 |
|
Peak oil: the economics behind the problem
Let’s get back to peak oil. Previously I defined the peak oil phenomenon and discussed some of the science underlying the issue. In this post, I’m going to talk about the economics behind peak oil, the dynamics that underlie worldwide consumption and production of oil. To review where we are so far: at some point in the relatively near future, natural limits to the rate of oil production will cause the daily supply of oil to top out and then enter a steady decline. This peak is the inevitable result of the geology of oil fields, and will occur long before the world’s oil supply has been fully extracted from the ground. Demand for oil, on the other hand, is not likely to decline anytime soon. Quite the opposite. In 2004, China passed Japan to become the second largest consumer of oil, after the United States. If Chinese oil consumption continues to parallel the country’s economic growth, China will catch up to the U.S. in about 20 years. And China is by no means an isolated case, although it is one of the largest single drivers of increasing demand. The same story is playing out across the globe, particularly in Brazil, India, and Russia. Currently, worldwide demand for oil is about 84 million barrels per day. And worldwide pumping capacity is…about 84 million barrels per day. That’s right, we’re already bumping up against the ceiling of our pumping capacity. In the past, the world could rely on Saudi Arabia’s spare pumping capacity to smooth out temporary supply fluctuations. For example, during the first gulf war, Saudi Arabia moved quickly to make up for the interrupted supply from other Gulf States, and managed to keep the resulting oil shock from being worse than it was. These days, however, even Saudi Arabia is pumping at full capacity. Now, pumping capacity is not quite the same thing as peak oil. We can theoretically increase pumping capacity, whereas peak oil places a harder limit on production rates. But new pumping capacity takes time to develop, so the high gas prices and dramatic fluctuations we’re presently seeing are a foretaste of what’s to come. Demand is overtaking supply due to large-scale, systemic trends, and we shouldn’t expect gas prices to revert to “normal” anytime soon. The good news is that sustained high oil prices by themselves aren’t that bad for the economy. We can have robust growth even when gas is dear. And, as some have pointed out, high gas prices have the positive side effect of making alternative energy sources more economically attractive, which is a key to long-term adoption. The bad news is that, while high oil prices themselves are not necessarily crippling to the economy, plenty of evidence suggests that severe fluctuations in oil prices are in fact very bad for the economy. Sudden jumps in the price of energy — which is a key input to, well, just about everything — cause ripples throughout the economy. I’m not old enough to remember the oil shocks of the ’70s all that well, but I’m told they weren’t very much fun. Tags:
Further reading
Like this article? Get weekly updates by email!
Comments2.
Comment by Josh
@ Jan 2, 2006 2 PM
 Your title should read “No Economics: The Problem with Peak Oil.” A bell curve would suitably fit a plethora of different products (in fact, I just plotted VCR production over the last twenty years and am confident that we have run out of VCR parts). Hubbert made one obvious prediction but did so with the wrong tools (he also made many wrong predictions, a hallmark of the research of those who followed him). He definitely didn’t take economics into account. And since then economists have made a living by forecasting some enigmatic peak, a great make-work project since they have had to continually push out their predictions. Josh, Who said anything about bell curves? The number of wells has an upper limit, the number of VCR-capacitors does not — they just went out of style. These are intrinsically different kinds of variables. Yes economics will slow demand - when a gallon of gas costs 5 or 7 or 10 bucks eventually Americans will drive more fuel efficient cars. My feeling is that Americans will ignore the price of gas/diesel until it costs way more than we’ve seen already. Thus the demand will show vanishing signs of slowing and more SUV’s and RV’s will be purchased in 05 than in 06 and undoubtedly more in 07 than 06 etc. While Hubbert didn’t take economy into account, Americans (who far outweigh the rest) will significantly delay the reaction time. Of course one should spend more time acting than blogging. I drive an 02 VW TDI and make my own fuel from waste cooking oil with a reactor I made from an old hot-water heater and a couple hundred bucks of plumbing etc. http://www.biodieselcommunity.org/appleorchard/ I encourage all who read to build one of these now to sidestep the direct effect of this coming crisis. We will need to save as many dollars as possible to pay for our meals which travel on average 300 miles to get to the dining room table. Adam, When you look at the impact on markets, however, the real discontinuity occurs well before the peak, at the point at which the growth of supply can’t keep pace with the growth of demand. The last two years have given us a small taste of that, though that could reverse with the wave of new oil supplies coming onstream over the next few years (see http://www.cera.com/news/details/1,,7777,00.html). The challenge will be sustaining interest in peak oil once we have passed the dates of its most dire predictions (2006/2007) without reaching an obvious peak. Meanwhile, keep up the good work, and I’ll continue to mention TerraPass on EnergyOutlook, as appropriate. 
Josh, I’m not too clear what the technical obsolescence of gadgets like the VCR have to do with consumption of a nonrenewable natural resource like crude oil. This feels a bit like comparing the demand for gold pocket watches with the demand for gold. The two don’t really have anything to do with one another, and comparing them just confuses the underlying economic issues. It also bears mentioning that predicting the oil peak is hardly a make-work project for academic economists. To take just one example, Matthew Simmons, one of the most prominent peak oil pessimists, is an investment banker who has made a very successful career in the energy industry. Legitimate disagreements exist over when oil production will peak, but the economics of the situation are far too well-understood to be dismissed out of hand. 6.
Comment by Priti Zararia
@ Sep 25, 2006 12 AM
hello. i would like to know yr views on connection between high oil prices with the fashion industry. i am a student of Polimoda, Italy, currently doing Masters in fashion marketing. We have to give our views on how increase in oil prices is affecting the fashion industry. 7.
Comment by Anonymous
@ Sep 25, 2006 7 AM
TerraPass has given a lot of thought to this issue. We think stovepipe hats and velvet jodhpurs will be making a big comeback in the fall if oil prices stabilize at current levels. Any further supply disruptions could have a dramatic effect on hemlines, so we’re watching the situation in Iran closely. Although it’s too early to say exactly how the discovery of a huge deepsea field in the Gulf of Mexico will affect the long-term outlook in the fashion industry, we have two words for you: trucker hats. Post a comment |
|
good stuff Adam.
I’ve been thinking a lot about the potential alliances/conflicts between the climate change crowd and the peak oil change crowd…there’s a lot of common ground, but there’s also a few issues that could be interesting. I’m working on a post on that over at TOD right now…
Also, I wanted to thank you for that link to us over in your blogroll. It actually points to our old site (we moved to http://theoildrum.com), but we’re thankful nonetheless! Send me an email over at TOD, and we can talk about some ideas. Cheers, PG