut down oil production for fuel use long before any shortage.)

Hydrogen is an energy distribution technology, of course, not an energy source itself. So that means that development of energy production capacity will be a critical component to making a hydrogen economy work.

But energy production capacity is a solved problem. It's not a PERFECT situation, but we know perfectly well how to build the solar plants and the wind farms and the nuke plants and the coal plants and the orbital microwave stations. We just have to do it. We're not doing it now because there isn't a market for the power that those stations will produce – there won't be until we stop burning the oil and start burning the H2. Basically, whether we go hydrogen or develop oil shale is an economic question – which is cheaper, learning to extract oil shale efficiently or building a hydrogen economy. I'm betting H2, as are most oil companies, but we'll see.

The hysteria of the oily chicken littles is exactly the same as the hysteria of a teenage kid whose dad is about to retire. "The figures show your income dropping by 50 percent! We'll STARVE TO DEATH! The neighbors will take our furniture! We have no manufacturing base left!" Yeah, but there's a lot of stuff you don't know about, kid. 401(k)s, for starters.

We will adjust to changing economic circumstances as time goes on. Those adjustments may sometimes be painful, although there is literally nothing in the energy situation per se that would lead any rational observer to believe there will be pain in this transition. If anything, hydrogen cars are going to be way vrooooooooom cooler than boring gas vehicles.

Here's the sentence in oil-is-doomed propaganda that you have to watch for:

"…Within the coming few years, the era of cheap unlimited energy is expected to come to a close"

That's what this is really all about. The fact that individual people have access to cheap energy that is (practically) unlimited drives a certain species of control freak absolutely insane. People who have access to cheap energy can live out in the wilderness, far away from social control. People who have access to cheap energy aren't afraid of political change. People who have access to cheap energy aren't dependent upon a political class for the necessities of life.

Leftoid environmentalists, central planners, and other fans of undemocratic authority have been pounding the "no more cheap energy!" drum for the last fifty years, at least. It's not a prediction for them.

It's a policy platform.

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11 Comments »

  1. Well written.

    I was given a lengthy Peak Oil article to respond to once, I did so at length and found it quite curious that, while the writer was willing to bring in geologists and businessmen and politicians, they were unwilling to bring in economists or any economic theory at all, though their argument was primarily an economic one.

    I’m not saying the economists are infallible or even mostly right on the subject; it’s just that you’d think their ideas would be the ones you’d want to engage.

    Oh well.

    Comment by Adam Gurri — April 17, 2006 @ 12:39 am | Reply

  2. I’m glad to see that you also recognize that fundamental economics shows that we’ll never actually run out of oil. I wish other people could see this as clearly.

    I note that you made the observation that hydrogen isn’t a fuel itself, but is more like a battery. You may want to write about which source material we’ll be using to derive the hydrogen.

    I agree that there is a very significant overlap between environmentalist and state-planning advocate. The appeal of forcing their lifestyle choices on others is overwhelming and energy shortages are a particularly delicious vehicle to use to achieve their philosophical goals.

    Try this test with an environmentalist – tell them that Space Solar Power Satellites can deliver sufficient “clean power” and allow us to continue on the trend of increasing per capita energy usage and they would quite significantly decrease the environmental impact of energy production, even compared to wind power and distributed solar panels, and see what they say?

    Comment by TangoMan — April 17, 2006 @ 1:56 am | Reply

  3. Below I’m trying to offer a balanced response, not merely dispute and argue, which seems to be the response to most posts.

    In purely pragmatic terms, you may be correct, though it’s difficult to substantiate or disprove your projections except by observing what indeed manifests in time. I do have a couple observations. If indeed we are expected to face some serious discrepancies between our future energy consumption and the ability to deliver it economically, you have a great deal of faith that science and technology will rescue us from any crisis. There are probably other good reasons for believing so, which I won’t try to dispel. Also, economics can be a strange filter through which to develop and discuss energy policy. Undoubtedly economics figures into the mix, but whereas you seem to believe that economics drives the issue, I think economics follow.
    Your underlying assumption appears to be that whatever resources may lie within our grasp — now or later — are implicitly ours for the taking. Reminds me of “eminent domain,” which demotes one right (private property) in favor of another (common ownership for some social good). With resource management, whether energy or raw material for, say, manufacturing, conservation and ecology are demoted (not absolutely, but significantly in many instances) in favor of enabling ever-increasing consumption. For instance, “[n]o other century in human history can compare with the 20th for its growth in energy use — we have deployed more energy since 1900 than all of human history before 1900” (Something New Under the Sun by J.R. McNeill). Your list of potential new energy sources to exploit is valid, and not all of them are environmentally destructive, but the overriding behavior you describe is akin to the actions of early 20th-century industrialists (and those who followed), who raped and plundered the natural world, leaving behind severely damaged ecosystems and toxic dumps that even now aren’t cleaned up.
    Conservationists and ecologists operate from the underlying assumptions that responsible stewardship of the environment and sustainable energy resources are preferred to rapacious migration to new, despoiling energy sources once the old ones become less abundant, economically prohibitive, and/or obsolete. This attitude goes hand-in-hand with the idea that our habits of energy consumption probably can’t or at least shouldn’t increase without bounds if we want to be responsible caretakers of the environment and not live too heavily on the land.
    You write that “Leftoid environmentalists, central planners, and other fans of undemocratic authority have been pounding the ‘no more cheap energy!’ drum for the last fifty years, at least. It’s not a prediction for them. It’s a policy platform.” Absolutely true. Everyone shapes their message to fit their agenda, and they are frequently disingenuous about it. Still, I’m not quite as ready as you to dismiss out of hand the attitudes behind conservation of energy and well-designed resource management. As you observe, it’s a complex issue, and no one is well served when the discussion veers on one side or the other into demagoguery.

    Comment by Brutus — April 17, 2006 @ 3:15 pm | Reply

  4. “Peak oil” does not even mean running out of oil. The term means declining production. Declining oil production must necessarily come at some point, and it may very well come reasonably soon.

    Supply meanwhile, seems very likely to increase, as the Third World develops.

    No, we will not suddenly wake up one day and be oil free. But, to the extent that production declines as predicted, while demand grows, one should expect not only rising oil prices, but an increasing rate of oil price increases over the long term.

    Rising oil prices do not mean the end of civilization as we know it. But, they do mean rather dramatic changes in how our economy is organized, particularly in so far as ground transportation and conventional (fertilizer and pesticide based argiculture which is petroleum intensive) is involved.

    Some of the changes one would expect to see are a shift from long haul trucking to train and barge based transportation (trains are much more fuel efficient), a shift from single passenger vehicles to multipassenger vehicles (this is the lowest tech, least expensive way to improve fuel efficiency — a city bus is more fuel efficient per passenger-trip than a Toyota Prius), a retreat from suburban sprawl, a shift to organic agriculture (which has costs less sensitive to petroleum costs), a reduction in pleasure travel by air (which is far more price sensitive than business travel), an increased interest in natural gas or electrical heat in the Northeast (the only area that makes significant use of fuel oil), an increased interest in nuclear power in Hawaii and Alaska (the only places that make significant use of petroleum to generate electricity), greater use of smaller vehicles with diesel power (more fuel efficient), and more expensive plastic products (which might mark a return to things like glass product containers).

    Comment by ohwilleke — April 17, 2006 @ 3:50 pm | Reply

  5. Your underlying assumption appears to be that whatever resources may lie within our grasp — now or later — are implicitly ours for the taking.

    Yup.

    Who else would have a claim?

    A case can be made for our children or our grandchildren – but a case can also be made that they’ve got eight more planets (plus an Oort belt) to exploit, a job which we’re not quite up to yet.

    To be clear, I think that if we engage in an orgy of consumerism and use up all the easy resources, but fail to develop the ability to exploit the solar system, then that would be a failure to meet our stewardship obligation to our descendants.

    But if we use up the Earth and leave them with a working space elevator, then they’ll be starting from a fantastically better position than any previous generation has.

    Still, I’m not quite as ready as you to dismiss out of hand the attitudes behind conservation of energy and well-designed resource management…

    That’s because you’re a communist hippie.

    …As you observe, it’s a complex issue, and no one is well served when the discussion veers on one side or the other into demagoguery.

    Oops! OK, I withdraw the communist hippie. 😛

    I think that conservation of energy and resource management are fine things, when done as the result of individual choice.

    Comment by Robert — April 17, 2006 @ 7:04 pm | Reply

  6. Undoubtedly economics figures into the mix, but whereas you seem to believe that economics drives the issue, I think economics follow.

    Economics is the science of distribution. If we’re talking about how much oil will be left to use, and how a decrease in its supply will effect production and transportation more generally, then I’d have to say that economics is the playing field we’re in.

    I won’t dismiss anything out of hand, but when you speak of “resource management”, you’re obviously talking about how those resources are put to use, how they are divided up. That’s economics plain and simple. If one could demonstrate that the current policy is destructive and unsustainable, then obviously any economic theory that predicted otherwise would fail to hold up to empirical scrutiny.

    As it is, there was what you might call a Peak Coal theory long before Peak Oil, and not only did we never run out of coal, but it currently accounts for a third of America’s power supply.

    As for being destructive, well, with the air getting cleaner and all, I have to say that I’m not too worried about that, either.

    Comment by Adam Gurri — April 17, 2006 @ 8:06 pm | Reply

  7. Adam: Economics is the science of distribution.

    I was thinking of economics in the terms it’s usually discussed: money. If you use it more broadly to describe distribution science, then it’s true that we’re on the same playing field.

    If one could demonstrate that the current policy is destructive and unsustainable, then obviously any economic theory that predicted otherwise would fail to hold up to empirical scrutiny.

    Nuclear energy is destructive with respect to its highly toxic waste product. Strip mining underway on a large, industrial scale is damaging in that it opens up gargantuan holes in the earth and creates slag piles. Logging and oil exploration in virgin territories in Alaska and Africa (the two I’ve heard about, though there must be many more) are legion in their despoiling the countryside. Remember the Exxon Valdez? Much of the Third World is taking over the manufacturing base that used to be the domain of Western Europe and N. Amer. In doing so, they’re basically trashing their own back yards for short-term gain, just like we did. This is just off the top of my head. There’s lots more if anyone wants to search for the evidence. Just don’t trust anything Al Gore has to say about it.

    As for being destructive, well, with the air getting cleaner and all, I have to say that I’m not too worried about that, either.

    Part of that story is that air and water quality is improving over levels recording in the 1970s (when things in N. Amer. were at their worst), while another part is that we’ve polluting less, which while an improvement over our own record, isn’t the same as there being no problems. The cite you gave reads like an apologist’s position paper. “See, we’re killing fewer and fewer people all the time!” Those reports, by the way, are good ammunition for the Bush administration to relax environmental protection regulations. One of the Kennedys adopted environmental causes as his focus and wrote a withering indictment of the Bush administration’s record on the issue. It’s hardly a bed of roses.

    Comment by Brutus — April 18, 2006 @ 12:15 am | Reply

  8. Short-term gains?

    We industrialized and became the wealthiest – and the sustainably wealthiest – area of the planet. The place where babies don’t die routinely and where people think it’s tragically short-lived to die at 65.

    Godspeed to the Third World in establishing their own industrial age, with its concomitant blessings. The curses are a lot more affordable than the ones that come free with the noble agrarian lifestyle.

    Comment by bobhayes — April 18, 2006 @ 1:12 am | Reply

  9. The short-term gains are quick, massive, concentrated profit reaped by industrialists, many of whom became known in time as robber barons, on the backs of laborers and at the cost of long-term environmental despoilation that follows it. One of the lasting legacies of Standard Oil (and the fortunes built upon it), which BTW no longer even exists, is acres upon acres of toxic canals and land just south of the lower end of Lake Michigan. Sure, the larger picture of growth in infrastructure and quality of life is undeniable, but I don’t infer a cause-effect relationship. Rather, I think that we would have seen many of the same historical trends if we had proceeded more judiciously, without wrecking things along the way. It’s no surprise, of course, that the Third World is making the same errors.

    I stumbled across , which makes a case that we’ve already passed the time of peak oil, totally in terms of the pragmatic lack of infrastructure. Again, that’s a short-term problem that might eventually be ironed out with technological solutions, but in the meantime, based on what the article says, there’s likely to be a world of hurt ahead of us.

    Comment by Brutus — April 18, 2006 @ 10:39 pm | Reply

  10. The link to the article apparently didn’t go in:

    http://business.timesonline.co.uk/article/0,,13130-2124287,00.html

    Comment by Brutus — April 18, 2006 @ 10:40 pm | Reply

  11. It’s a fair hypothesis (that things would have proceeded smoothly on a similar growth curve without the messiness of the industrial revolution under market capitalism). The test is to look at other societies that made similar transitions, but put more restraint on the economic choices available to individuals.

    I don’t think those societies turned in a better performance on exploitation and environmental sensitivity, or matched growth rates; quite the contrary. But I’ve been wrong about such things before – perhaps Tuomas is going to swoop in from the wings with the example that proves my error. (And earns him a beating, now that I know the Finns are bad fighters.)

    de Margerie’s argument doesn’t appear compelling to me. “We can’t expand oil production, because we’d have to build a power plant in Qatar to give electricity to the contractors!” Yeah, it’ll cost money to build capacity. The oil industry is suddenly poor? I suspect he’s trying to soften expectations so that his own company’s bad strategic decision to not invest in production capacity doesn’t look quite so stupid to stockholders.

    Comment by bobhayes — April 18, 2006 @ 11:14 pm | Reply


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