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Blog » Why “Peak Oil” isn’t what really worries me

8 Apr 2005

Why “Peak Oil” isn’t what really worries me

Filed under: Economics — paulcook @ 7:13 pm

To flog a dead horse, here’s another post on oil depletion. This one is a few thoughts, mostly rebuttals to some points that have arisen about the validity of the argument around “Peak Oil” — that we’re a few years away from the greatest oil production we’ll ever see, and it’s downhill from there.

This post follows from my post on Price Elasticity of Oil, as well as this post on blogwaffe, and a whole collection of excellent, but scary, posts on Ted Brenner’s blog.

One of the more common replies to Peak Oil concerns is that oil production is not merely a function of how much oil there is in the ground, but rather a raft of other factors — such as the price of oil (determing what deposits are economical to drill), technology, investment in expanding existing fields, and political stability. I have two points here: the problems of keeping up with demand, and what higher prices mean.

Keeping up with demand

In my opinion, Peak Oil is not our immediate problem. If only it were. Rather, the problems will start when supply growth can no longer match demand growth. Oil demand is growing rapidly, at both ends of the wealth spectrum. US oil consumption is still growing, while that of China is growing even faster. And I can’t see a way that this fact can change.

Per person, first world citizens use a number of times the oil of the bulk of the world’s population. Thus as places like China, and perhaps soon India, approach first world living standards, their oil consumption is going to dramatically increase. Developing countries around the world, especially China, are doing particularly well at the moment, so this is going to drive global demand growth for many years to come.

What could cause demand not to grow? Either getting richer will have to happen without increased oil demand, or getting richer itself will have to stop. Now the US is more oil efficient than China per dollar of GDP — but only by a factor of 2. This efficiency gain, if realised in its entirety, would slow China’s demand growth for only a few years. Is further efficiency possible? Absolutely — blogwaffe is full of good ideas. But are the people who matter interested? No.

The other option is stopping the process of getting richer. Note that this implies stopping GDP growth in the US too — but the effect is even greater for the developing world. In effect, it would mean the developed world saying to the developing world, “There’s not enough oil for all of us to be as rich as we are, so in order for us to stay rich, you’ll have to stay poor”. Besides being almost unenforceable in today’s global economy, this would probably lead to widespread war.

So demand growth is going to continue for the forseeable future. Thus we don’t need to maintain supply, we need to be continuously increasing supply. Thus if, for example, one claims that using the Canadian shale oil will in a few years/decades replace, say, Russian oil (which has smallish reserves), then one has to show that Canadian shale oil can produce a lot MORE than Russian oil has up to now. It’s not a case of finding reserves to replace exhausted fields, we need to be finding more and/or bigger reserves than ever before, all the time.

Facts on the ground show that the rate of discovery is, if anything, decreasing. But the point is that anything less than continuously increasing is not enough.

The Effect of Higher Prices

Yes, higher oil prices will lead to new oil sources being exploited. But this isn’t that helpful, for two reasons I can think of:

  1. If oil prices are rising due to supply exhaustion, then because of continous growth in demand, we need new sources of supply immediately. New technologies and fields need a long time to come on line. The only way to make demand growth stop while we wait, is for prices to rise so high that global GDP growth stops — so this is what will happen (note that this relies on oil having a low price elasticity of demand). Such a price rise is disasterous, for the reasons below. We are not seeing much speculative investment in oil supply at higher prices, so this supply lag seems to be real problem.
  2. Again, rising demand implies that the new sources that become available at higher prices need to be bigger than our current oil sources. And this needs to be true at every future price level. This doesn’t seem to be the case — Saudi Arabia’s huge oil reserves are already all available at the current price, for example.

More to the point is the economic effects of higher oil prices — because it isn’t just a simple overall slowing in growth rates. The oil industry constitutes a significant proportion of the world’s GDP. This is a rough indication of the proportion of the human race’s resources — labour, capital, research, risk mitigation insurance (explaining the instability premium in the current oil price), etc. — that are spent on oil extraction. Increased oil price results from a greater proportion of humanity’s resources being dedicated to oil extraction, and so less to other things. This leads to a drop in production of other products, and a corresponding drop in human welfare.

Different products leverage the oil price to differing degrees. Food, transport and energy are obviously highly dependent on the oil price, while the market price of CDs or movies depends on it very little. The people who experience the drop in welfare the greatest are those who spend the greatest amount of their income on products highly dependent on the oil price. This will be the poor of the world, who spend most of their money on food, transport and energy.

Oil price rises are thus a moral tragedy for the poor. But even worse, this means that the largest energy consumers, namely the rich, will “feel the pinch” comparatively later, and so will not reduce their oil demand till prices rise much higher. The poor will be starving long before drastically higher petrol prices stop the sale of SUVs.

So what does this mean?

I’ve argued that Peak Oil isn’t the immediate problem. Rather, we need to worry about supply growth slowing. Relying on new sources of oil to be found or become available at somewhat higher prices won’t help, as the rate of discovery needs to be constantly increasing — something it isn’t doing. Also, the time lag for supply to catch the endlessly growing demand will mean disaster already, and anyway price rises have the wrong demand-side effects, by hurting the poor rather than the largest consumers.

The only way out, seems to me to be:

  1. Immediate, serious efforts to reduce oil consumption. This means energy efficiency drives such as raising the price of petrol in the rest of the world to Europe’s level, through taxation. Rather a gradual increase, allowing market forces to alleviate some of the suffering, than a sudden collapse when oil price inelasticity catches up with us.
  2. Massive investment in alternatives to oil in the short term, such as biologically-derived plastics or fertilisers, or even bio-diesel.
  3. Massive investment in long-term power alternatives, particularly fusion.
  4. Stop gambling — even if you happen to believe we’ll keep finding ever larger amounts of oil, our civilisation is a lot to gamble! The Easter Islanders chopped down all their trees, and then starved when they couldn’t build canoes. Our situation is not too dissimilar.

In the end, it may be a race to see whether we develop fusion first, or whether the supply curve finally drops below the demand curve first. The result is somewhat important.



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11 Comments »

  1. So, I’m not sure if the term “flog a dead horse” is accurate anymore. I think that we are “flogging something that might have once been recognizable as a horse, had it not been flogged so much”…

    Comment by Adam — 9 Apr 2005 @ 2:45 am

  2. Thanks Paul, well put. Today I found a NY Times op-ed in favor of nuclear energy, which cites a statistic from the International Energy Agency, estimating that global energy demand will rise 60 percent over the next 25 years.

    Comment by Laurel — 10 Apr 2005 @ 1:11 pm

  3. Why a horse? Since we’re talking oil, why not a Stegasaurus?

    Comment by xaosseed — 13 Apr 2005 @ 12:06 pm

  4. Paul, good piece. Yeah, I agree that even if we are decades away from peak oil it doesn’t really matter if demand far outstrips supply. Well, I guess it matters a little. But either way the price of oil will become very expensive and will certainly put a crimp on our way of life.

    Some people argue that the poor have the least to worry about when it comes to problems with high oil prices. I’m speaking of the global poor, not necessarily America’s poor. They argue that since they live a much more simple life they are far less dependent on energy for their livelyhood. For those of us living the good life, getting our food is far more costly and thus much for exposed to spikes in energy costs. Now if you apply this to America’s poor who as you say spend a larger percentage of their income on food and energy and are just as exposed to spikes, they will suffer the most I would think.

    Comment by Griztown — 13 Apr 2005 @ 2:16 pm

  5. The problem is that relatively few of the developing world’s citizens still live a subsistence farming lifestyle. The massive urbanisation of the last few decades means that as much as half of the developing world live in cities, often “mega-cities”. This means that are just as vulnerable to food disruption problems (sometimes more so, as most developing world countries are net food importers), except that people have less ability to afford more expensive food. Also, mega cities often require long commutes to get from affordable housing to work, so transport uses a huge fraction of disposable income. So I think it is a real problem, if not for everyone in the developing world, then at least for a substantial part thereof.

    Comment by paulcook — 13 Apr 2005 @ 6:55 pm

  6. Yeah, I agree. I also think this is the biggest concern is the food issue. I read recently that the world grain yields have dropped for four straight years or something like that. I think that my strongest belief about all this oil stuff is simply that the lifestyle we enjoy currently is not sustainable.

    Sustainable World - A Global Initiative

    Comment by Griztown — 13 Apr 2005 @ 10:25 pm

  7. [...] for the foresight of explaining the difficulties. That is assuming there is a future after peak oil. This entry was posted [...]

    Pingback by Apparent Horizons » Blog Archive » Oldde thymesse — 28 Apr 2005 @ 12:37 pm

  8. I think it’s high time we stopped digging up the sticky black goo that dead stuff turns into when you let it lie around for a long time, and then trying to burn it. Disgusting habit really. I have to hide my face in shame whenever I admit that I’m one of the Humans.

    Sooner or later we’re gonna have to stop relying on oil (and coal etc. for that matter), so the least painful way forward is to start weaning ourselves from it now. I had thought that steadily increasing oil prices might be a good thing, despite the economic impact, because they make things like alternate energy and hydrogen powered cars more and more economically attractive. You make a good point about oil prices affecting poor people though.

    Comment by spleen — 4 May 2005 @ 6:59 am

  9. But yes, even though oil prices hurt the poor more, a gradual increase seems to be the only option. At least that gives time for governments to start doing something to help the people who can no longer afford to commute to work.

    Comment by paulcook — 7 May 2005 @ 12:09 pm

  10. The steady increase in the price of oil is certainly going to inspire mainstream growth in energy alternatives. This has been happening at a grassroots level for quite some time. George Bush’s state of the union address gave some great exposure for renewable energies (regardless of his motivations in doing so). Peak oil may become a very effective motivator. Many americans are already driving less to save gas.

    Comment by Peak Oil News — 26 May 2006 @ 11:03 pm

  11. Oil will never go below $85 again. In 2010 oil will be over $250 a barrel and gas will be $10 a gallon. Even though reserves are rising which should make oil prices drop the fact they don’t drop in price is because the political tensions are rising. With that you will either buy a hybrid which will still be expensive to operate or ride your bike or take the public transit. There are ways to reduce your fuel cost.

    Comment by Ron — 2 Mar 2008 @ 3:29 am

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