Is peak oil a fraud? from "Does it matter if global warming is a fraud?"

[modest]

This is probably far too simplistic an analysis and I'm hoping someone who knows some basics in economics can tell me if it's correct.

 

I was looking at global oil production and it seems to have plateaued in the last few years so that the quantity of oil produced is roughly constant. In that same time the price has gone up. It seemed to me that the supply must have come down for those two things to happen.

 

On a supply and demand graph where quantity stays the same and price increases,

supply has to shift left, or decrease. Would that indicate that the global supply of oil has decreased over the last few years?

 

Would this represent a real shift in global supply, or, perhaps... OPEC has done this purposefully?

 

~modest

[Eclipse Now]

Another long post, answering Modest on oil price behaviour over the next few years of the plateau, and JMJones on a question he PM'd me about oil subsidies and how vast they are throughout the whole of society.

 

Oil Prices over the next few years

 

Hi Modest

I think the price has done more than rise, but you're right about production levelling out. Is this IT? THE PEAK! Who knows? People get too fixated on the date of the actual peak... 2005 one guy has, 2012 another estimates... who cares? It wouldn't matter so much if there was another larger peak to follow one day. The real question is when does the terminal decline set in, as that is when the world oil market and international politics could get really funky.

 

My understanding of the oil price is that it is not so much affected at this stage by fluctuating supply but fluctuating demand.

 

The highs of 2007 were probably a speculator's bubble more than fundamentals changing forever, but boy that helped the peak oil cause! ;)

 

Yet now that the GFC has kicked in, world demand dropped off several million barrels a day... and yet with economic growth in India and China, demand is creeping back up again.

 

Get ready for the "Bumpy price Plateau". What will oil prices do when they rise too high? They'll cause another sort of oil induced GFC recession, which will kill demand, and prices will crash again. Then the economy will start to recover again, and prices will rise again, and then when they inevitably get too high again because this is the ceiling of production, there will be another price crash. Up and down, see-sawing all over the place, and totally unreliable. (This is until the 3 or 4 or even 5% annual decline sets in, and then all bets are off! Anything could happen!)

 

So the nasty side-effect on these rising and then crashing oil prices is that there is no one clear signal to the market to DO SOMETHING permanent to get off oil. People end up confused. Alternative energy producers and alternative car markets like the all-electric Better Place battery swap system are more competitive one day, less competitive the next. There's no reliable price structure to adapt to... right when we need a CLEAR signal to get moving on this!

 

This is why it would benefit any country to voluntarily adopt the Oil Depletion Protocol.

Home | Oil Depletion Protocol

 

It's kind of like the Kyoto Protocol, only instead of measuring what comes out of the tailpipe we measure what goes INTO the tank! You'd buy your petrol as normal, but as you paid for it those litres would come off your annual oil allowance (you'd probably swipe an oil allowance card or something). Then the next year you'd get 4% less oil, and the same the year after that. The benefit? It is allocated to all citizens on a equal basis, and then those who live an oil-free lifestyle relying on bikes and public transport can sell their oil allowance to those who need it more. So as well as buying oil itself, if you need *more* oil than that you are allowed, you can "top up" your rations by purchasing them off the oil-rationing market, and that extra tank or 2 (or 100) will be allocated to your card (or your business's card).

 

However, Europe has got by pretty well without such a complicated system... they just consistently tax the heck out of oil and the countries there use about 50% less oil per capita, and are better prepared!

 

(If I didn't love some things about Australia so much I'd probably move to Europe... Australia has followed the American city plan too closely!)

 

Anyway, for more on the oil price just plug those 2 words into the search bar at Energy Bulletin and you're away!

 

What is the REAL cost of oil to society?

 

JMJones contacted me with some very pertinent questions about fuel subsidies and the broader costs of oil to society that I thought I had to share here. There's a wiki here that mentions a few studies that might come in handy. (Check the links below the article).

 

How many subsidies are paid by various Federal and State tax concessions? I don't know... it's hard enough to keep up with what is happening in my own backyard of Australia. Try googling around later... I'll supply a few options below.

 

The wiki above doesn't mention how much of the USA military budget is actually about oil?

This article is at one of my favourite energy clearing-houses and has a bit of a round up of US military awareness of peak oil, and how that may have affected policy.

Pentagon and Peak Oil: A Military Literature Review | Energy Bulletin

 

Yet just as certain other products might find their way into civilian use after military development, so to the US military is starting to fund some very interesting post-oil tank technologies... we'll see if any of these mature into civilian applications like mining and agricultural harvesters. So my feelings about the military are mixed... why do we pay so much money for them to scare us to death with WMD potential? But then the internet came out of DARPA... so sometimes I love the US military! :eek:

 

Back to subsidies. What other subsidies to this product that have to 'go with' the product?

 

EG: When we buy oil, we just assume that it will come with a side-order of out-of-control suburban sprawl, traffic jams, smog, lung disease, traffic accidents, lives maimed or lost, and enormous productivity decreases in business time lost to traffic, and even measurable levels of increased unhappiness because people are not spending enough time with their families and friends. We're all stuck in a traffic jam, or even if we're driving smoothly... why are we DRIVING for so long to get to the people we care about? Don't we have the capacity to make friends locally anymore? Don't we have a city design structure with enough attractive public spaces that encourage this!?

 

Check this out for a discussion on the transport and city design cost of oil in Australia.

 

Citizens are saying, we want to pay for increased public transport. We see that in research by the Warren Centre where 70% of the citizens who were surveyed said yes, move my tax out of the roads budget and into public transport. Now that’s a resounding response…

— and —

…Robyn Williams: The cost of road crashes in Australia is $17 billion a year. The cost of traffic jams in America, according to The Economist is $100 billion a year, and that was in 1999. The cost of traffic jams in Australia was $12.8 billion in 1995. By 2015, long before 2024, it’ll cost us $30 billion a year – that’s six times what the Commonwealth spends on all scientific research. Can you afford it? Whatever the energy source, hydrogen, wind or whatever, we can’t, says Dave Rand, just hope to go greener and keep our vehicles.

— and —

Sally Campbell: Public transport systems cost less as a percentage of GDP than transport systems based mainly on roads. And we see that when they start to compare Europe’s current systems to the current systems in Australia and the US and it’s almost a third less in terms of percentage of GDP to operate a system mainly based on public transport. So there are massive cost savings to be had.

Robyn Williams: You’re talking about billions.

Sally Campbell: Yeah, we’re talking about billions of dollars, we’re talking about two, or three, or four a percent of GDP that we could be saving. This is huge amounts of money.

The Science Show: 15 January* 2005* - 2024 Dreaming<BR>Beyond Gridlock: An Impossible Dream?

 

That gives a rough indication for how destructive a largely roads based civilisation is. 97% of Australia's intercity freight is by road. As Australia has most of our largest cities on the coast (due to the fact that we are a desert with a skid-mark of green around the edge), we're going to have to upgrade our ports if we don't get our rail upgrades built in time.

 

So now we have come full circle from subsidies back to American rail:

 

“As noted above, the Interstate Highway system was built with 90% federal funding; yet the current administration has cut federal funding for new urban rail from 80% to 50%. The United States once built 500 electric streetcar systems in less than 20 years. Most cities and towns of 25,000 or more got a non-oil electrical transportation system. The US did this with a population of less than one-third of today’s, approximately 3% of today’s GNP, and relatively primitive technology. We did it once, we can do it again!”

Transportation Electrification, electric transit, electric railways 10% Reduction in America's Oil Use - Light Rail Now

 

Again, this article is absolutely indispensable for the discussion of the cost of oil to society.

Worldchanging: Bright Green: My Other Car is a Bright Green City

 

EG:

the cost of the water polluted by cars in the U.S. alone

 

"totals $29 billion per year ... Note that this estimate excludes costs of residual runoff, shoreline damage, leaking underground storage tanks,reduced groundwater recharge and increased flooding due to pavement, so it is considered a conservative value."

 

Check this!

"The number of miles Americans drive has grown three times faster than the population since 1980, and twice as fast as the increase in vehicle registrations... The U.S. Energy Information Administration projects total miles driven to increase by 59 percent by 2030, which the report's authors say would cancel out whatever reductions in carbon dioxide might be achieved by improving the gas mileage of cars and trucks."

 

Oh, and how could I leave out this?

Transportation costs are a significant part of the average household budget. The average transportation expenditures for the median income household in the US in 2003 was 19.1%, —the highest expenditure after housing.

 

But that 19.1% figure is the median. How much individual households spend varies enormously, and how much we pay for transportation is determined largely by the location of our homes. People who are living in extremely dense areas, getting around mostly on foot, by bike and by transit, with the occasional use of a carshare vehicle (an increasingly popular lifestyle), can find themselves paying a small fraction of that 19.1%.

 

Do yourselves a favour... just read the whole article!

It's my FAVOURITE! :hyper::hyper:

 

(After reading My other car is a Bright Green city, if you are still after more on subsidies try here at Energy Bulletin.)

 

My gut feeling is that oil is the most government subsidised commodity good in human history, yet some surprisingly smart people in the USA would claim that any move by governments to create a fast-rail New Urbanist / Ecocity world would be heading towards communism? :) :naughty: That's just bizarre rationale. The American dream shouldn't be about one pre-packaged McMansion in the McSuburbs McDriving McLife, but that "anyone can make it", whatever city style you prefer to live in.

 

(New Urbanist, traditional European city, Venice, Village town, Ecocity, Eco-village, Earthship desert hippie township, or Mad-Max collapse because we stayed addicted too long... take your pick of post-oil accommodation!)

 

If you like flash-animation sci-fi cartoons, check this landscape by the same "Bicyclopolis" cartoonist who sketched the work above.

[Buffy]

This is probably far too simplistic an analysis and I'm hoping someone who knows some basics in economics can tell me if it's correct.

I am not an economist, but I play one at work, so...

 

This classical macroeconomic supply and demand graph is the one for "normal markets," and the oil market is anything but normal these days. Normal means that the slopes of the supply and demand curves do slope such that as price increases, supply increases because there's more money in it and demand goes down as prices go up.

 

The problem with oil that both supply and demand are what economists call "inelastic." The problem is twofold:

• Demand is inelastic because as prices go up, people still have to go to work, heat their homes, eat, etc. Demands is primarily dictated by population increases and economic conditions (hold that thought), and changes within that only slowly because it requires expensive infrastructure changes to cause downward shifts due to high prices (e.g. buying a higher mileage car, or even worse, waiting for mass transit to be built). So even when the price goes up, demand does not go down. Redraw your demand line so that it's horizontal.
  
• Supply is inelastic because of two tragically coincidental effects: Because of the charts shown previously, suppliers are having a hard time increasing supply even when the price goes up. When they do increase the supply, it's generally due to going with more expensive production methods (e.g. tar sands, deep sea drilling): what that means is that as the price goes up, profit is stagnant and therefore there's no incentive to increase supply as the price goes up. What *has* happened coincidentally though is that the bursting bubbles in the stock and real estate markets have driven speculation to the oil business, and even the Saudi's say that $70-$80/bbl is unjustifiable given current (inelastic!) demand. Thus redraw your supply line so that it's vertical.
  

Now what has thrown everything for a loop in all of this is that as I said before, the demand for oil is mostly tied to population (long-term monotonically increasing) and the economy (stochastic with an unpleasantly large variance). Demand *growth* *has* gone down very significantly in the last 18 months because the Americans are driving less and buying way fewer goods from the Chinese and services from the Indians, who are together by far the biggest contributors to growth in oil demand. We've seen the effect of this in the US with gas prices dropping in the last 18 months from over $4/gal to under $3/gal since the implosion of the financial markets and millions of people being laid off.

 

Using your graph, this should have dramatically dropped the supply, but the fact is that the demand is not from consumers, it's from speculators investors, and oil products manufacturers (the oil companies). The specific situations of these players has produced quirks:

• Countries like Iran (who's oil output is stagnating by the way), have economic problems too, and can't afford *not* to produce, so they keep pumping it, and OPEC keeps failing to cut back production quotas.
  
• The investors have no place to put their money that looks like it can produce significant income, so they keep pouring it into oil, which on the slightest scary news is turned into a reason to bid the prices up. Turmoil in Iran, militants in Yemen, any excuse is good, and because it's a relatively small mutual admiration society, it's still maintaining a price of nearly $90/bbl (much lower than the $140 of 2008, but still above what many analysts argue).
  
• The oil companies are also betting on the increase in price over time, so they abet the investor's addiction by buying the contracts when they come due, and park the oil in tankers and storage facilities all around the world (the parallel to the major banks continuing to buy Mortgage-Backed Securities from the high-flying mortgage originators and investment banks is an edifying parallel here).
  

Thus, just about the only thing that has kept the cost of oil reasonable over the past year or so has been those pesky inventory numbers: depending on the previous week's rumor, oil prices will go up and crash or go down and pop up (like they did last week) when the quarterly inventory numbers come out, which invariably show that inventory is basically at capacity because the suppliers won't stop supplying and the *real* buyers (remember, not you and me, but the investors and oil giants) keep buying.

 

Not pretty, and another instance of why consolidation in any industry down to a handful of entrants (with only about a dozen oil companies in the entire world) produces horrible effects on the economy and just about everyone, simply in order to maintain these companies "freedom to innovate."

 

Competition is good. Let suppliers be numerous and let them have a level playing field.

 

As scarce as truth is, the supply has always been in excess of the demand, :)

Buffy

[modest]

Thank you both. As suspected, I'm in far over my head.

 

The only question I have for the moment... before I try to figure all this out...

 

• Demand is inelastic because as prices go up, people still have to go to work, heat their homes, eat, etc. Demands is primarily dictated by population increases and economic conditions (hold that thought), and changes within that only slowly because it requires expensive infrastructure changes to cause downward shifts due to high prices (e.g. buying a higher mileage car, or even worse, waiting for mass transit to be built). So even when the price goes up, demand does not go down. Redraw your demand line so that it's horizontal.
  
• Supply is inelastic because of two tragically coincidental effects: Because of the charts shown previously, suppliers are having a hard time increasing supply even when the price goes up. When they do increase the supply, it's generally due to going with more expensive production methods (e.g. tar sands, deep sea drilling): what that means is that as the price goes up, profit is stagnant and therefore there's no incentive to increase supply as the price goes up. What *has* happened coincidentally though is that the bursting bubbles in the stock and real estate markets have driven speculation to the oil business, and even the Saudi's say that $70-$80/bbl is unjustifiable given current (inelastic!) demand. Thus redraw your supply line so that it's vertical.
  

... wouldn't the demand curve be more vertical if it is more inelastic? That way, quantity produced would decrease very little when prices increase dramatically, or vice versa.

 

~modest

[Buffy]

... wouldn't the demand curve be more vertical if it is more inelastic? That way, quantity would decrease very little when prices increase dramatically, or vice versa.

Sorry, you're right. Inelastic is vertical. Elastic is horizontal. It's, ahem, been a while since my last macroecon class....

 

This is why traditional macroeconomic analysis kind of falls down in helping with understanding this. What does it mean when both curves are inelastic, and for all practical purposes do not cross?

 

Answer is weirdness, and no, it's not sustainable. Without government intervention to fix it we're in for more bubbles and bursts and it won't be good for the little guy (although some of those investors will make out like bandits if their timing is good! :) )

 

When a man tells you that he got rich through hard work, ask him: 'Whose?' :naughty:

Buffy

[modest]

This is why traditional macroeconomic analysis kind of falls down in helping with understanding this. What does it mean when both curves are inelastic, and for all practical purposes do not cross?

 

Answer is weirdness, and no, it's not sustainable. Without government intervention to fix it we're in for more bubbles and bursts and it won't be good for the little guy (although some of those investors will make out like bandits if their timing is good! :) )

 

Yeah, from a layman's perspective, it sounds absolutely disastrous. If both curves are near vertical, and is sounds like they have to be, then the slightest shift of the demand curve to the right and the slightest shift of the supply curve to the left (which peak oil demands) would mean exponential price increase. Unless there is another energy industry to offset the demand, it seems... well, it's really quite scary.

 

~modest

[Zythryn]

I love that we have such smart and knowledgable people here, thank you all:)

 

Another factor in the price (touched on by Buffy) is that the price of oil is not based solely on supply and demand, it is by definition a speculators market as are most commodities (gold, copper, etc).

Traders are trtading on futures. Not what the price is today, but what it WILL be in 1,2,6,12 months (etc).

So the price today is the best guess of a number of people as to what the supply and demand will be in the future when:

 

China starts building more cars than the US (which it just has).

India starts building many more cars

The US passes, or doesn't pass a carbon tax.

etc, etc.

 

I personally believe that consumer demand does play a larger role as well.

For example, if the average American uses one less gallon a week of gasoline that adds up a lot. People that are unemployed use a lot less gasoline (on average) than employed people.

While this certainly isn't the only thing that impacts demand, and perhaps not even one of the biggest factors, I do believe it plays a definate role in prices.

[Eclipse Now]

Yes modest, it's scary not just because oil helps us get to work, and the shops, and everything else we do.

 

It's the food! 10 calories of fossil fuel energy to grow just 1 calorie of food energy in the current agricultural system!

 

This is where my doomer mates really go to town... if you want a few sleepless nights, try reading "Eating Fossil fuels".

 

 

However, I'm seeing new technologies such as "crop and cow" rotation and biochar and integrated systems thinking like permaculture hitting industrial level broadacre farming systems. But as I'm not actually a scientist, let alone an agricultural specialist, I have no idea how much of what I'm reading is spin and how much is truly doable at scale!

 

Another completely different thought...

Peak oil & climate change.

 

As this thread emerged from the global warming thread originally, I'm wondering how many people have thought through the implications of peak oil, gas, and eventually coal (anywhere from 2010 to 2048) on climate change?

 

This is why it seems to me that a carbon-trading system is just way too much paperwork. If we just banned the building of any new coal power stations and let the market and nations build any Co2-friendly electricity technology but coal, surely peak oil & gas and gradually retiring old coal power plants would start to decrease Co2 emissions while our exponentially increasing fast-rail intercity systems and trolley-bus New Urbanism city living replaced oil based transport systems and cities?

 

So rather than a vastly complex carbon trading system, maybe the best way ahead is a new-coal ban and an Oil Depletion Protocol rationing system to stabilise the oil markets?

 

(The ODP website explains that it would rely on the creation of a bipartisan international oil institute that required OPEC nations to open up for a long overdue audit! Once a global depletion rate was estimated this would be applied to citizens rationing cards each year. Anyway, because of the effects on weaning a nation off oil this would still help any individual nation that decides to kick into a serious oil weaning process).

[Pyrotex]

Another note to cheer you up.

Remember, there will be another impact on the availability of oil: the military. Our armed forces cannot continue to enforce what little "peace" there is in the world, if the oil runs out.

So, when it comes down to the point of rationing petroleum, guess who is going to get all of it?

[Eclipse Now]

Agriculture, vital trucking services, and the military!

 

The rest of us will just have to 'get by'. Something like this is in the OECD's Liquid Fuels Emergency Act... haven't laid eyes on the actual document (and am not going to bother to), but 'know' it to be there from reliable sources. And even if it isn't, hopefully our governments will quickly enact some common sense legislation.

 

We need emergency rationing legislation prioritising farming and certain VITAL freight. Otherwise we might not be asking how to get to the shops, but whether there's any food when you finally get there.

[Buffy]

Remember, there will be another impact on the availability of oil: the military. Our armed forces cannot continue to enforce what little "peace" there is in the world, if the oil runs out.

And that's why the DOD is investing a large fortune in Green technologies.... :hyper:

 

Now how are the Cheney conservatives who think that green is merely a "a sign of personal virtue, but it is not a sufficient basis for a sound, comprehensive energy policy," going to continue to "support the military" with a straight face when it turns out they're all a bunch of librul tree-huggers? :)

 

Not even the gods fight against necessity, :naughty:

Buffy

[Zythryn]

...We need emergency rationing legislation prioritising farming and certain VITAL freight. Otherwise we might not be asking how to get to the shops, but whether there's any food when you finally get there.

 

Exactly!!

Rationing should not be even, some services will need to take priority. Exactly as you mentioned, transporting food TO the local stores should be one of the first (and medicines to pharmacies).

[Zythryn]

And that's why the DOD is investing a large fortune in Green technologies.... :cheer:

 

Now how are the Cheney conservatives who think that green is merely a "a sign of personal virtue, but it is not a sufficient basis for a sound, comprehensive energy policy," going to continue to "support the military" with a straight face when it turns out they're all a bunch of librul tree-huggers? :rolleyes:

 

Not even the gods fight against necessity, :phones:

Buffy

 

I remember a show which had a Bush admin higher up muckity muck fellow that was driving around a Prius with a bumper sticker that said 'Bin Laden Hates this car';)

It really is a national security issue. The DOD and branches of the military and CIA treat it as such. I don't think the conservatives can continue much longer pretending it isn't.

[Eclipse Now]

Not even the gods fight against necessity,

But it sure can make us mortals fight amongst ourselves.

EG: From Zog's cave raiding Grok because Grok's cave caught the last mammoth, through to Spanish Conquistador's bringing glory and gold to Spain while smallpox killed an empire, through to Haiti street riots over food drops, through to the Carter Doctrine getting over-protective about the dregs of the hard-to-get sour crude in the Middle East.

[Eclipse Now]

So here's another question...

 

Where do you rate peak oil in terms of risk to our society? Worse than global warming, or an easier risk to mitigate? What if we see peak oil, gas and coal occurring over the next 10 years? Remember the University of Newcastle NSW has said peak coal could occur anywhere from this year to 2048.

 

So while there is still a lot of oil, gas, and coal to burn, the vast volumes of the 'good stuff' are burnt, and now we're heading into the less energy dense, harder to extract stuff.

 

As Chevron said (PDF)

"So why should you care?

It took us 125 years to use

the first trillion barrels of oil.

We’ll use the next trillion in 30."

 

Do you think alternative technologies like "Better Place" electric cars with battery swap stations can be rolled out as fast as the liquid fuels deplete? Do you think peak oil will be a small economic blip, a severe recession to rival the GFC, a Greater Depression that sees us grinding through amazing fuel rationing and horrific poverty for the next few decades, or a civilisation ending event?

 

What do you think!?

 

Let's put it down here for the record, and look back in 10 years.

[Pyrotex]

I think it will be devestating. Maybe 5 billion people won't die off over the next half century. Maybe fusion power will save our energy infrastructures. But it won't be the same as what we got now. The end of the 20th Century is at hand, and we will never see its like again.

[Eclipse Now]

Yes, it certainly is serious. I'm inclined to warn those in charge of the very serious scenarios, while also dreaming of the positive solutions for the average citizen like you and I... just to maintain morale.

 

Don't underestimate the power of big infrastructure programs to generate employment in the post-oil collapsed economy, and get things running again.

 

America built the first California to New York railway by hand, with no oil assistance, in just 3 years!

 

Gosh, here in Sydney Australia we can't seem to build a subway that stretches 3 suburbs in that time.

 

But as oil-crisis unemployment rises and the economic pain truly begins, surely the governments of the world will roll out infrastructure and employment programs around the solutions, even if it means severe liquid fuels rationing and approving projects in a faster-than-usual emergency economy situation.

 

I'll be happy if it looks and feels like a war-time-economy as we go to war with our addiction to oil, as long as we can avoid it becoming an actual war over the remaining oil.