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September 01, 2005
Worth Reading
Smart thoughts on "peak oil", from the editors at the Seattle-based online environmental magazine Grist. A brief excerpt:
The last few months have seen a surge of stories on so-called ''peak oil." That's the moment when we're pulling as much oil out of the ground as we'll ever be able to pump. Supply hits its peak and begins an inexorable decline, regardless of demand. Hurricane Katrina has shown what kind of damage short-term supply disruptions can do; peak oil represents long-term and permanent supply disruption...
Nobody knows for sure when the peak will occur. Estimates range from a few years ago to 50 years hence. But expert consensus is closing in on the next five to 15 years...The difficulty it poses is incredibly complex but simply stated: Our entire economy hinges on the availability of cheap oil.
Read more for a sobering-but-optimistic take on the subject.
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Comments
Although I've been tracking Peak Oil for years now, I'm finally reading "The Party's Over," by Richard Heinberg. Well worth looking up, along with the sequel: "Power Down".
This is bigger than Katrina, bigger than all other environmental issues put together, bigger than the fall of the Soviet Union, bigger even than nuclear war -- which it may well beget.
But the good news is that most pollution and greenhouse gas is directly attributable to energy use. As oil slowly goes away, things just might get cleaner -- for the 1 out of 6 people who will be able to live off the new energy budget.
Posted by: Jan Steinman | Sep 1, 2005 3:25:38 PM
Unless, of course, we turn en masse to coal -- there are more abundant coal reserves in the US than oil reserves. Coal is undoubtedly subject to its own Hubbert peak -- which some analysts think could be sooner than we think -- but in the near term, an oil peak could actually lead to far more pollution, not less.
Posted by: Clark Williams-Derry | Sep 1, 2005 4:36:20 PM
Why, oh why, do the well-meaning among us so often forget/ignore the obvious solution of reducing usage of oil? Our culture has become gluttonous, and we need to face that. In the Seattle region, we increased the amount we drive collectively at about 3 times the rate of population growth from 1970 to 1990. Our culture became this way only very recently, and the smart folks at Grist should know the powers we have to change when the greater good demands it. Victory Gardens, rationing, aluminum foil balls, Jimmy Carter in his sweater, Reduce/Reuse/Recycle: these things worked.
Posted by: cary | Sep 2, 2005 4:01:42 PM
The Murrican economy depends upon profligate waste, cary, and until that changes Jimmy Carter will be ridiculed by those who refuse to see the economy is dependent upon the biosphere, not vice versa.
Posted by: Dan Staley | Sep 2, 2005 5:05:22 PM
Have we thrown out all economic theory? What about Hotelling's rule for dynamic efficiency?
If we are talking about $200 a barrel two years hence, then 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.
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. Not all the way up to $200, because you have significant interest, storage, and idle capacity expenses from trying to wait a couple of years before getting your profit.
An economist would expect the end result of 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.
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.
So how could it be that there are billions and billions of easy dollars to be made, and nobody can be bothered to collect them? Unless you have a clear answer for that question, an economist at that point is going to ask whether you're sure that you've got all the facts straight, that oil really is going to sell for $200 a barrel in just two years.
Posted by: Jeremy Brown | Sep 9, 2005 10:26:43 AM
Whatever Hirsch means by "peaking of world conventional oil production," it certainly isn't the condition that "production will no longer satisfy demand."
How much oil is demanded at any given time depends, among other things, on the price. If the price were $1 a barrel a very, very large quantity would be demanded and practically none would be demanded if the price were $10,000 a barrel.
Economists pay so much attention to prices because it is guaranteed to adjust to ensure that demand always equals supply. Supply equals demand today, supply will equal demand in 2025, and supply will equal demand in 2050.
Posted by: Jeremy Brown | Sep 9, 2005 10:27:50 AM
Jeremy -- on the futures markets not predicting $200/barrel oil, you're clearly correct. The collective opinion of the market (which probably represents the best available guess about future prices) is that oil prices will actually decline slightly over the next 6 years, to about $60/barrel.
But consider this: just 3 years ago, the December 2005 NYMEX oil futures contract predicted oil prices of, oh, about $22. It's now close to triple that. See:
http://tinyurl.com/bontf
Likewise, the market for farther-out contracts -- which was seriously backwardized for years (meaning that they predicted substantial price declines over time) -- isn't particularly backwardized anymore.
So in fact, virtually anybody who bought oil any time over the last 5 years is raking in the bucks. There was lots of easy money on the table; and roughly half of the market (people who bought, rather than selling or shorting) made the right bet.
I have no predictions about future price trends; I won't pretend to substitute my judgment for that of the market. But what I take from all this is that, even if they're the best available estimates, the futures markets don't always do such a good job of predicting the future. So I no longer think it's ridiculous to believe the price of oil will triple in short order -- even if the futures markets disagree.
Posted by: Clark Williams-Derry | Sep 9, 2005 2:10:23 PM
Jeremy-- on supply vs. demand. Again, you're absolutely correct, in a technical sense. And I don't think most people who predict a near-term oil peak would disagree with you (at least, not if they used the terms "supply" and "demand" as a trained economist would).
But that's exactly their point -- if supply is stable or declining because of geological limits, and demand remains high, then the price of oil will rise.
And since oil demand is extremely inelastic (at least over the short term) prices increases could be steep & dramatic -- which could cause some people serious economic pain, and have political and social ramifications that (in their view) society really isn't ready for.
I don't have a professional opinion on when oil supplies ("conventional" or otherwise) will peak. I'll leave it to others to make that judgment. But I do agree that a near-term physical peak could, in theory, be far more wrenching than the oil shocks of the 1970s. Which is what most people who talk of "demand outstripping supply" are concerned about in the first place.
Posted by: Clark Williams-Derry | Sep 9, 2005 2:26:29 PM