How to talk to an economist about peak oil

A quality piece tonight over at Econbrowser; it captures one of the things we try to do here at the oil drum: integration of the many aspects of the peak oil problem. Here's a snippet:
I for one would like to see better communication between economists, geologists, and petroleum engineers about the timing and consequences of the eventual decline in global annual production rates of crude petroleum. In part the failure to communicate better with each other stems from differences in the language, assumptions, and paradigms with which those of us from different specialties approach this issue. As one small step toward bridging that gap, I'd like to lay out for noneconomists a few of the key aspects of how economists might think about peak oil.
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Thanks for this link. It is a great primer on an economist's viewpoint of peak oil and is very rational and balanced. I do think everyone should take the time to read the post and some of the comments (although they can skip mine, which is far too long).

Yes, thanks for the link - definitely worth reading. I particularly liked Adam Porter's post ( Buckminster Fuller points out (in Critical Path) that the elites created and benefit from specialist academic education (he cites Oxford University as the first example) - an extension of "divide and rule". An interesting opinion, but either way, let's talk more across our specialization boundaries. And Jack, I enjoyed your comments too :)

I guess it goes back to a time issue. We are seeing things ramp up priceewise, seeing tight markets, but not in the catastrophic ranges. Futures markets bear this out, But what we know is that the problems driving the pricing are inexorable, and their pressure will continue to build as we go forward.

Am I wrong to think that economists need to see demand destruction before it is something they will worry about? At what point does an economist begin to worry about societal effects?

Just wondering out loud...

I've also been pushing this notion of an interdisciplinary approach to PO, with a particular emphasis on bridging the economist/geologist chasm. The main problem I've encountered in this area is trying to get non-economists to understand that we economists aren't a bunch of idiots marching in lockstep. Hell, ask 10 economists for an opinion on ANYTHING and you're likely to get at least 15 different answers. Getting us to agree makes herding cats look easy.

The linked article touches indirectly on a critical detail, though, one that I think deserves much greater attention than it's received so far: The fundamental and major difference between a single country's oil production peaking and the entire world's production peaking.

When the U.S. 48 oil production peaked in 1970, there was no constant run-up in oil's price, so there was no signal sent via the price mechanism to bring new, more expensive production online. The flow of cheap oil imports meant that there was no looming disaster, and everyone knew it at the time. We knew there were huge oil reserves in the world, so there was no need for drastic measures.

When world production peaks, though, not only do we have the expected higher prices caused by geology-constrained supply, but there's also a second layer of price rise, in effect, caused by our realization of what's going on. In other words, in 1970, the market priced oil one way, and in 2005 it's pricing it via a very different set of rules. Yes, there are issues with tropical storms and fears of terrorist attacks on the oil infrastructure pushing up prices, but in essence we're faced for the first time with the notion of what oil is really worth when you won't have as much as you'd like.

Put another way, we see that we're running pretty fast directly at a brick wall (the need to make the post-oil transition), and we're figuring out that we need to stop running, get ready to climb, and accept that some of the baggage we're carrying might not make it over the wall with us (e.g. the airline industry in its present form). In 1970 we faced nothing more than a curb we could step over and keep on running without so much as breaking stride. This time we have to respond much differently or we'll smack into the wall and have no chance of getting over it in a reasonable fashion.

Luckily, there's a lot of attention on the issue, and people, companies, and universities are doing what's needed. It would have been much better if we'd gotten on the job, say, back in the 1970's, but let's be real--it's not like we had a U.S. president, decked out in a cardigan sweater, giving us the bad news about energy and trying to lead us in the right direction.

Well, I read the article, but wasn't impressed much. His argument is perfectly circular, and will resist any modification until a disaster actually happens. Saying that oil cannot go to $200/bbl because the market would naturally see it coming and we would already be at $180/bbl doesn't impress me. He counts a lot on greed leading to increased investment, ignoring the fact that short-term greed trumps long-term greed every time.

Some of the commenters were interesting. Apparently scientists and engineers are too authoritarian and don't understand how the real world works, and lack economists free-market abilities to create solutions out of thin air.

I enjoyed the article, and its follow-on discussion. I think one funny thing is that the range of opinion in the comments sort of proves the limits of human economic prediction. If we were "good" we'd all have the right answer ;-)

Amory Lovins of RMI says reckons we can kick our oil dependency now:
1. Double the efficiency of using oil...
2. Apply creative business models and public policies to speed the profitable adoption of superefficient light vehicles, heavy trucks, and airplanes...
3.Provide another one-fourth of U.S. oil needs by a major domestic biofuels industry...
4. Use well established, highly profitable efficiency techniques to save half the projected 2025 use of natural gas...
This is from the executive summary of Winning the Oil Endgame, a Pentagon-sponsored report. Personally, I think we have the technology but lack the vision to pull it off in time. What do you economists (and others) think?

There is a fair amount of country between what we can do, at any one point, and what we will do.

I mean, maybe the "economists" should explain Enron ... especially explain why it was unique and not characteristic of wider trends and motivations within the energy industry.

odo -

Don't single out my industry on the Enron deal *grin*

Seriously, there is a wealth of articles out there on the selfish and destructive business practices used by most large corporations. The big difference in Enron is the scale of the obfuscation and deceit, and the fact that they got caught. The fact that they were an energy company is actually an anecdote.

I consider businesses that let their pension plans be robbed by management and covered by government pension insurance just as guilty as Enron. Job export by corporate managers here in the US is also something done simply to enrich their bonuses. Sure, it is caused by Fed banking and trade policies, but the disconnect between management and employees has never been wider than today. Lying has become a talent sought after by corporate boards across the US, and obfuscation has become an art form known as "spin".

It is rare to find a company small enough that honesty is still considered an asset, rather than a liability, in climbing the corporate ladder. MO anyway..

The Lovins book deserves a lot more attention among those who follow the Peak Oil issue. Lovins is an optimist, but achieving half of what he proposes would go a long ways towards mitigating the impact of peak oil. The big question is time. Even if we went to a "war footing" in implementing his recommendations now, some significant pain would be inevitable if we peak this decade (much less this year), as appears to be the most likely case.

Perhaps The Oil Drummers could take a stab at commenting on the Lovins book at some point?


J - that's actually where I was heading. I'm usually an optimist on human nature, but I think it is a valid question - how widely "Enron values" are shared (even if not taken to that extreme) in government, major corporations ... and down the line, to the local level.

It becomes another reason to split the difference on expectations - not everybody is an Enron, but not everybody is a Berkshire Hathaway either.

Lou Grinzo,

You make a very important point that the characteristics of the final peak will be very different from individual country peaks. I have been thinking about it as well, but haven't seen much public discussion of this issue. In the recent past any single peak could be easily dismissed because the assumption has been that Saudi Arabia, or OPEC in general, will just backfill. But if Saudi peaks, or world production peaks, I agree that prices will shoot up as you describe. Keep posting on this topic, I would like to hear other opinions.

John Norris,

I saw Amory Lovins and his team present the Winning the Energy Endgame at Resources for the Future in Washington last year. I do think studies like this can map out potential ways that we can adjust to a future with less oil. My personal belief is that there will be no single replacement for oil. But Lovins shows that from a technical standpoint, we already have the ability to get by on a fraction of what we use now. The ultralight cars and use of biodiesel are two good examples of how that could be done. While the transition could be difficult, in the end the economic impact of oil demand reduction could be manageable.

I do think the price signals from the final peak that Lou mentions are the only possible driver - we won't take action until we feel the pain. But as the Econbrowser piece discusses, market will price this in and start adjustment earlier than many people think. I do think futures markets are an alarm system that may already been telling us that the wolf is approaching the shed.

I'm going to make some comments from the "non-economist" point of view.

1) Since energy and oil in particular is a fundamental resource, the price of virtually all goods and services depends on it. So due to inflation, the straw man argument that oil now = $60 and oil n years from now = $200 can't be considered with a constant value for the dollar (or whatever currency is used for pricing).

2) Every economist I've heard talk about PO assumes that the resource in question (oil) is essentially infinite in supply. The higher the price, the more that will be extracted at the higher price. But even if the supply is "infinite", the peak assumes that it becomes more and more difficult to extract the stuff due to smaller fields with lower payoffs, deep oceanic drilling, depletion of "megafields" etc. Similarly with the non conventional sources (e.g. tar sands). Sweet crude, before the peak and considering start-up costs, has a energy cost in/energy out ratio of about 1:20. In the future, start-up costs rise dramatically, targeted reserves are smaller or less certain and the in/out ratio declines. The bottom line is that investment risk escalates despite higher prices. No new easily recoverable megafields will ever be found again, IMHO.

3) The "market adjustment" argument assumes that automagically societies will turn to alternative fuel sources and decreased use (conservation, economic slowdown) as prices rise. For the former, how fast can this happen? We have already made our energy bed and now we must sleep in it. The enormously expensive infrastructure for using alternative non-fossil fuel energy sources is not there. As energy prices rise, it will become more and more difficult to build. Even worse, conservation only goes so far and the anticipated slowdown (recession, depression) of oil-dependent economies slows or even halts investment in switching over to new energy sources.

Lovins is definitely an optimist, but there are lots of issues that simply aren't dealt with - cost of superlight, doing away with or severely modifying crash test requirements, revamping GVW taxation, etc. Any and everything as it is currently regulated and taxed will have to be changed - not something our government is very good at. Any time you screw with someting that has a tax associated with it, you are screwing not with just one but usually 3-5 governmental entities.

Ever try to change a sales tax? You have to deal with state, county and municipal entities at the same time. That is one of the things that CA has over the rest of the country - referencums can make things happen. But elsewhere, the "simple technology" of going to ultralight hi-tek cars is fraught with issues that affect government revenues (their word - I say taxes!)

The plight our rail system is in has to be corrected - this is not something that can be done in a decade, assuming we stick with the rail and engine designs we have now. Changing those two items, in addition to upgrading or replacing spurs and major track sections, we go to 2 decades to rebuild.

Genetic modification of plants is currently not sustainable, and is very questionable ecologically - if we push biodiesel using the same methods, we will have an eco-disaster or else a giant monopoly (like ADM) controlling fuel supply.

Nit-picking? You could say that, but after a half century of watching how things REALLY unfold when disparate interests must come together... I think these "nitpick issues" are going to make the change over very bumpy and problematic.

oops - referendums...another misteak by the dum

odo -

I think the "Enron Value System" is actively engaged and in play at every level other than the immediate local system. Even metro county governance is eaten up by graft and corruption, with people getting the nod on where to buy land in the path of future freeways and bypasses to county officials simply refusing to do business with anyone they haven't known since childhood. I use these examples, as one is typical of Harris County Texas, and the other typical of neighboring Montgomery County Texas. I have had dealings with both, and researched a lot of information on both.

Where does the first Urban Rail System run in Houston? From the Medical Center to Downtown. One might be inclined to ask who lives in the Med Center that works downtown? Or who lives Downtown that works in the Med Center? Both have the same answer - very few people.

However, in small cities where the amount of cash flowing is relatively small and understandable, these issues seem to never come up. Similarly, metro area small cities seem to avoid these corruption prblems as well, but again, they are of a size where you can actually speak and address the city council unencumbered. Try getting on the list to address any metro city council - if you aren't "one of the boys" or else locally famous, it isn't going to happen.

What do you think? At wht level does corruption set in visibly within government circles?

I don't have the Lovins book in front of me, but I seem to recall him at least addressing each of the points you make. Whether he addresses them convincingly is of course debatable.

With regard to vehicle safety, he argues that lightweight synthetic auto materials are safer than current materials. The big obstacle here is figuring out how to reduce manufacturing cost.

With regard to ethanol / biodiesel, he argues for utilizing marginal farmlands where switchgrass or sugar cane could be grown. Will this replace all transportation fuels? No, but he presents it as one part of a larger strategy.

Furthermore, his analysis conservatively does not include any assumptions about changes to urban forms. Some good growth management and transportation planning could do wonders for our liquid fuels situation.

I'm not saying that the plan he presents is THE answer, but it's the most comprehensive, well-researched, and well-cited plan I have seen to address this issue so far. I agree with the general consensus here that we are in deep doo-doo, but I believe we may have more options than most peak oilers recognize.


"At what level does corruption set in visibly within government circles?"

That's the ten million dollar question ... how does my expectation of human nature match the reality of human behavior?

... I'll never know for sure.


I think he has a pretty fair plan based on things as they are today. The problem is that as we progress along Hubberts Curve, these things become more and more difficult to implement, especially if the economy is crashed for whatever reason.

What I was also beating at is that our government is not capable of rapid changes in anything tax/revenue related. Even if the cost of UL cars was equal, the legislation for conventional vehicles is a huge part of state, county and municipal regulations, not even talking about the Feds. The ICC regs are hugely weight-biased, and there are wholesale regulatory issues these new technologies must satisfy or force changes within BEFORE THEY CAN BECOME REALITY. Anything that effects the government revenue stream will require changes in legislation, in all 50 states.

Dude, don't forget that our own government is still ignoring the issue. The words "peak" and "oil" are never uttered in the same interview by any neocon apparatchik or PTB bureaucrat. We have a single congressman who has decided that this is important - just one, our newest bestest friend, Roscoe. Peak Oil is actually avoided more than global warming - at least the planet frying into an Ice Age is being talked about between governments. Peak Oil isn't even on the waiting list as yet, since MSM is still busy pooping all over it and us.

The tendency for biomass will be to use existing mass production techniques, or GM crops. These are both proprietary and problematic in their own right. If native switchgrass cross pollinates with the new stuff, do we get RoundUp-proof switchgrass as a bonus? I feel the debate over GM plants and chemical intensive farming is just getting started, and since it is the darling of the agri-corps, this would be a "push" issue for them. They (agricorps) would have to "own it" in some way, shape or form.

If we continue with business as usual, it will not be just "marginal lands" that get plowed under for biomass - it will be the entire countryside. Just the needs of the armed forces would take a sizable chunk of land, not to mention commerce as it works today. Overhsoot still has the piper to pay, and it feels like he isn't wanting stocks or long bonds anymore.

I know there are several ways out of this mess. I am concerned that both corporate and governmental interests are more concerned with profits and power, respectively, than they are with the fate of their customers and citizens. Enron, Exxon, Dick Cheney and Tom Delay are what we have come to expect from the PTB.

I am concerned that because we are not ready TODAY and moving forward with some of these ideas and solutions, the economy may collapse into a big mess before we can even get started. In that environment, oil demand is destroyed along with demand for everything else, and long term gets booted in favor of survival by people, corporations and governments. Where does that leave us? We may have to claw our way back into something better from a very deep hole.

Those are what I wonder about, and why I am prone to go my own way (herd avoidance mechanism) and be self sufficient, as much as is possible.

I read the Lovins book a few months back - clearly he's a key voice to think about. My initial thinking is that his scenarios make more sense in a slow depletion scenario than a fast depletion scenario. Eg at 2-3% annual depletion, switching over a 19 year turnover auto-fleet from 20mpg to 40mpg gets you there (given auto use is about half of oil use). At 10% annual depletion (a la North Sea) it doesn't at all. The future depletion rate seems to have been an object of very little adequate study by peak oil experts.

It also seems unclear to me that the free market will really make great choices in an oil depletion scenario. Eg the auto sector is an obvious area where there are huge easy wins as Lovins notes. People can perfectly well get to work in 40mpg vehicles instead of 20mpg vehicles (sell the Explorer and buy a Prius). It's going to be much harder to cut truck or farm oil use in half. However, in the short term, most American consumers can pay 2x or 3x for gas without driving much less or buying a Prius - they'll whine about it, but they'll still drive the Explorer just as much. Meanwhile, the farmers and truckers are starting to bleed already (search on under fertilizer prices or diesel prices).

So after enough of a shake out to give the farmers and truckers pricing power, then food prices start to go through the roof at a high rate, while the middle class continue to drive their SUVs. That sounds like a recipe for bread riots and other forms of social instability (in the event of a fairly rapid depletion curve). In that scenario, I think there'd be a good case for govt intervention in the form of higher gas taxes for consumer gasoline than industry diesel, high CAFE, or similar.

(I stress that I think the free market might accomodate a gradual depletion ok without any intervention).

Well Stuart, with demand rising in the US, Latin America, Asia and pretty much everywhere but tight enough that weather is now a critical component in BOTH spot and long term pricing...and depletion in most places outside the Middle East approaching double digits or at least seeing double digits ahead, I happen to think we are in a bit of a spot, what?

Why is it that those who think of solutions to PO immediately think of cars and how to replace the fleet? Are we going to continue adding more roads? Should everyone who wants a Prius get one? Why aren't any of you thinking of more comprehensive visions about how to reconfigure the economy? Isn't this the perfect time to look again fundamentally at how we organise things? At least debate it and not just simply think about how do we replace our cars. Are any of you thinking about how other countries are going to cope? ...the ones that aren't saturated with cars, modern technology etc. How many of you have started to consume less, forego the latest gadgets, cut your mileage, spend less time on the internet?
Incidentally...why are people still talking about the 'free' market? Or do you lot still believe in the American Dream?

Philip Martin -

We are a wide and variable group. The commonality is that many of us believe in resource depletion and overshoot, and petroleum happens to be the first item appearing scarce on the planet. We mostly agree that it portends societal and economic adjustments that our civilization is simply unprepared for.

Many of us are already living or moving to sustainable lifestyles.

We have discussed lots of things, including those issues you call into question. But the primary focus is to make people simply aware of the issue, and get them thinking. Once they begin to think, they usually read, and then they freak out. Finally, they begin to act.

A lot of time is spent arguing with disbelievers, or arguing with those who simply feel the forever expanding economy will sort things out, and we are all a bunch of Chicken Littles. Most of us have been disabused of the American Dream. Many of us understand about things like account 990N, gold manipulation, etc. and realize that markets are being controlled.

But people are at various stages of discovery concerning how bad things are, and a lot of words are spent talking about each of the issues you speak of.

Stick with us - join in. We are all learning here, and we have perhaps the widest set of perspectives on PO in the blogosphere.

I'm pretty sure we got the only drilling engineer *grin*


I think the "fleet replacement" thing is important on a serious level (national consumption, natuional preparedness), but on the other hand, it is the thing that hits me everytime I head out the door. I live down in Orange Country California, where (despite California being the Prius capital of the world) it is still possible to see more Hummers on a commute than I see Prius.

I bought a Prius ... but all I have to do is drive someplace to see that I'm in the obvious minority. More "new cars" are big than small.

I take it as a sort of survey in progress. Obviously these people don't believe that gasoline will get "very expensive" in the lives of those new cars. Those owners are not treating Peak Oil (if they've ever heard of it) as a proximate threat.

Sure ... there are things to do "after" people wake up ... but the fleet is a leading indicator of public sentiment.

odo -

This might cheer you up...

The bride and I went by CarMax going somewhere else. The lot was basically filled to excess with Suburbans, Expeditions, Explorers, Yukons, Trucks and BIG vehicles! Only about 20% of the lot was cars!

That means people ARE making the switch!! Maybe not to the pricey and hard-to-get Prius, but they are downsizing. Otherwise the lot would look 50/50, as it has for the last few years.

Maybe in the Land of Fruits and Nuts, it will just take even more pain for people to part with their big toys, and we Texans are just faster on the uptake... *grin*

It will be very interesting to see if "fleet mpg" turns this year, or continues its decline. Very interesting.

Let's hope the worm turns in our favor, eh?