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Thursday, August 16, 2007

My Thoughts on Peak Oil

Mike Moffatt continues to try and hammer some sense into the doomsayers that are predicting sharp oil production declines in the next couple decades due to limits on resources. His points are excellent:

1.If the peak is just around the corner and exceedingly high prices ($200 dollars a barrel? $300? $400?) are coming our way, then why are the prices for oil futures and oil call options so low?

2. Are you buying oil futures or oil call options? If not, why not?

3. Why did peak oil supporters in the 1970s tell us that the oil supply would run out in the 1980s and 1990s? Why were they wrong then? Why are you right now? What's changed?

Nevertheless, I do think Peak Oilers and economists can find some middle-ground. The general idea of Peak Oil is after all not that controversial (for most people) – at some point oil production must reach a peak and start declining due to limits on how much oil there is left on Earth. Short of technology one day being able to replicate oil and its energy chemically, or of Earth’s population finding oil on Mars etc, peak oil WILL occur.

I also think the Peak Oilers are correct when they say that this, unless anticipated, can cause some catastrophic events. Economists are quick to point out that as resources decline, the price of oil will rise to increase the incentive for alternative energy. The problem is that alternative energy doesn’t just appear at our doorstep, and the change from an oil-driven economy to some other energy-driven economy doesn’t just happen overnight. There could be decades of hardships both for businesses and for consumers who currently rely on oil and its outputs. I wonder if some pro gas-taxers may tend to overlook this point (For the record, I don’t think Mike is one of those) for the same reason they overlook any potential hardships caused by a gas tax. As I’ve said before, oil and gas are not like other commodities such as bubblegum and shrinkwrap: I don’t drive a stick of gum to work….

The point is that it is likely worthwhile to start the transition now, well before the peak happens than to be reactionary to the price mechanism. This is something the pro gas-taxers are right on – they want to deal with this now and they have a plan (which is more than I can say for the doomsayers who just want to spout off about the end of the world as we know it).

I view hardline cornocopian economists, whose only answer is to “let technology solve any perceived ‘constraint’ on resources,” as incredibly na├»ve. Technology can help ‘extend the date’ for resource depletion, that’s for sure. But the idea that economic growth can create a condition of nearly limitless natural resources is illogical by definition of a limited natural resources (again, barring some Star Trek-like ability to replicate things at will).

Having said all that, I don't think anyone is suggesting that the world will eventually 'run out' of oil. It will approach a limit near zero [as prices keep rising] (I believe that is what the original Hubbert curve looks like). In that sense though, "useable" oil will probably reach zero as the price will eventually reach a point where few if any would either need to buy oil, or could afford to if they did. This will likely take a LOT longer than Peak Oilers might think though, since, as our economy substitutes away from oil to other infrastructures etc, the demand for oil (the curve) will fall, tempering any rise in prices. By that time, oil would likely (hopefully) have little to no use anyway.

This actually illustrates my earlier point - if supply falls exponentially before people's overall demand (curve) falls as well due to changing infrastructure and tastes - hardships will be great, prices will be high, until the transition ends. (There are I think plenty of institutional and political reasons to think that demand would not be able to keep up with supply). If, however, we start slowly reducing our demand on oil NOW we can get ahead of the game BEFORE the supply starts dwindling.

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