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Predator-Prey Dynamics in Demand Destruction and Oil Prices
Posted by jeffvail on August 26, 2008 - 11:01am
One of the classic ecological modeling problems is the oscillating populations of predators and their prey in an ecosystem--as prey population rises, predator population follows suit until prey population begins to fall off, resulting in a subsequent drop in predator population (illustrated below). The same dynamic also applies, to some degree, to the relationship between oil price (prey) and marginal production/demand destruction/energy policy (predator). This post will explore that relationship and its ability to help us avoid poor energy policy choices.
The prey-predator dynamic has been mentioned in the context of peak oil occasionally on The Oil Drum (1 and 2), but usually in the context of human population and carrying capacity. Both oil price and demand destruction can be modeled, at least in theory, as a predator-prey system. Here, I would like to look specifically at the relationship between demand destruction, marginal production, and price through the predator-prey lens.
Classic predator-prey system
The simplest predator-prey dynamic is described by the Lotka-Volterra system of differential equations. The exact values obtained by this system of equations is predicated on several assumptions--such as exponential growth of a prey population when a predator is absent and that predators can consume infinite quantities of prey. I don't propose that these assumptions apply to oil, nor that the Lotka-Volterra equations can accurately predict either oil price or production. Instead, I propose that the relationship dynamic is analogous between the general predator-prey model and the behavior of oil price, demand destruction, marginal production, and energy policy choices.
Seeing Oil as a Predator-Prey System
When oil price rises, there is an increasing incentive to 1) reduce elastic demand, 2) produce more oil, and 3) make public policy choices that mitigate the impact of high oil prices (or at least use it as a lever to pander to a voting population or enrich oneself). Likewise, to the extent that each of these three results bears out, it exerts downward pressure on oil price due to relatively greater production and relatively lower demand. Lower prices, in turn, remove the incentive to reduce demand and to produce more oil--especially where the lower price impacts the economic viability of marginal production.
Since there is an uncertain lag time between rising prices and reducing demand/increasing marginal production, it seems likely to me that the sequential corrections in price and demand/production will overshoot and create oscillations similar to the Lotka-Volterra predator prey model. This may not be the case if oil production potential and cost was a constant (as well as human population, economic growth, etc.), but the uncertainty created by a background environment of peak oil will make it very difficult for these oscillations to eventually settle at an equilibrium.
To some extent, we are seeing exactly this effect in America today. As prices rose steadily from $110/barrel to $147/barrel in early Summer, national attention zeroed in on "America's Oil Crisis," as a perpetual counter on CNBC labeled it. The stage for much of today's Presidential contest was set during this period. As oil prices dropped, and CNBC's "Oil Crisis" ticker unceremoniously disappeared, I've actually heard more than one person comment that "I guess I don't have to sell the SUV." While the macroeconomic situation adds a complicating wrinkle to the simplified predator-prey chart above, we may have already entered the phase where ramped up production plans are being scrapped, efficiency measures postponed, and political will to enact bold energy policy measures fade.
Figure 2: The predator-prey oscillations of price increases and demand destruction/production increases superimposed on top of a geological depletion scenario--note how the volatility fo the predator-prey dynamic works to conceal the underlying geological and geopolitical trends.
Conclusion
At the end of the day, this is a very crude model. It is not intended to predict actual price or production, but rather to illustrate how production and price may interact similarly to predator and prey populations in an ecosystem. The importance of this analogy is that it may help us to avoid certain policy mistakes (or at least be aware of them). When the oscillations of price and demand/production are superimposed on top of geological depletion and geopolitical feedback loops, the resulting volatility effectively masks the underlying fundamentals (see Figure 2, above). This presents several problems, each of which may be more avoidable if the medium-term fluctuations in price, production, and demand are seen as oscillations on top of a very worrying underlying trend of peak oil.
At the risk of invoking the problematic "awareness" issue, the problem of peak oil cannot be effectively mitigated through political or economic choices until it is understood. (how effective this mitigation can be, even if the problem is fully understood, is debatable, but at least some mitigation is possible.) Awareness of the underlying problem, in turn, is being masked by the oscillations of the price/demand/production "predator-prey" dynamic. If individual consumers realize that price drops (at least relative to purchasing power) are temporary in an environment of geological depletion, and if policy makers learn to effectively communicate this point, then we will be positioned to best mitigate the effects of peak oil on a personal, regional, and global scale.
If, on the other hand, we do not see through the fog of these predator-prey oscillations, then we may miss our best opportunity to adapt to the long-term energy reality. Technophiles may be right--efficiency gains and high-tech substitutes may allow us to continue "business as usual" indefinitely. While I don't share their optimism, my overriding concern is that the lure of their sales pitch--especially in an environment like today's where prices are dropping and production is (arguably) rising--will convince us not to make the difficult choices about changing "business as usual" now and force us to make much more difficult choices later.
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Good.
I'm glad somebody finally tackled this.
Up till now it seems that the only possibly paradigm has been an algae boom and subsequent bust as a model for peak oil.
The top post graph is one of many possible models. It would be interesting to see some of the others too.
By merely tweaking the values of α, β, γ and δ you can get an entirely new and different model:
Note that the choice of predator and prey species are merely convenient names to assign the axes of these plots. Given appropriate parameters for Lotka-Volterra, you could just as easily be talking about SUVs and gasoline supply.
As a biologist I love these analogies and I never thought of your example.
When I was learning about peak oil it became easy for me to see parallels in my field. For example:
Optimum foraging theory can likely be used to explain how the big fields are discovered and exploited first and how as these are depleted the "predator" (i.e., resource consumers) switches to alternative resources that are generally smaller and have a lower flow rate, causing a decline in the predator population.
Another good analogy is from macroevolutionary theory and is called the Red Queen hypothesis. It is basically the long term evolutionary consequence of the Lotka Voltera dynamics. As the predator gets better at capturing prey the prey evolves to elude the predator. As the prey evolves to elude the predator the predator evolves to be better at capturing the prey, etc. This is the same dynamic with resource exploitation and economic efficiency--we run faster and faster and find ourselves staying in the same place.
You could add to the analysis the ability of some predators to switch to other prey (Coal, Natural gas, Biofuels). You might also look at EROI from each to see how long the predator can last on each one or how many predators can survive on each prey. Some prey cannot be eaten by certain predators. The predator list can be expanded to the various economic sectors like transportation, food production, steel making etc. It might show a nice path to prioritize our use of all fuels. If you could somehow tie in water use, the model can be expanded.
Indeed, "resource switching" as it is called can include whatever a consumer can consume!
Another analogy that comes to mind is from the field of ecology and is called the "Diversity-Stability Hypothesis." It posits that ecosystems (or food webs) with many species tend to have fewer wild swings in population size because a diversified resource base allows switching to prevent any one "prey" item from being over exploited. Species poor ecosystems, by contrast, would be characterized by the fluctuations of the Lotka Voltera model.
What this means in practical terms is "Don't put all your eggs in one basket." There are obvious parallels with energy portfolios, but this is really a general strategy. So when economists preach the notion of specialization, sure it can improve efficiency, but that always comes a cost that may not be known until it is too late and the formerly diversified economy is gone. I think of this most often in the terms of the U.S. food system. Where I live gone are the facilities for potatoes, grains, meat processing and dairy, for example. But we plenty of vineyards and wineries! Oh, and another crop-based economic sector is even larger but I'll not talk about that.
Jason to be clear we do not find and exploit the big fields first. The search reveals the normal distribution of fields it does not find the big ones first. However we search well in advance of exploitation and we always exploit the best known fields at the time first. We may find a better field later on that we exploit Alaska is a perfect example.
Over time of course the net result is we take the most easy to produce oil first.
Its important to understand that WebHubblTelescope is 100% right in his discovery mode and 100% wrong in interpeting it because he does not include the bias in selection for the best fields at the moment over time.
For all intents and purposes once peak discovery is reasonably in the past i.e 20 year we can assume that we found and exploited most of the best fields.
Of course most of the models on the oildrum assume that despite this selection pressure we will have a nice smooth post peak decline. In reality the time delay between when the best fields in a region are produced and the worst fields can be decades. This is why EROEI is growing rapidly for example it simply because of this selection factor. If we where not able to do significant selection then EROEI would be constant.
Its not.
Nice clarification. Just as a predator develops a search image for the most rewarding prey and will ignore the "second and third best" while it can afford to even though it may be aware of their presence.
Well this gets into the Maximum Power concept exergy EROEI etc etc.
Your hitting the tip of the iceberg of the relationship between predator and prey and energy concepts.
A better model may be lean meat starvation we need fat to live. In oil light sweet oil and natural gas are the fat and heavy sour etc are the lean meat.
I least my investigations indicate that once we have problems with both light sweet supply and NG then our civilization will begin to fail.
What really interesting is we seem to have hit peak everything at roughly the same time.
I don't think this is a coincidence and it seems to come from maximum power coupled with energy conversion concepts. As long as we had cheap energy we where able to leverage it to continue to extract other resources at higher levels and lower and lower EROEI.
For example with enough energy coupled with technology we have been able to exploit lower and lower grade ores.
As the cost of energy has increased it tends to cause peaks across the entire resource base as deposits become uneconomical and price increases result in and explosion of feedback loops and the receding horizons problem. Everything becomes exploitable at some price point that just happens to be higher then today.
Its fascinating that with all this complexity that the result is and implosion or collapse.
The real underlying reason I've come up with is a bit amazing.
Consider the perfect lead glass crystal wine glass it can be used for a indeterminate about of time but the only way it can change is to shatter or break.
Complex systems work this way once they are refined their future is predetermined from that point on the only way they can change is to collapse or shatter. The refinements prevent adaptation and coupling cause feedback.
Historically people note that civilizations always seem to collapse from some maximum the height of power is very discernible. But what really happened was as the society reached its zenith it did so by throwing away flexibility and alternatives in favor of a complex refined coupling. The moment it goes down this path its future collapse is certain. Just like with predator prey relationships as the predator become more efficient either by higher population vs prey or via adaptations then your certain to see the collapse.
The way out if you will is to recognize the danger and aggressively decentralize and decouple and example would be some monster corporation recognizing that it would collapse under its own weight and aggressively spinning off business units while retaining most of the depth. The hope is that the new smaller specialize companies can grow not only enough to pay off previous debts but eventually to provide greater revenue as they in total grow larger then the single entity ever could.
However in general like the beautiful lead crystal glass the parts are not viable thus the solution which is to decentralize and the failure mode which is to shatter are the same.
Life has come up with a incredible solution to this problem it lets collapse happen but then via evolution it recreates a new complex system. Thus as long as some life can exist it incredibly has figured out how to take both routes.
The irony is that man the supposed peak of evolution is unable to grasp these simple concepts in aggregate we as a group refuse to even understand what we are and how life works.
What Nate Hagens and Jeff Vail write about should be self evident truths taught in grade school not subjects of debate. Some how our species fallen into group psychosis brought about by our belief we are greater than the rest of the life on the planet and can "defeat" mother nature because we are clever. What we fail to realize is that every day a clever homo sapien is ran over by a bus.
"The way out if you will is to recognize the danger and aggressively decentralize and decouple and example would be some monster corporation recognizing that it would collapse under its own weight and aggressively spinning off business units while retaining most of the depth. The hope is that the new smaller specialize companies can grow not only enough to pay off previous debts but eventually to provide greater revenue as they in total grow larger then the single entity ever could."
Catch 22...ironic!
Theoretically a large company or government can accomplish more than a small one for the following reasons.
1. A large entity can invest $100 million on a risky potential market or product. A small entity might never have gross revenue of $100 million so it can only invest proportionately MUCH less.
2. Economies of scale.
3. A large company can have MANY specialists... a small company will have proportionally more generalists. Specialists are probably 3 times as efficient IN THEIR SPECIALTY. The large company will have the efficiency of specialists.
The other part of the catch 22 is; to survive Peak Oil society needs to become LESS efficient and have more redundancy IE small companies with local shops instead of Wallmart.
I don't see any good solution to this catch 22. Darnit! I know what I mean, but I am not eloquent enough to explain explicitly.
The problem in a nutshell is the inability to solve new problems. Peak oil is a new problem. In Predator prey terms the predator only knows how to capture prey any thing he does to do a better job at capturing prey simply makes the problem worse not better.
What I think your missing is the loss in flexibility. Most 100 million dollar problems are 10 10 million dollar problems and these 10 million dollar problems are actually 1 million dollar problems. 1 million dollar problems are solved by small groups.
Efficiency of scale only works with very well known problems that are reasonably well understood or can be better understood via specialization. When the problem is ambiguous and much less the solution economies of scale fail. This crystallization the support economies of scale also seem to be exactly the wrong way to solve new problems.
The problem is that efficiency only makes sense with well understood problems and solutions inefficiency is absolutely required to solve new problems with novel solutions. This of course implies excess energy/money largssee whatever to persue these new problems however the original system is efficient and leaves no excess.
Therefore if your resource constrained you have no choice but to dismantle the orginal system to cause and excess to allow the overall system to adapt. You have to generate a surplus. When this need is not recognized then the system will suffer catastrophic failure to free up resources.
Its like a law of thermodynamics efficiency and specialization is always exchanged for adaptability. Its a real force in complex systems just like any other law of nature.
These effectively physical forces cannot be ignored. Predator prey cycles and other models of complex systems are simply examples of the effective forces created in complex systems that behave identically to natural forces. Its absolutely no different from the concept of hole or phonon's in semiconductors.
For and example consider simple majority voting. Voting creates a effective force that causes a new condition to result i.e you choose a winner. Voting is just as real and powerful in a complex system as is the real force of gravity. For some reason only a handful of people seem to really understand that these effective forces are just as real as natural forces and have as big of and impact.
The "American lifestyle" can be identified as the effective force that got us into the peak oil mess. Underneath the complex or group forces is plain old greed and willingness to kill. This has lead us to wreck our ecosystem and will eventually result in the death of billions. Indeed the virtual forces of our complex society actually rival anything nature could do in destructive power.
I think if you can see what I'm saying and visualize the "real" complex forces in our society then its trivial to recognize that it absolutely must collapse. Our only choice is how we collapse the system. The current worlds population must be reduced significantly below its current level it can be done with dignity or with violence thats the only choice we can make and the chances of a dignified ending are sadly probably already in the past. Everyday we deny the truth about our situation simply ensures the violent death of a few more million people. Probably every year we do nothing about peak oil ensures that at least 100 million people will die and early violent death. On a individual level what this would mean is say for every person that manages to concentrate resources to maintain a high level lifestyle ten people die.
I'm not all that much better then anyone else and its hard for me to accept this.
I've already started to take steps in hopes that one day I can give more than I take but this does not absolve me of my role in todays society and the damage I inadvertently caused in the past because I was ignorant. Its hard to not just run off into the woods and start growing my own food etc and stop contributing to the madness but I think or more hope that I might be able to help by staying connected.
All a world leader has to do is stand up and explain to the pigs in America what they are really doing I'm sure if they understood the real truth of the situation that they would be willing the change.
Memmel,
It looks like you hold a similar position to Jared Diamond and The Club of Rome?
I think that it is fair to say that some areas are moving towards solving peak oil and others are already fairly well buttressed against the effects.
The slow moving elephants in the Room are China, Europe and the United States.
I still believe that we can have a partial collapse and a reconfiguration after a period of pain round a more sustainbale solution.
I base this on the assumption that problems become evident over the next five years and some countries (such as Israel, Denmark (perhaps Japan)) show what the solution is and the slow movers subsequently get on the bandwagon.
On the other hand if we get large scale fighting over oil instead I think it might well be game over for the big players along with a catastrophic Alec Scarrow style population collapse.
Dan, I'm intrigued by the notion that "some areas are moving towards solving peak oil and others are already fairly well buttressed against the effects."
Could you (or anyone) specify what areas you have in mind, and what evidence of resilience.
I'd have thought that Pakistan, Haitii, Indonesia and much of Africa (etc?) are already very much suffering the effects. Just because they are poor countries doesn't mean they are not dependent on globalised high-tech and aid from G7 countries.
Memmel: "Peak everything". No. just looking at merely my piano, peak ivory, peak ebony, and peak soundboard pine were all long ago, not to mention peak craftsmanship. Quality buckskin for the keys action has also become scarce. Probably other woods such as pear too. Whale-oil? Furniture used to be rountinely made from solid oak and elm (the latter now extinct in uk). Hopefully peak japanese knotweed but I wouldnt count on it.
Re predictions of civil war - I think many people here continue to severely underestimate just how low-technologically-crippled everyone has become. In aftermath of any breakdown of globalisation, people will be desperately struggling to merely survive (ie find food) to such an extent that they'll have no time or energy for warmongering even on a local scale.
There'll be a huge die-off from starvation/stress/disease. And soon the population will be so much lower that the survivors will have more need to cooperate than conflict.
PS to memm- you do post some(times) interesting ideas but if you could make your posts a bit briefer they might fit better in the limited reading time of myself and many others! (Though I appreciate this can be difficult.)
The current worlds population must be reduced significantly below its current level it can be done with dignity or with violence...
I have trouble envisioning any dignified way in which the human population can be significantly reduced "with dignity." Do you have some such imaginary scenario in mind (even if unlikely)?
Food, Clothing, Shelter, Basic Medical Care, Education, Pension.
The first three are well known but the last three are just as true and just as critical if you wish to control population. Large families are formed to ensure pensions in your old age and to potentially cover medical costs and finally as a collective to potentially allow one of the members to be educated.
I could write forever about how to solve these problems but I'll try and give a brief review of each.
Food intensive agricultural methods coupled with drip irrigation can provide enough food
in addition land is often poorly distributed. I'm not saying you should bust up the larger farms by force but you can support smaller farmers in buying more land potentially via collectives. If you think about it for a bit formation of collectives of various sorts makes many of these problems solvable.
Clothing is not a real issue these days.
Shelter can be greatly improved with some engineering work and small factories to convert scrap materials to decent building materials. Probably one of the biggest gains would be to open up small brick factories that use solar kilns for the bricks.
So the idea is that with some light localized manufacturing we can develop ways to create good housing from local materials and scrap.
Basic Medical Care:
The easiest way to start solving this problem is to take in some of the poorest members of the society and train them as Doctors and Nurses if they agree to help their communities in exchange for their education. Over this Doctors and Nurses who receive a subsidized education could pay it back in the form of a tax either money or working in the poor areas. I know from first hand experience that the medical industry is not designed for the needs of the poor regions a move back to renewable supplies robust equipment etc can greatly increase the quality of medical care in the poor regions we have gone to disposable supplies because its easier then using autoclaves.
I could rant forever on this but the bottom line is with some thought medical care can be vastly improved and equipment and supply costs can be minimized. Local manufacturing of medical equipment could play a large role in this. Next of course decent synthetic labs could produce most of the needed drugs. Lab testing can be reviewed and optimized. I'll stop but the medical profession is so far from whats needed by the worlds poor its in my opinion one of our worst sins. Finally of course birth control and sex education come into play.
Education: Like with Doctors but more tractable its a matter of education of people within the community to be teachers and sending them back to their local communities.
Communal communications with new wireless technologies opens up the chance for almost every part of the world to have equal access to mankinds knowledge. This extends into adult education and practical education. The key point and where I differ from most efforts today is that the educators must come from the community.
Pensions:
This is probably the biggest issue and primary reasons for large families. The first and foremost issue is dealing with single people and widowers. I feel that communal monastic like living arrangements open the doors for people to live a single life for as long as they choose. In the past in most cultures these sorts of communal living arrangements where common often tied to the local religions but the point is that we have removed them in all our cultures with our focus on family living. A family is not the only solution and if we can bring back these alternative ways of life then we can create a population of people that choose to have no children or join the communes with just a few. The problem is of course money and a small global pension would go a long way to helping these types of living arrangements. Pensions can be scaled on the number of children you have with zero receiving a healthy pension. You can argue this for a long time but the key for me at least seems to be communal living arrangements that lessen the need for large families. If enough people choose to have zero children it makes a really big difference. Two people choosing to not have children allows a fairly large family of four to exist without causing population growth. So you can see how its in my opinion what makes the difference not just small families.
Certainly with a social safety net in place and education you can then have smaller families. Finally of course with modern birth control methods being single does not mean you have to risk having a child so it all ties together.
You can break these problems down a number of different ways but the core idea is reintroduction of communal living/collective living for people that are not interested or able to form the traditional family. These same communes could readily be the source for doctors, teachers etc and also be the provider of the pension plan. Done correctly it need not even be a cash issue simply a matter of setting aside sufficient land to allow the commune to support itself.
We should have never ripped these out of our societies I think modern manufacturing and economies of scale is what did them in since light manufacturing was often one of the primary ways these communes continued.
Dignified death? A lot of people are going to be driven crazy with negative life-events, especially those who currently have "wealth" and "status". A lot of them are going to be suicidal.
Another high proportion are more likely to die of hunger, shock, and fatal diseases than by violence.
At Global Guerrillas, Robb argues that big companies have to break up and downsize for very related reasons. That the companies that do not will not survive. [The on-topic post was in July 2008 I think. Something is wrong with the site right now - only showing one post per month.]
Another point I think Jeff is skipping is the issue of limits. We're bouncing around between demand constraints and supply constraints and will shortly move into an environment nearly always supply limited. Like an audio amplifier, when the signal starts clipping, all sorts of nasty harmonics appear. That's the noise.
I don't think he is skipping the issue of limits like you saying. The problem is that as you try to come up with any sort of model for the entire system it gets complex quickly and is in general chaotic. Chaotic models while they look cool are for all practical purposes worthless as predictive tools since by definition they are sensitive to the initial conditions. A small change leads to a major divergence in outcome.
You can look at parts of the problem geopolitical feedback, predator/prey, export land etc and show fairly convincingly that almost all the influences are negative and worse capable of fairly rapid large magnitude changes generally for the worse. The predator/prey model is important since it shows that short term price drops from demand destruction don't help even in the medium much less long run.
We have had numerous posts looking at the wedge effect of conversion our economies and all of them point to a 10-20 year time period at most to change with a fairly concerted effort. Add in the required political consensus and you get the 20-30 time for change common. Look at pollution issues and global warming as examples of the timescales for group change.
I think the intrinsic problem and it seems prevalent even on the oildrum with fairly enlightened readership is that people have a real problem with this sort of meta-analysis that cannot be easily reduced to some predictable simple graphics. But the whole point is thats the problem we actually face once you put everything together your looking at a highly unstable and unpredictable situation with the vast majority of potential outcomes being bad. Although we don't know the real outcome for sure without action its pretty obvious that its certain to be bad. Conveying this message to the public seems to be a hopeless task. The problem is that if you drill in on one detail lets say shale NG production then you can have a difference of opinion since it boils down to if we can drill enough wells. However if you put shale NG production into the global problems we face its obvious that we probably won't keep production up. For example consider a Gulf coast hurricane having a big impact on GOM NG production. Lets say a lot of production goes offline for 1 year. This will put tremendous pressure on shale NG plays and they will be extracted at the maximum rate and probably our ability to create new drilling rigs will be impacted by problems in the gulf. The point is one reasonably probably secondary event coupled with the rapid decline nature of shale NG production is sufficient to ensure that future production will always be less than todays. A fall in prices below the economic level that slows the drilling rate is another case. You can do this for a while and the consensus outcome is that we probably will see high NG prices in a few years as external and even internal factors result in overall declines in NG production. You can do this across the entire energy industry include EROEI etc etc.
So what you see time and time again is that as you try and understand even the simple complex cases the result is always worse then would be predicted by not including them. In fact it becomes obvious that in the case of Shale NG plays the ability to make up for conventional declines is a one time event early in the extraction effort that cannot be repeated.
We face thousands of export land like scenarios and as you dig you find more and more cases.
I found a big one just the other day for example. I was puzzeling over tanker traffic this year and thinking about WT saying that with declining VenMex production more traffic would have to come out of the ME to compensate. But one thing I came up with was that the density of crude varies by 40% so if your shipping more heavy crude oil you literally cannot ship as much by volume as you can light sweet crudes. So paradoxically you can see higher traffic with less total volume if the mix of crude being shipped has moved significantly to heavier crudes. This ties into my NG/Heavy problem.
What this would probably mean for the ME is that if you consider my NG/Heavy coupling and the price and the fact that tanker traffic is close to 2006 levels that Ghawar production probably started into rapid decline this year.
This highly probable solution requires a complex analysis approach since you have to put together a lot of events. For me the last piece of the puzzle was recognizing that less heavy oil can be shipped by volume leading to higher tanker traffic and less real oil.
But try explaining all this to people esp since these complex interaction models would require extensive correct data to refine and prove which we simply don't have. If anything transparency has declined dramatically along with data quality the last few years.
Anyone thats willing to spend some time understanding the problem using the approach of full systems analysis and considering some basic models most from the life-sciences can comprehend the whats happening. Taking a message to the masses that requires them to educate themselves to understand the problem is a hopeless task.
Silver bullets simply don't work when your playing a game of whack-a-mole.
I'm forcing myself to read the 2005 Millenium Assessment. The message is the same, though the UN typically won't use the same language you do. I'm not so sure that people cannot come to understand the situation. If the horizons are brought closer - and they will be - and if people are able to live the solution like they currenly live the problem, they could learn it. I don't expect that to happen.
cfm in Gray, ME
Not only will the failure mode probably not be consistent across classes it also will not be consistent across regions. This is why I'm predicting the formation of enclaves scattered throughout the world. The key issue is if these enclaves will simply use force to retain control of oil and food or if they will work aggressively to rebuild a new low energy intensity economy. Outside of the enclaves of course the overwhelming issue is if sufficient food and medical care exists to prevent serious problems.
I'm of the opinion that we will actually be able to retain a substantial amount of our manufacturing base even if it means continuing with coal fired electric plants for longer. The big question is are they going to be building electric powered SUV's for the enclaves or building wheelbarrows and windmills for the newly impoverished.
Comments made on this board tend to make me suspect that most will focus on electric powered SUV's.
Eventually of course the less fortunate people outside the enclaves that choose the SUV route will become sufficiently well armed by other enclaves and sufficiently desperate to take over the the enclaves that choose the SUV route. One thing that I can't see us having a shortage of is guns and bullets.
It seems the US has fired 6 billion bullets in Iraq as of a year ago and yes this is straining our bullet supply but its not even a fraction of all the bullets made in the world. We probably have enough bullets right now to give 5-6 to every single person on the planet. Peak bullets is a ways off.
http://www.independent.co.uk/news/world/americas/us-forced-to-import-bul...
http://www.marinecorpstimes.com/news/2008/04/marine_recycle_042808w/
And it seems the Iraqi's have no problem selling brass for new bullets.
http://www.navy.mil/search/display.asp?story_id=9696
Memmel:
I love what you are writing here. Very thought provoking.
re: your comment about life's solution and a collapse being allowed to happen and a new complex system arising. I think it's happening.
There are also historical models showing the different kinds of collapse:
Easter Island = algae boom and total collapse
Rome = collapse almost all the way
China = oscillation between partial collapse and rebuilding (rinse and repeat) for centuries.
So are we Romans or Chinese?
Romans or Chinese ?
Good question I wonder. I think it really depends on how well we can relocalize manufacturing and at the same time keep critical trade routes open.
It boils down to getting spare parts in a lot of cases. One thing thats dramatically different today is that we have never seen widespread civilization collapse with the availability of modern weapons. Just the light arms alone make a huge difference esp coupled with light artillery. Few places are actually defensible without being reduced to rubble. Modern warfare tends to completely destroy the infrastructure of and area.
Mogadishu for example has had almost all its infrastructure destroyed and one could make a good case that a big part of Somalia's continued problems is from the previous destruction thats taken place. These sort of conflicts do not bode well for the future in a lot of places. I happen to think that these civil wars will actually be the most devastating not conflicts between nations. One of the big reasons I want to leave the Los Angles area soon is that this region will probably decay fairly quickly into regional conflict that results in most of the infrastructure destroyed.
I don't have the analytical skills to put numbers to why "peak everything". It's my sense, however, that the "peak everything" includes finance and climate change as well as more prosaic resources. Climate change is just a sink that can be maximized - for a while - with more money/resources. Hence the standard arguments that pollution decreases with increasing wealth (it gets exported). No different than extracting resources at different levels of EROEI. It feels right - how's that for a solid empirical basis - that everything peak at once - at least everything interconnected through the economic system.
What we read about at Automatic Earth is the money generated by reducing the planet to gray goo. [I've been thinking about it more in terms of emergy and entropy than maximum power.] That money - made possible by the energy/work/economy of fossil fuels - cannot put the ice caps back. All that money, but nowhere to spend it. We cannot spend it exploiting more of our resource base to repair our resource base - that makes things worse.
"She canna take any more, Cap'n! She's gonna blow!" [Which did happen on Scotty's final mission]
cfm in Gray, ME
I understand what your saying. The fact that we are seeing indications of peak everything which is the result you get from maximum power in that all resource will be exploited for maximum power not efficiency and associated with this is that cheap energy can be leveraged to increase the efficiency of extracting bottle neck resources results in the overall system effectively peaking across the entire spectrum of resources about the same time. It seems that a sort of central limit theorem is possible driven by the decline in net cheap energy.
Although not on a strong mathematical background even the conceptual approach lends powerful support to the concepts Jeff and Nate are presenting. We would not be seeing a broad spectrum of resource problems if technology was capable of solving the energy crisis. This includes pollution/global warming.
If we are lucky then the future will be better then the doomers predict but its clear to me at least that blind luck is all that can prevent the worst outcomes.
If you want a mathematical/systems model for "peak everything" look at the Limits to Growth/World3 outputs.
Specifically look at chapter 4 of the book "Limits to Growth: A 30-Year Update," (http://www.amazon.com/Limits-Growth-Donella-H-Meadows/dp/193149858X)
and this description (pages 170-171) of their Scenario 1 (or
baseline) model run:
As
non-renewable resources become harder to obtain in Scenario 1, capital is
diverted to producing more of them. That
leaves less industrial output to invest in sustaining the high agricultural
output and further industrial growth.
And finally, around 2020, investment in industrial capital no longer
keeps up with depreciation. (This is physical
investment and depreciation; in other words, wear and tear and
obsolescence, not monetary depreciation in accounting books.) The result is
industrial decline, which is hard to avoid in this situation, since the economy
cannot stop putting capital into the resource sector. If it did, the scarcity of materials and
fuels would restrict industrial production even more quickly.
The book and models describe various ways in which the human economy can encounter limits, and
Scenario 1 demonstrates the impacts of resource constraints. Another way to express what the authors are saying is that as more work is needed over time just to obtain the raw material resources needed for economic production, cost inflation eventually leads to industrial decline, followed by a shortfalls in food, medicine, and other basic services like delivering water supplies.
Right on I'm not surprised that a economic focused treatment would also not result in the Peak Everything effect as net energy declines.
I suspect that the some more fundamental model starting from Maximum Power concepts is the right one.
However these don't capture the essence of how fragile the system becomes to breakdown as it reaches this decline phase. We of course know from the historical data that TSHTF more times than not when the system becomes strained like this.
What we don't seem to have is a good way to "prove" this it must collapse. The underlying problem can be explained by looking at the export land effect. As long as oil was cheap it was not a major factor but as oil supply becomes constrained and expensive the flow of money into the exporting nations result in increased consumption lowering next exports. We have many potential other feedback loops that can grow exponentially or even hyper-exponentially that swamp the primary decline. In many ways these could well be black-swan like events that know one ever conceived of.
The interaction of peak NG and Heavy source the chances that finished products exports of diesel and gasoline may drop faster than oil production to stave off local shortages in countries with refining capacity. Etc etc any one of these secondary issues is a candidate for the one that causes real problems to start.
And I stress we have others that no one even recognizes that could be as bad or worse then what we have thought about.
In a lot of ways these can be treated as 1/f noise or spikes.
http://en.wikipedia.org/wiki/Pink_noise
But consider the case of limits of growth with and even this predator prey model with the addition of some sort of spike say a virus that kills half the prey.
The point is the stressed system is both highly unstable to strong random like perturbations and it friggin generates them naturally. A stressed complex system generates anomalous events that cause significant short term stress generating further anomalous events ... We can identify some of these but the reality is your getting spikes at all frequencies that are causing the system to generate more spikes.
Like a bad bearing in a motor as the bearing goes bad it generates vibrations that destroy the bearing.
Maybe this can be called the monkey wrench effect.
I'll add that we know about this in other physical systems.
http://en.wikipedia.org/wiki/Mean_time_between_failures
The solution of course is to replace the part with a new one well before we hit expected failure.
In this case the part is our civilization and the suggested replacement time was 30 years ago.
That's also the argument Hall made some months back where he had graphics showing the energy infrastructure expanding to take over ever increasing portions of the economy. Ultimately the economy has to collapse - you can't keep doing lower and lower EROEI work if you can't feed the workers. It will collapse well before that because all sorts of other ancillary services will fail - and they will not fail uniformly across classes in society.
I'm really looking forward to the Smart Growth forum tomorrow night in Portland Maine. I'm sure they will set me right.
The model isn't wrong because it isn't modelling production. It's modelling price and consuption instead, and production is an input to it.
Ok, later edit: It talks about production increasing because of price, but it is still one (and the smalest) of the two effects that change prices and field quality is still an input.
Excellent post, I was also thinking about a post around the same idea. I believe that we are heading for big price oscillations (or super-spikes) for the next few years. There are all sorts of mechanisms that will generate oscillations in oil prices:
1. There is a short term feedback mechanism (maybe 6 months-1 year):
demand growth -> tight supply -> prices increase -> consumption go down -> prices go down
2. A longer term mechanism (2-3 years):
demand growth -> tight supply -> prices increase -> inflation -> slow down in economic activities -> prices go down
3. A supply mechanism (3-5 years?):
demand growth -> tight supply -> prices increase -> more investments -> more supply -> prices go down
4. A long term structural change in demand (3-5 years?):
demand growth -> tight supply -> prices increase -> consumers buy more efficient cars -> less consumption -> prices go down
5. A long term structural change in supply (3-5 years?):
demand growth -> tight supply -> prices increase -> oil alternative become competitive -> less demand for oil -> prices go down
We have observed feedback 1 already. I believe that 3,4 and 5 require a stable high price environment for a long period for them to occur.
I think we're definitely seeing feedback 2 currently. This is not just a decline in consumption, but a global decline (or stall) in economic activity, due at least partly to high oil prices. Does this mean that the price oscillation will be on a longer wavelength than from feedback 1? Dunno.
Excellent list.
IMO we are also amidst 2) at the moment as resources diverted towards energy started to starve the rest of the economic activities, pushing some of them from the boom to the bust phase, and causing overall economic slowdown.
We also do have 3) as projects started 2-3 years ago are now coming online (but we need to keep in mind that those projects were commenced after 2-3 years of sustained price rise, so the overall cycle should be about 5-6 years at least).
4 and 5 are just starting to kick in. IMO we are in a critical moment right now - if oil prices go much below $100 in the medium term (not too unlikely in a "marginal barrel" market) we may see those positive long-term trends grinding to a halt.
Let's add a couple very short term items to this list. Predictable oscillations are fertile ground for speculators.
a) price is at a recognizable low in the cycle -> speculators go long en masse -> price go up
b) price is at a recognizable high in the cycle -> speculators go short en masse -> price go down
Speculators may amplify or dampen the amplitude of the oscillations depending on whether they move in phase or out of phase with the underlying predator-like cycles. If the oscillations go wild because of speculation amplification, speculators become a scapegoat that masks the fundamentals even further.
Speculators as parasites or a different type of predator?
Different type of predator.
Their population grows depending on the direction of price movement rather than production per se.
They are baby boomers I guess because speculators increase their population depending on predicted guesstimates of future abundance or scarcity.
If you think about it for a bit Oil production already has longer amplitude price swing associated with it on the way up so this predator and prey model works quite well before the peak and is almost a perfect fit for the price swing we have seen over the last several decades.
Absolutely no reason to not assume it will extend forward into the post peak world.
In fact most peak oil deniers are betting on these price swing resulting in more oil just like they did in the past.
Hi Khebab,
I think there is another affect, that of supplier hording creating supply destruction. If I was a supplier and I realized that I could now charge $140/bbl where as 1 year go I was getting 1/2 of that, I would try to maintain the supply/demand ratio to keep the price at as close to its highest peak as possible. With enough surplus supply in the past, this was not possible for a small producer to do, but now with little excess capacity, a small supply reduction can significantly increase the price of oil.
So, reduced supply & higher prices might not spur me to explore for more oil. I think it will depend on my own internal production forecasts vs. escalating exploration costs. In other words, do save my money and wait to explore as the value of my asset increases, or explore now when its less expensive, but cap the new supply until its needed. Thus, reduced supply and higher prices may not necessarily lead to increased supply capacity, just found and/or partially developed reserves.
I'm sure all the large oil producers have at least a few folks working on how to maximize profit based all of these variables. In addition, the state run companies will also be watching as their internal consumption rates approach their falling production and will probably set a date when they will automatically start reducing exports to ensure enough domestic supply for a smooth man-made fuels transition, regardless of the affect on world crude prices and the global economy.
I agree that it deserves further study. Yet we have to remember that the variables involved here remain extraneous variables, only loosely coupled to the underlying finite resource of oil. So the equations that one would derive essentially "ride on top" of the peak oil depletion.
Lotka-Volterra equations usually model cyclic oscillations of "renewable" resources such as foxes and rabbits. So R is the prey (Rabbits) and F is the predator (Foxes). R starts at some value and decays nonlinearly and proportionally to how much prey there is and how many predators there are to eat it. The predator F starts at some value and grows proportionally to how many predators there are and how much prey exist (i.e. exponential birth rate sped up by food supply). The predator population also dies in proportion to its current population (i.e. classical death rate). So, in the essential analysis, one would presuppose that R is some sort of money supply associated with the worth of oil and that F is the set of investors trying to corner the market on the worth. The investors essentially multiply and die-off in proportion to the worth, with the important consideration that you see a phase delay in the current populations of each of the two variables.
In the end, both the populations of investors and the oil-based money supply are renewable in the sense that they will never disappear and thus we can consider them to oscillate indefinitely.
Khebab,
Your list can be simplified during this 2002-2008? price rise. This is because oil is now used mainly for transportation and remote electricity generation.
(1)The short term response is a reduction in VMT, as occurred in 1978-82 price shock and recession.
(2) The second and only response will be replacement of low mpg vehicles with high mpg ICE vehicles and eventually mainly EV or PHEV. In 1978-82 this went on for >10years as existing fleet was replaced, average fuel economy rose from 12 to 25 mpg and only flattened in late 1990's as SUV's became popular. This was during a massive price retreat. VMT however continued to increase after 1982. You could make the case that this time vehicle fuel efficiency can go up much more because there are EV and PHEV's on the horizon and we have efforts to reduce CO2e, new fuel efficiency standards so whatever the oil price in 5-10 years vehicle mpg is doing to make a steady increase perhaps to over 100mpg ( 400%) rather than the 100% from 1980 to 2002.
When virtually no vehicles use oil( long term structural change in demand) , then other uses such as air transportation will be the dominant factor until supply constrains make it too expensive or other energy sources become competitive.
This will be the forth very very long term structural change, the first being oil for kerosene lighting(1860-1915) , the second oil for heating and ALL transportation and some electricity generation(replacing coal 1915-1980) the third oil only for transportation(NG replacing most heating and electricity production) and finally some time soon the forth; (oil only used for air transportation and chemicals).
This means that Jeffvail's thesis that the economy becomes more brittle is not correct, it only applies to immediate reversible price responses, longer structural changes make the economy less dependent ie stage 4 where oil is only used for air transportation and chemicals, most of economy can still function without oil( providing other energy resources are available).
Neil,
Jeffvail's hypothesis IS correct.
The difference is it's correct *currently*.
We could move to your stage 4 (I love your theory by the way) but we could also sit on our collective behinds if we are stupid enough to allow the oil companies to continue to dictate our future.
A somewhat similar discussion was at http://www.postcarbon.org/oil_price_falls_peak_oil_non_problem
by Richard Heinberg:
"I can see the headline of the Wall Street Journal a year or two from now: “Oil Price Falls from $300 to $275, Disproving peak Oil Theory.”"
However, the predator-prey analogy seems to be a little far-fetched. The interactions in the predator-prey system are totally different from what we have in the supply-demand system. The mechanisms are different and the equations are irrelevant. You may equally well consider a system of two pendulums, observe their motion to then start deriving conclusions. If one model produces output that seems close to what your system does, it doesn't mean that the two systems are similar.
The observation that the short-term price oscillations do mask the long term resource trend is a very good one.
That quote from Heinberg is on the money...
While I think the problem of short-term oscillations masking long-term trends is the most important, I don't htink it's quite as far-fetched as you suggest to compare the demand/price system to a predator/prey system. The demand/price interaction isn't like a system of two pendulums, where the motions of the pendulums is a factor of mass interacting with gravity, not of the pendulums interacting with each other. In oil demand/price/marginal supply systems the price directly impacts the demand, just as the population of prey directly impacts the population of predators. In that sense, I think the analogy is pretty accurate--not that the specific set of equations that models predator/prey can be directly applied, but in the sense that increase in A (prey/price) leads to a decrease in B (predator/demand) which then leads to a decrease in A, etc.
"...increase in A (prey/price) leads to a decrease in B (predator/demand) which then leads to a decrease in A, etc."
Actually Jeff, it's an increase in scarcity which leads to the decrease in (predator/demand). An increase in prey would lead to an increase in predators, not a decrease. Just clarifying. I think the comparative analogy is apt, and is just what we're seeing at present.
I wonder about that. How expensive oil must get until the pain makes denial impossible to sustain? Is $275 too low?
I suspect we will never see such stratospheric prices, except maybe for a short while. If we get sustained $275 the world economy will be in shambles and we will have riots on the streets. There are some price levels at which the economy will simply break apart. I can't guess exact values, but I suspect it will be well short of $300.
I don't understand this argument. Economy in shambles and riots on the streets are not impossible events. The fact that a price level brings unbearable pain doesn't put oil back into the well.
It won't put it back into the wells, but will probably make it so dear that people will be forced to stop using it - one way or the other. If you are given the choice to eat or drive for example, what will you choose? We can argue how and when exactly are going to stop using it - but one thing is certain - some day we will have to do it. That's why I think there is an upper limit to the price that can be sustained; if not for anything else, oil can not cost us more than we earn.
If the price rises too high we will have to stop using oil. This part is true.
If we stop using oil, it will reduce demand and help lowering the price. This part is true too. But this lower price will last only for so long. The resource will keep depleting. Also if we use the lower price to start buying again, the price will go back where it was.
I just don't see why oil can never cost more than we earn. Plenty of things cost more than we earn. There are in this world people that can't afford things they need very badly and strength of their needs doesn't make these things more affordable. It just make their life more miserable.
When oil depletes scarce enough, it will go into that territory too. This would be a situation where we can't afford oil and the price still don't go down because others that are richer than us keep buying all the oil at the higher price. There is nothing to prevent that. This is the very thing that will cause riots and put the economy in shambles. But given enough depletion, this is what will happen.
OK, it's my fault - I didn't state my assumption which is that oil price will never reach sky-high figures and still be the predominant energy source powering the society. After some price simply the economy will break apart or we will have to substitute oil with something else (like using less or with other energy sources) - there is no other scenario. Either of these things happening will subsequently lower oil price, so the idea of a price ceiling is quite feasible. After all I don't see a meaningful use of oil as some kind of boutique staff for the ultra-rich to show off.
Of course we will have substituted oil with other sources, long before we've approached figures of such magnitude... but this is just MO.
There is a possible scenario of rampant inflation.
Everything we purchase had required energy for manufacture, transport etc. Even if we stop purchasing oil directly, we still purchase it indirectly through food and other goods. Rising oil prices means we all get poorer every year due to oil driven inflation. Then there is not much ceiling in terms of the absolute buying power of people. The ceiling would be expressed in terms of a fraction of the GDP in constant dollars.
The consequence is a reduction of the oil supply doesn't cause a raise in oil price in constant dollars. It causes the GDP to shrink until demand matches the supply constraints.
Yes. There is obviously an upper price.
Here's a crude (pardon the pun) back-of-the-envelope calculation:
Mean World GDP per capita: $10,000 per annum.
Mean Barrels of oil per capita: 5 per annum.
(85 m x 365 / 6 billion)
The top price is therefore $2,000 per annum if we spend nothing else.
Assuming that we cannot spend every penny on oil and we spend 25% on shelter, 25% on food and 25% on taxation then the top price is $500.
I suspect that the true maximum price is somewhere between lower than this since the economy will obviously break if it only consists of food, shelter and taxation.
Dan, that's an interesting calculation (I like things that are logically imperative like that).
BUT!!!
Those input figures are true for the here and now, but they aren't necessarily true at sometime in the future. If in a few years time those same dollars are chasing half as many barrels, then the highest possible price would be doubled. So we then have to come back to production predictions...
Meanwhile it looks like this calculation is tending to concur with others' reckoning about things getting very "interesting" in the $200-300 range. Now if anyone here can tell us how long our present demand dip is going to last then we will have some idea of when.
Extending the model, a price hight enough will destroy all prey (demand), and thus, completely stop the predators.
Remember that the price can only go highter while there are people paying it. It really doesn't matter if there are bilions killing to get your product, if none of them can pay $200, $500 or $1000 for it, you can't sell it for $200, $500 or $1000.
World GDP is $48 trillion. 40% of world's energy comes from oil. World's oil production is 31 billion barrels per year. It means each barrel of oil contributes $620 in GDP.
In my opinion, the upper limit of price of oil is $300/barrel. This is because an economy must have a ROI factor of 2 to use oil. Long before this price reach many things including air travel, personal & family cars, air conditioners, tractors, refrigerators, tv, internet etc would be gone. The $300/barrel figure is assuming that govts take no taxes.
In a realistic environment where govts do take taxes and where there are unavoidable inefficienes and defects a price of $150/barrel is the maximum an economy can sustain. If price go near this level recession starts which reduce consumption and bring down prices.
Note: The figures used above are of constant july 2008 dollars.
Say around 2075 to 2100 AD there is a worldwide oilflow of 3 million barrels per day going to market.
Assume that ALL feasible renewable energy sources have mostly REPLACED the need for oil as a fuel.
With these two conditions; oil could easilly have a value higher than $300( $300/barrel does not include inflation ). Uses; chemical feedstock for industrial chemical manufacturing, lubricants, fertilizer, airplane fuel. It seems to me that airplanes will still need hydrocarbon fuel in 2100 AD.
When there is only 250,000 barrels/day of oil worldwide the price will be ?
Well let's see... wind energy costs 10c/kwth at most, or the equivalent of $170/bbl on primary energy basis. If we used electrolysis to produce hydrogen at 70% efficiency - the hydrogen will cost $242/bbl oil equivalent. This is all assuming no improvement of technology etc. Actually these figures can be even worst-case scenario, as nuclear reactors are reported to be able to produce hydrogen for as low as $1/kg or about $100/bbl.
Hydrogen can be readily used for all those purposes you listed, including air travel. Of course nobody does that yet, but I'm certain that if oil price stays above $200 for several years things might change a bit. Maybe if oil was really the only option out there, that scenario would hold, but I don't think it is.
Note: I'm assuming all prices in 2008 dollars.
Ummm I conceed to your numbers.
Also IF in the future 'crude oil' is desired an approximation could be derived by several means if the energy supply is cheap enough IE unlimited electricity from LOTS of solar worldwide.
Thus...the post you replied to (me) is likely in error:(
If you need a breakdown - a bbl of oil is 6120MJ, a kwh of electricity is 3.6MJ -> 1bbl = 1700 kwh * 0.10 = $170
Having said that I'm not trying to say "sleep well kids, there is no problem, oil will never exceed $242/bbl, because we will miraculously transition to hydrogen from wind".
There is no shortages of scenarios where other energy sources replace oil, what we don't know is how and what will happen from here to there.
Lets see, the best alternative option is wind energy. Its capital cost is $3/watt. I don't know the maintenance cost so ignoring it for now. Ok, my research said that you need 5 watts capacity to get one constant watt but since jerome said you need only 2 and he has practical knowledge, not just bookish like me, therefore I take his figures. So, that means $6/watt. Then there is the issue of storage. My research said you lose 20% of energy in storage. So the figure now is $7.5/watt.
World's power usage is 15 trillion constant watts. I assume that two-third of it is using ICE with 32% efficiency. Since efficiency of electric motor is about 80% so we get a factor of 80/32 = 2.5 which means we only need 4 trillion constant watts here, not 10 trillion constant watts. Add the other 5 trillion constant watts which is already electricity or is in other non-ice uses we get a figure of 9 trillion watts.
To get this 9 trillion watts we need a capital expenditure of 9 trillion x 7.5 = 67.5 trillion dollars.
World's GDP is 48 trillion dollars. World's entire industrial capacity is 40% of that, that is $19.6 or say 20 trillion dollars. So if you use the entire industrial capacity of world to make wind mills and related equipments you need about 3.5 years.
What is absent in above analysis is the cost of conversion to an electric economy. I read somewhere that it takes about as much energy to make a car as the car would use in its entire life. So, to replace ice with electric motor contains a huge cost.
Lets see economy of a wind mill.
Suppose we have a wind mill of 1 watt capacity. Using jerome's numbers it produce a constant output of 0.5 watts. 20% of it is lost in storage. We get a constant output of 0.4 joules per second.
During its life of 30 years it would have produced:
0.4 x 86400 x 365.25 x 30 = 379 million joules
Since world's gdp is 48 trillion dollars and world's energy consumption is 475 million trillion joules, therefore each dollar of gdp means energy consumption of 10 million joules.
Therefore, 379 million joules means 37.9 dollars in gdp.
Capital cost of installing a wind mill is $3/watt. We ignore maintenance cost for now.
We reach a ROI of 37.9/3 = 12.6 of a period of 30 years. It means 42 percent per year. Not that this is figure for ROI in the GDP of country, not ROI for the wind mill owner.
My other posts show that when one barrel of oil contributes $620 in gdp, world economy can sustain only 25% of it, that is $150, in energy cost. Using the same method we can say that at maximum the windmill owner can expect a ROI of 10.5 percent per year.
If you buy farm land and grow food on it and sale it in market you get a ROI of 12 percent which is not only more than what you can get from wind mill but as long as you do sustainable farming your capital the land remains undestroyed, that is, it not get lost in 30 years as the wind mill do. Also in times of trouble you can eat the food you grow and wear the cotton you grow but you cannot eat the electricity you produce. Also somebody can come and destroy your wind mill but nobody can destroy your land, it would remain there till the sun and sky is there.
Wisdom: If I understand correctly, at first everyone will invest in the more profitable farming and neglect the less profitable windmilling. This will cause an excess of food and a shortage of windpower. This will then cause the market to adjust prices leading to windmilling being a worthwhile investment.
Right. I think hydrogen definitely has a place.
Though well-to-wheel it's efficiency is a bit less than 70% (more like 40%) it's still nearly double that of ICEs and as you point out, it could easily be used for airplanes.
On the other hand, I doubt that it makes sense for automobiles (except in very, very cold climates) since all-electric is double the efficiency of hydrogen fuel cells and much less than half the cost.
I think ground transportation will (or should) definitely go electric, hydrogen doesn't have a place in cars.
But that's already off-topic.
Thanks for this reply. It helps clarify the thinking.
My calculator says that $48T * 40% / 31Gb = $620 per barrel. I guess this is the calculation you referred to.
Your calculations make sense to me. I could ask questions about why the minimum ROI of 2 instead of some other number and why taxes and other inefficiencies divide the maximum by two and not 1.5, but this would be nitpicking at this point. The base logic makes sense and this is what matters.
What you are saying is there is a maximum price that can be derived from GDP and when price approaches this level, the economy must slow down to keep oil affordable. The corollary is depletion is not going to cause much higher prices than what we see now. It will just cause sufficient recession and inflation to keep the price in constant dollars in a range below that maximum sustainable level.
Jerome a Paris has observed a trend of 30% increase in the oil price since 2002. We are dangerously close to the 150$/barrel threshold. According to this theory, we are approaching the state of permanent recession.
GDP varies greatly from country to country. Could it be that the maximum oil price before recession starts varies from country to country depending on the GDP and oil consumption? If the discrepancies are great, I can see geopolitical implications. Someone with the ability to manipulate oil price could provoke recessions in vulnerable countries to reduce their oil consumption while non vulnerable countries would keep their economy going and pick up more of the oil supplies.
Was this kind of reasoning discussed in a main post on TOD before? I wonder what Gail the Actuary would think about it.
-------------
Addendum
I have found this Wikipedia page that give the approximate GDP per barrel of oil for most countries. However the calculation does not take into account the proportion of oil over all energy sources for each country. If somebody knows of a source of information for this ratio, then a better calculation could be produced.
The factor of 2 between the contribution $620/barrel in gdp and maximum price an economy can afford $300/barrel is because there is a cost of transporting crude oil from exporters to importers, there is a cost of refining the oil, there is a depreciatin cost of all the equipments used in an economy, there is a cost of the non-working portions of economy, the unemployed, the disabled, the children, the elderly and the house wives and most importantly there is an associated less efficient use of part of business profit in luxury by the wealthy business owners.
The factor of 2 between $300 and $150 prices comes from the fact that in advanced countries which have a larger part in consumption of world's oil more than half of gdp is services. A large part of these services, about 50% of country's gdp, consists of govt organizations that are consumers not producers therefore a load on the producers that is the industry and agriculture. In simple words, in absence of any govt expenditure and therefore in absence of any taxes, world economy can work at $300/barrel. In presence of a govt and its expenses and therefore taxes, a price of $150/barrel is about the maximum limit. The direct taxes taken by govt in usa is 28% to 50% of income, in germany 50% etc so about 30% in advanced countries but there is an indirect tax also which is in form of currency printing aka inflation. Then there are other direct taxes like property tax, wealth tax, sales tax etc. So overall about half of your income is consumed by govt organizations.
The factor of 4 is also because we all have seen that as oil price approached that level of $150/barrel a significant decrease in consumption happened which brought the price down.
My knowledge is that the oil (and gas and coal) gives same contribution to GDP in dollars per unit (barrel for oil, cubic meter for gas, ton for coal etc or whatever unit you prefer) irrespective of the country. Simply put, usa consumes 25% of the total energy usage of world and usa's gdp is 25% in dollars of the world's gdp. If you gather data country by country you will get the same conclusion that the percentage of energy used by a country of the world's energy usage is equal to the percentage of country's gdp of the world's gdp. The information can be gathered from here https://www.cia.gov/library/publications/the-world-factbook/print/pk.html. Since the contribution is same therefore the maximum price an economy can afford is also the same provided that all the govts tax their people at the same level. I think that is what happen today. Poor countries like Pakistan not have that high direct taxes as usa or germany but people have to bear the very very high indirect tax of inflation. Only if a govt tax its people less heavily can sustain a higher price of oil. Such govt would be one which not have any military conflict with any country at the moment so can reduce its defence budget.
But the crux of the matter is that wealth is not uniformly distributed across countries. Even within a country, wealth is not uniformly distributed across the population. Some countries can afford $150/barrel oil; others cannot afford it at even $50/barrel. In the US, for some people $4/gallon for petrol is a big burden; for others even $8/gallon is not a big deal.
As net exports decline, forced conservation will move up the food chain and the price will have to go up a lot before relatively wealthy people start conserving. People will cling to their lifestyles for as long as possible.
Wealth is very unevenly distributed in the poor countries. In general the purchasing power of those that use most of the oil in the poor countries is not all that much lower than in the wealthy countries. The smaller rich and middle class segments use a lot of the oil. The rest is generally used for economic activities so the costs can and will be passed on until the products are not possible. So profit margins fall for the businesses that depend on oil. As in the US only the poorest actually cut back but they use very little oil to begin with.
So I don't like this concept that some country cannot afford 150 dollar a barrel oil. Heck even in Nepal you have shortages and long gas lines right now does not look like demand destruction to me but lack of supply.
The price is determined by how deep the pockets are of buyers. Once you get past the poorest classes the demand purchasing power is fairly equal throughout the world thus the price will have to increase significantly to reduce demand if supplies drop some.
Subsidies of course distort the picture.
I really don't see any limit on oil prices until you get close to 500 a barrel at that point as I said in my longer post demand destruction aka conservation and alternative energy source both reach a sort of balance point. At lower prices its tough to show how dwindling supply can outstrip demand.
Europe with its high gasoline taxes should be the first place that will hit this magic 15 dollar a gallon mark and I suspect we will see European oil demand steadily declining as it passes this mark. Also I suspect once they hit this level they will be forced into cutting taxes some so they probably will stay around this level for some time as the rest of the world catches up.
Although it may cause a slow down in Europe the European economy should be able to successfully transition into this max energy price world.
Memmel,
Europe is going to be interesting because the model varies from an almost U.S. like reliance on cars and trucks for transport to a system where cars are highly taxed and the transportation system includes all electric trains, streetcars and subways.
On the U.S. like side I would place the UK, Ireland and Spain.
On the resilient side I would place Scandinavia.
The others fall somewhere in between.
Isn't "lack of supply" the same thing as demand destruction by rationing instead of demand destruction by price? There are long lines in Nepal because the price is fixed by the government. In the absence of subsidies there would be no lines and significantly reduced demand. The problem is that the government can't reduce subsidies without risking massive social unrest. It is a trap. Of course, there are people in Nepal who can afford oil at $150/barrel, but it is not they but their nationalized oil company which buys oil. Can the Nepalese oil company afford $150/barrel oil? The Nepalese oil company can barely afford $50/barrel with subsidies in place.
But the problem is that when the poorest classes form a majority, you cannot get past them without risking massive social unrest. Hence my statement that some countries cannot afford oil at $150/barrel.
I think the crux of the matter is that when an oil importing country fixes the price of gasoline, diesel and kerosene, its overall purchasing power is limited by the fiscal health of its government. It is irrelevant what the wealthy consumers in these countries can afford to pay.
However, I agree with your statement that the peak price of oil will be very high. The peak price will be determined by what the wealthy in non-subsidizing countries are willing and able to pay.
The contribution in gdp in dollars per barrel of oil is same in all countries no matter its a sub saharan african country or an advanced european or north american country. The difference is another factor called foreign exchange. The sub saharan african countries simply not have enough foreign exchange to buy as much oil as they did last year which means reduced energy consumption which results in shrinking gdp.
"The contribution in gdp in dollars per barrel of oil is same in all countries."
Can you reconcile this with the fact that the EU has a share of world GDP of around 30% and it consumes 14 million barrels per day?
You not only have to see EU's oil consumption but also its natural gas, coal, nuclear etc consumption, add them all in joules. World's energy consumption is about 475,000,000,000,000,000,000 joules or 475 quadrillion joules. Using this you can find EU's share in world's energy consumption. When you do this you will find that EU consumes 30% of world's energy.
This is a very different statement, and one which is much more hopeful, than your previous statement that there is a one for one correlation between income and oil consumption, as it is within the bounds of possibility that energy consumption could increase from nuclear and renewable sources, and even coal, but none at all that oil consumption can do anything but shrink.
To argue against my own previous post in this thread that available evidence indicates that $147/barrel may be something of an upper ceiling for prices as it would cause the economy to collapse, perhaps a lower contribution from oil and a higher one from other sources such as coal or nuclear ( a la France ) might mean that as the percentage contribution from oil reduces then higher oil prices will be sustainable, and that it is the percentage of income used by oil which is relatively fixed.
This would have beneficial consequences as it would allow a higher oil prices and hence make renewables more profitable and encourage the production of more oil where it is difficult to extract.
"This is a very different statement, and one which is much more hopeful, than your previous statement that there is a one for one correlation between income and oil consumption"
Yes it is.
It looks like what WFP is actually saying (and I'm more inclined to buy this line rather than the original one) is that there is a direct correlation between ENERGY usage and GDP instead of oil usage and GDP. I wonder, however, if we don't have the cause and effect mixed up.
I have no evidence for this other than a hunch but it seems to me that the driver of energy consumption could be GDP and not the other way around.
It is obvious to me, for example, that I could do almost *everything* I do currently using electricity as a substitute if I, for example, bought a phoenix electric SUV.
I also don't buy the line that electricity cannot be stored. It *can* but it's more expensive. Pumped storage is expensive from a dollars and cents point of view but an army of unemployed could physically dig a couple of stepped reservoirs and some tunnels between them so from an EROEI point of view it looks plausible.
So getting back to the original topic, I think we might see a predator/prey graph where the prey is cut down to a certain level by the high prices and some switches over to alternatives. As the oscillations between the price spikes get closer and closer, this will inhibit jevons paradox and more people will maintain their conservative fuel usage patterns and more and more will switch over to sustainable practises.
I know an example of one is a poor statistical sample but take me as an example: I had a GMC suburban and a Chevy Camaro in 1999. By the time the tech bust came in 2002 I no longer had a vehicle. By 2003 I bought a chevy cavalier because it has better fuel mileage but I try to use as much mass transit as I can and though I have watched colleagues start moving back to more expensive vehicles such as BMWs etc and I currently have more than enough income to do so, I am very reluctant to do so.
In fact, I want an electric car and I will forestall purchasing any new vehicles until I can get what I want and will take as much mass transit as possible till the market meets my needs.
(Which may be never but I can always hope).
GDP means "Gross Domestic Production". To produce anything you need energy. So GDP depends on energy usage, not the other way round. Interestingly, the energy usage inturn depends on technology. It goes like this:
Technology -> Energy Usage -> GDP -> Technology
Invention of steam engine increased usage of coal which increased GDP which increased R&D budget which increased technology which increased GDP. It goes on like this until a major war or a long series of conflicts (see napoleanic wars, world wars etc) damage the international and intranational peace needed for non-war R&D, production and trade.
Amount of goods produced by you is independent of the way you reach your work place and the way you go for shopping.
"GDP means "Gross Domestic Production". To produce anything you need energy"
I know what GDP means. You should change your nick because you are setting yourself up.
As for requirement for energy:
Yes in a broad and general sense nothing can be done without energy.
It is patently untrue, however, to even suggest that we need either fossil fuel or electricity to have production.
Here is a very simple example for you:
Grow some vegetables in your backyard which happens to be on the coast. Ship it a few miles down the coast on a wind powered ship.
Sell it.
The GDP of the country has gone up.
Likewise, if the banks print some money, I borrow some of it and I pay the bank back out of savings I already had but with interest, no energy has been used but GDP still goes up.
Also see your own quote:
"Invention of steam engine increased usage of coal which increased GDP which increased R&D budget which increased technology which increased GDP"
Which came first? The production of the steam engine or the use of the coal?
Ofcourse you knew. My point is that GDP is aggregate production of a country and nothing can be producing without consuming energy.
I never said that energy must come from fossil fuels or electricity. For example in traditional agriculture the energy input comes from food previously grown and eaten by farmer. I am just saying that there is a direct, constant and universal relation between GDP and energy consumption. It not matter for GDP from where the energy comes from.
Assuming you are not using any artifical fertilizers, pesticides and no electricity, you are still using food to get energy, that food is the input energy. If you ship it by a horse then you need to feed the horse using food energy. If you ship by a boat you need food energy to go cut woods and make the boat. Whatever way you look at it you have to use energy. It need not be fossil fuels' energy I repeat.
If bank prints money without putting gold behind it then its just inflation, not rise in GDP. You have to have savings to give to bank, that savings comes from your past productions that needed energy.
Technology came first. With technology comes invention. When steam engine was invented coal usage increased and with it GDP. The first technology, that is fire making, that came about a million years ago, was not due to any rise in energy consumption. The increase in energy consumption by burning wood etc came AFTER fire was invented.
You are implying a one-for-one correlation between GDP and energy, which is far from the case.
Japan, for instance, has increased GDP far more than it's power consumption, although admittedly part of that is due to sourcing manufacturing in other countries.
However, it is still true that GDP can increase substantially without a similar increase in energy use.
To give a concrete example, if one run a business by catching an aeroplane for conferencing, video conferencing might massively increase the ability to do this at a fraction of the energy cost.
The critical part of the puzzle is what the overall ratio of GNP to energy is, and we simply do not know the answer to this, as energy has historically been cheap.
Another example might be the use of energy to heat and cool buildings. At a higher energy cost it would become economic to insulate or design houses such that energy use was vastly reduced.
Whether the economy will be in a condition to finance the needed investment is really the issue, and that is what we are going to find out.
"Whether the economy will be in a condition to finance the needed investment is really the issue, and that is what we are going to find out."
Yes. This is the key determiner of how well we weather the coming storm.
In theory we could just print up some money via fractional reserve banking (while said paper money still has some value), so it seems the short term solution in part is in the hands of the banks.
Longer term the paper money may not be worth enough to pay for the investment.
If that is the case then we would have to rely on some kind of forced labor. At that point, things may have gotten bad enough that the masses would have voted in a dictator to "fix things". Unfortunately it seems that most dictators only seem to know how to "fix things" by blowing up other people's things...
Here's hoping for a smart and benevolent government post TSHTF...
Dan, I agree with this but we have had rule by selfserving incompetent deceitful demagogues for many years already. We have many talented people with great ideas but they've been ignored, because our nations have long been controlled by what Arnold Toynbee called "dominant elites" which have little talent for anything except f-ing things up as is now making itself clear (was clear to myself 30+ yrs ago). Criminalocracy as I called it: http://www.lulu.com/content/140930 .
Fat chance of a smart/benevolent govt coming along. The positive is that the system on which these pseudo-talented parasites depend will collapse and genuine talents and virtues will become the elite values again. (Creative elites in Toynbee terminology.)
"I am just saying that there is a direct, constant and universal relation between GDP and energy consumption. It not matter for GDP from where the energy comes from."
It absolutely DOES matter where the energy comes from.
We CANNOT increase the production of oil.
We CAN increase the production of electricity.
"Technology came first. With technology comes invention. When steam engine was invented coal usage increased and with it GDP."
Right. You prove my point with your own words. GDP increase leads to energy increase.
WFP-
Not so. The invention alone made no difference. It was the USE of the invention, dependent in turn on having the spare cash (and energy!) to make the thing, that increased the usage etc. This is one of the persistent fallacies, that great ideas bring empowerment independent of other necessary enabling assets, and hence the fallacy that we can escape from our hole by just dreaming up marvellous ideas.
According to Wikipedia the World GDP is 54 trillions US$. This should change the numbers somewhat. The base logic remains valid.
I think someone with stronger economic expertise than I have should make an exact calculation and track it over time. This concept of maximum price beyond which the GDP has to shrink is too important.
I think the best way to work on this is to determine if demand exists at certain price point. Europe shows for example that 10 dollar gasoline/diesel still results in significant demand this translates into something like 500 a dollar barrel oil. Thus demand for 500 dollar a barrel oil will be sufficient to meet the supply of 500 a dollar barrel oil. Demand destruction is not the way to look at the highest price oil could go.
Intrinsically its just a reduced hydrocarbon and its price will stop increasing with substitutes such as soybean oil can reasonably cover the remaining demand. The volume at where we make this cross over is much much less than today say 10% of todays usage thus the price of oil will continue to increase until substitutes can provide a significant amount of the remaining market.
This point is actually pretty easy to figure out since at 15 dollars a gallon for gasoline almost any alternative is viable and demand would be reduced we can see that 15 dollars a gallon is a reasonable estimate for max price this translates into 500-800 dollars for a barrel of oil.
Lower estimate fail simply because demand is still higher then substitution can satisfy. I'd be surprised if we ever pay more than 15 dollars a gallon for gasoline or and equivalent substitute. And I'd be just as surprised if the price did not increase until we reached this point.
Lets look at 15 dollar a gallon gasoline.
Assume the starting case that gasoline is 5 dollars a gallon and my car gets 40 mpg
Initial case
5 dollar a gallon 40 mgp 15 dollars = 120 miles or a 60 mile roundtrip.
15 dollar a gallon scenarios.
Double fuel economy to 80 mpg ( small motorcyle)
15 dollar a gallon 80mgp = 80 mile trip or 40 mile round trip 66% drop in fuel usage 1 gallons
Same fuel economy 40mpg cut trip by 33%
15 dollar a gallon 40mgp = 40 miles or 20 mile round trip. savings 66% or 1 gallons
Just pay more
15*3 = 45 dollars save money elsewhere. saving 0
Quit driving don't take the trip savings 100% or 3 gallons.
So in or original scenario we had 4 people using three gallons of gasoline for a total of 12 gallons.
The high case has 1+1+3+0 = 4 gallons total savings is 66% and only one person or 25% or the original group kept exactly the same lifestyle.
Three made very resonable high price choices that are quite doable and still result in reasonable mobility even in the face of 15 dollar a gallon gasoline.
Therefore its pretty easy to take the current demand for gasoline and show that demand for gasoline at 15 dollars a gallon would be robust and only require 33% of todays production.
Lower prices simply mean the choices are less drastic not that these where all that hard only one person completely quit using oil. Demand remains robust and can readily match supply. Certainly 15 dollar a gallon gasoline would result in widespread increases in indirect costs but you can see this could be handled by reduced spending thus the economy would certainly be retracting. But I see no reason that we won't have demand for 15 dollar a gallon gasoline or 500-800 a dollar a barrel oil.
If you look at it going from five dollars a gallon to 10 instead of 15 might cause demand to decrease by only 25% because the important case of a person stopping driving and the case of someone switching to a high 80mpg motorcycle and the trip reduction does not exist. In fact my assumption of 40mpg does not actually hold at 5 dollars a gallon since this is not true today for the most part 10 dollar a gallon gasoline only results in far more people adopting 40mpg cars in the first place instead of say 20mpg.
In fact this is exactly what you see in europe that the fleet efficiency is much higher. It only when you finally cross over into the 15 dollar a gallon range that serious changes make sense.
300 a dollar a barrel translates to
http://tonto.eia.doe.gov/ask/gasoline_faqs.asp#gallons_per_barrel
300*.58/19.6 => about 8.8 dollars a gallon.
500 a barrel yields my 15 dollar a gallon gasoline
8
Memmel,
I would agree that the $500-800( in todays $$) is about right. After all its only 50% more than Europeans are paying now.
What may cause it to go the the higher end ie about $20-30/gallon would be if vehicles become much more efficient and other countries such as China and India can afford an even higher price, but not pay very much per person, but overall keep demand in balance with declining oil supply and increasing substitute supply. In that case you could have 4 billion cars using only say an average of 100 gallons/year.
What could cause the price to remain lower than $500/gallon would be a rapid uptake of EV's( by improved technology, or legislation) actually dropping demand below supply, with air transport being the main user.
Then I have a question for you. How do you handle the correlation between energy costs and the production of wealth as captured by the GDP?
There could be demand at $15 per gallon. This means every other product relying on oil for energy and transportation will have its costs raised. How about the demand there?
In the example you give you don't state why each of the four people drive their car. If the guy just want to visit his mother-in-law, then it becomes a matter of how much he is willing to pay for such a trip. Someone that values family relations may agree to spend quite a large amount with no expectation of generating wealth. But if he is a pizza delivery guy, then the cost of gazoline implies a rise in the cost of pizzas. If he stops driving, it is likely that it is because the pizzas are too expensive and not worth selling anymore. Then to stop driving implies that there are pizzas that won't be made because they can't be sold.
High price of oil means inflation for every body. The idea of a ratio between the fraction of GDP that depends on oil over the cost of oil expensed to produce said GDP must make sense. If this ratio is too low, the economic activity that depends on oil stops being profitable and must shrink until oil becomes affordable again.
What your examples tell me is there is a difficulty in capturing and understanding this ratio accurately. We can't assume all oil burned is used to produce wealth, so even if we know how much oil is burned, we don't really know how much oil is used to produce the GDP.
"There could be demand at $15 per gallon. This means every other product relying on oil for energy and transportation will have its costs raised. How about the demand there? "
It doesn't necessarily mean a really painful retraction in all products across the entire economy.
Let's take restaurants:
Say a middle class family of four has a budget of $100 a month to eat out. Let's say they eat at the olive garden and are fairly thrifty (meal for four totaling around $50). So they can afford to eat out twice a month.
Let's say their budget is cut by $60 due to increasing gas costs?
They still have $40 a month to eat out. So they trade down to Wendy's instead of the olive garden.
Later on they trade down to taco bell.
The same thing will happen with groceries.
Beef gives way to chicken gives way to pork etc...
People will end up with a no-frills lifestyle. Companies will end up focussing on the no-frills products and those companies with the foresight to have a broad range will see their product range changing.
The second round of downsizing after the first recession could be much more painful if people haven't adopted some more resilient strategies.
Wow Memmel this is a genius post.
This thread is one of the best threads I have read in a long time.
Maybe, but maybe flawed genius.
I suggest that the genius generalisation from the European (or at least uk) $10 tolerance is dodgy. An additional important way of looking at price is the business/household budgets of certain lifestyles. At a certain price point the cost of person X travelling to their job equals the earnings from that job. And at that point major, cascading, demand destruction takes place (cascading because the now unemployed person X no longer gives income to others, and so on).
It so happens that in the UK the workers have adapted to the "high" (huh) tax by commuting shorter distances in more efficient cars. And thanks to this they can still balance their budgets despite the $10 fuel. But the Amricans have meanwhile dug themselves into a deeper addictive hole. Due to their longer commutes and guzzlier cars, many cannot balance their books with $10 gas, only with perhaps $5.
The difference between solvent and insolvent is the difference between everything and nothing, trumps all other considerations. And hence may be the most important way of looking at oil prices.
The prices $150 & $300 are for crude oil, not for gasoline. The latter includes transportation costs, refining costs, govt taxes, petrol pumps' profits etc.
Some European countries do have prices in the neighborhood of $10/gal, but $7 of these $10 go back to the economy (and it's citizens) through taxes. They don't leak to foreign exporters and don't pile up into foreign debt which the country citizens will toil to repay.
In a hypothetical $360 scenario (oil at 3x current price), the price of gasoline will have to be $17/gal just to keep the tax flow constant (dubiously assuming there is no demand destruction), but will have to be $30/gal if the country wants to maintain the relative proportion of the funds staying in the country vs those leaking out. IMO either price levels will cause a significant social and economical turmoil, most likely a inflationary depression.
I agree with you. In fact the equivalence is that in most third world people uses taxis in common (seven or eight persons in a 5 seats cars). Those taxis are very expensive for their economy level (i.e. 2 dollar incomes/day), but they need and use them. I supposse in Europe would be more or less the same, more buses, more trams, etc. We would pay that cost if we can't afford paying the petrol for our cars to go work.
We have one data point on what the world economy can sustain when the possibility of increasing supply does not seem likely - the recent price hike to $147/barrel.
This appeared to be sufficient to break the economy, with recession and falling demand setting in.
The price of oil has since fallen back, but not sufficiently to re-stimulate the economy, just to slow the collapse, and the consequences of the previous high price has by no means worked through.
for the foreseeable future it seems unnecessary to hypothesise a price above $147 (inflation adjusted) to collapse the economy even though supplies become more restricted, as the damage already done would simply be compounded with ever more severe effects.
Some argue that the relatively small input of oil into the Chinese and Indian economies would enable them to pay more, but at least for the present if the American and European economies have been decimated it seems doubtful that economic production there would keep up, and it would take some time of moving to a more autartic system to alter this.
Unfortunately this situation, is the reading is correct, has grave implications for oil supply and adaption, as the burden of adjusting to reduced supply would be almost solely taken up by the economy disintegrating, and relatively low prices for oil would preclude more expensive resources being exploited, and also impact on the possibility of switching to renewables.
This would be a much grimmer prospect than if a price of, say, $300/barrel were sustainable, and would mean an economy not just shrinking but collapsing.
However, the only data point we have available seems to point to this as the most likely outcome.
Dave,
Good illustration with our one data point.
It looks like $147 has had an effect (though it is possible that some gaming of the system has taken place prior to the US presidential election).
It is interesting that in inflation adjusted dollars this is not too far off the previous record price set in the early 1980s.
The important point here from a resilience point of view is exactly how much deterioration in the economy will be caused.
Do we have enough fat left to continue with construction of factories to produce sustainable transportation and renewable energy devices?
BP's latest statistical review shows the 1980s peak price in 2007 dollars as $90.68. I'd previously seen figures around $108 as the inflation-adjusted peak, but $147 does seem to be in a league of its own (so far?)
OK I'll take your word for it.
So I wonder if that takes into account the greater average efficiency of our economy today per unit of GDP.
I hope we can make enough efficiency gains during the interrim period we are probably facing of recession, "recovery" and new (higher) price spike.
Apologies - the 1980s peak in 2007 dollars, according to BP, was $93.08 in 1981 - and of course that was the average price over the year. Either way, it was less than the likely average for 2008 and well below the current floor price of oil, which appears to be $110+.
Isn't there a Catch-22 about making efficiency gains in a recession? Real efficiency gains imply replacing inefficient products and systems with more efficient arrangements (buying a smaller car; installing double glazing or fitting a condensing gas boiler). In a recession, people lack the income, confidence or creditworthiness to do these things; so they do what they can - travel less; wear warmer clothing etc.
Come the end of the recession (and, with Peak Oil looming, I'm not holding my breath this time round), demand will be down but overall efficiency won't have improved by leaps and bounds. The stage will be set for another cycle of rapid demand recovery and spiking prices. This is the classic price volatility scenario predicted by many peakers, as well as the predator/prey analogy and (some would say) the history of population and pricing cycles going back to Roman times.
Something like this is happening in the European auto industry. Demand for new and used cars is crashing due to recession. What demand there is is mainly for small-engined cars, Eco (detuned) models and hybrids. Manufacturers can't shift SUVs, big-engined cars or high-spec versions. Trouble is, they lose money on most of the small stuff (especially small high-tech cars like most hybrids currently on the market) and only make big money on the big ones. The carmakers will have to increase small-car prices as the recession deepens, which will hit sales further. Round goes the spiral.
The response has to be to make cheap, low tech, high-mpg ICEVs, because that's what the market wants and can afford as well. The production capacity for making such cars is immense, and by making them progressively more utilitarian (i.e. reversing the whole historical trend in car marketing) and pushing fuel consumption out to 80 miles per (imperial) gallon, there is a good chance of keeping affordability in line with declining incomes and rising fuel costs assuming that oil prices do not fall back to the 1980-2007 inflation-adjusted average of $41 a barrel that would definitely support the present auto industry model.
Even then, the long term picture is for declining car manufacture and personal travel. If the world is too broke to afford cheap ICEVs (and the world going broke by current standards is what peak oil is fundamentally about), then I don't see where the investment and impetus to replace billions of ICE cars with expensive EVs - as predicted by some posters in this discussion - is going to come from.
This is why I have always argued that the transition away from oil should not be left to markets, but centrally planned with a comprehensive program from getting from A to B. If we are going to be swaying from a deflationary recession/depression to a short inflationary recovery in the years ahead it would take decades until the "free market" starts to address the underlying problem, if ever.
"The interactions in the predator-prey system are totally different from what we have in the supply-demand system. The mechanisms are different and the equations are irrelevant."
You are not a scientist right?
If you were you would realize that if the equations produce identical outputs in both systems then it doesn't matter that the underlying mechanisms are different. The predictive power is still there.
That happens all the time in mathematics and physics and thus I take the position that this model is absolutely useful.
FYI I have a bachelors in physics and math as well as an MBA and take the position that the predator prey models are excellent analogies for many different kinds of markets (including but not limited to the oil market).
Dan:
Wow Dan, I take it you're not a scientist either or you'd know better than to put in that ad hominem bit there! hah
I myself have had four unchallenged theories published, including my autism theory of which four predictions have proved correct http://cogprints.org/5207. Quite a bit rarer than 2-a-penny BScs. But if I ever cite that in support of any predictions here you can be sure I've lost any talent I had.
Blue Blue Planet
Will nothing be left unread,
With everything left to be done?
Other side of the mountain,
Broad enough to hold everyone?
It's a new new world,
On a blue blue planet.
Tell me my friend,
Hold that rope and belay,
I'm not really frightened,
But what's the delay?
I can't see my way,
Through this blizzard of words,
As I pound in our spikes,
How I wish we were birds.
Will nothing be left unsaid?
Everything left undone?
Soft land by a spring-fed fountain,
Green enough to feed everyone.
It's a new new world,
On a blue blue planet.
Tell me my friend,
What's holding us up,
The summit of time,
Or just Socrates cup?
Ask that eagle my friend,
Maybe his eyes can see,
Where we gonna be,
When our mountain fills the sea?
very interesting, thank you for this.
Into this analogy we should introduce EROEI. The Red Queen Hypothesis above states that efficiencies between predator and prey increase through time as the interaction of tens and thousands of generations of the hunted and the hunter maximize the efficiency of strategies to avoid predation when you are the hunted and to prey when you are the predator. Cheetah and Gazelle, Wolves and Elk make great examples.
But what about our Grizzly Bear at the salmon run in late summer taking one bite from the fat rich underbelly of a salmon, dropping it and moving on to the next one. This high EROEI food source at first glance seems not very efficient. It is only when we understand this as a seasonal windfall that we lean that this strategy is the best way for the bear to put on weight in the short term for the upcoming winter and it is also efficient in that the floating carcasses provide fuel for the aquatic ecosystem that feeds the salmon fry of the following generation.
Fossil fuels have provided humans with a 100 year non stop salmon run of a high EROEI food source and we have behaved just like the Grizzly Bear except that this isn't seasonal but has been permanent for the past couple of generations. And we have gone into overshoot as a result.
As fossil fuels go into depletion we will turn to energy alternatives whose EROEI will be lower and closer to those found in natural ecosystems where the Red Queen Hypothesis favors efficiency.
Analogies to the natural world to our current human dilemma can be found when studying what happens when invasive species discover a new unexploited resource like when rabbits were brought to Australia. Our what happened to Kudzu in the Southeast USA which is why I refer to modern humans sometimes as the Kudzu Ape. Energy alternatives with lower EROEI will create challenges but hone humans toward efficiency and re-introduce us to the Red Queen Hypothesis from which we have had a temporary 100 year reprieve.
We are only now starting to see the oscillations in price and productivity of oil mirroring predator and prey dynamics perhaps because the lowering EROEI is introducing efficiency back into the system.
The salmon run is thinning and a cold winter is ahead. Have we stored our nuts and fat?
Excellent post.
Could someone post a graph showing the effects on population of the introduction of the invasive species?
I'd be very, very interested to see what that looks like.
The model shown is interesting and thought provoking however ... there's always a 'however'. Models are created using a selected history of some sort and extrapolating something into the future. This is obviously the best we can do but there must be a reality check somewhere. Since we are talking about the future, I would put forth this argument. The actual historic plot we see is the culmination of millions of decisions and circumstances.
The Arab states decided to cut crude shipments to the US. This was a completely historically unknown event and made a great change in subsequent graphs and thought. Often it is the 'straw that broke the camels back' type of function that readily changes the future. A Gustav type storm entering the GOM of itself is not a big deal historically. Again, 'however' the pressure on the financial markets seems to be critical, so a moderate storm the takes out some refining capability (this may be a straw), the price of fuel goes up and that’s enough of a tipping point to cause the markets to crash.
The Pacific plate grinds against the Continental plate building pressure that is released in an earthquake. San Francisco is rubble and West Coast financials are changed dramatically instantly. It is possible that we could plot West Coast financials and forecast next week’s situation except for the earthquake.
The future is determined by millions of straws (variable decisions and circumstances), which can be plotted until you get to the final straw. Since we are dealing with reality and not a known future the only thing we can look at is the pressures building in our several areas of expertise, i.e. soil pressures, NPK pressures, housing market pressures, electric grid pressures, etc.
Obviously the only reality is "Here and Now" but each of us has built a reality concept of what the future may hold. Nate's lecture addressed this somewhat. There seems to be a lot of pressure in several areas. Plotting this pressure will take a unique definition of pressure for each area. Peak Oil is one pressure and most here understand that and have defined it quite well. Peak Grid, Peak NPK, Peak Housing Devaluation, etc are something completely different.
As long as we totally realize the limits of plotting most anything and not drawing 'reaching' analogies, the better we are to live in the next moment, sometimes a day ahead, seldom a week ahead and never a decade ahead.
Please excuse the long rambling post from an old man.
Hy Lynford,
I think you are describing a self-organizing highly interconnected, critical system (sand pile), where each "straw" is a grain of sand. Will the next slide be small or large? Their frequency and size follow power laws, but we won't know what the size of the next slide is until its happened. However, we can certainly see the stress and spider web of interconnections building. This is where I think classical economics and those who feel that the system will be self-correcting/self-healing are missing the point. A slide can be so large that it overwhelms the available infrastructure to correct it. Classical economics ignores this.
It's always been the case that when folks have asked me what I think is going to happen pricewise, I tell them an increasing trend line with a periodic S curve shape to it--usually drawn with my finger dramatically. I offered an explanation of action-reaction-action-reaction.
My question was always though whether the periodicity would remain constant as hypothesized above, but that's another matter for another time. (I tend to think there will be compression changes AND amplitude changes...but they will be idiographic and "awareness" related...as you mention towards the end there).
However, this explanation is MUCH more elegant than the one I offered, and makes even more theoretical sense to me. Well done Jeff!
I've also been explaining the expected volatility of oil prices due to recessionary periods in a similar manner(last night was the most recent). The troughs I would expect to lessen in depth over time (even with an upward trend overall) due to the recognition of PO, hoarding, etc.
I think you're right on the compression and amplitude changes, I'm just not sure what the mechanism behind it will be. I was trying to think of the compression issue in terms of my post that demand destruction will increase inelasticity. If that theory is correct, then I wonder if it will increase or decrease the frequency of oscillations? The argument for more frequent, compressed oscillations is that increasing inelasticity will lead to much sharper price spikes, which will more quickly destroy demand and quickly bring whatever marginal production is available to market. The counter argument (for less frequent oscillations) would be that consumers will hold off reducing consumption longer when that consumption is more inelastic, resulting in slower demand destruction (at least for the equivalent price movement). ???
I think this is at least too simplistic. In a situation of broadly acknowledged / accepted post-peak-oil, whenever that is, a given increase in price may in fact be an incentive for a producer to REDUCE production. Particularly applies in cases where the producer's local economy cannot absorb any more financial inputs without eg. damaging inflation etc. (see UAE or Kuwait now). Additional money coming into their economy even now is only adding to inflation and they prefer to direct it to developing of sustainable post-oil economies but have no further capacity to do so. They (I hypothesise) should believe that the best investment they can make with any additional revenues is to plow it into crude oil (eg. leave it in the ground) rather than deposit more money into their banking system (inflation > 5% already) or into foreign banking systems (questionable reliability).
Definitely too simplistic! I think you're exactly right that, at least for some producers, the result of higher prices will be the incentive to further reduce production (at least to seek out the sweet spot that maximizes revenues reduced by time-value-of-money). But, as if there aren't enough complicating factors to add in here, the ability to do that will turn on the structure of the producer. For states, it will be possible only if the political time-horizon is sufficiently long, and the power-base of the current faction in control is sufficiently solid that they can sell the political proposition of delayed gratification to their populace. That will work well in a monarchy, at least until demographics catches up with the leadership (what is happening now in Saudi Arabia). For corporate owners of oil reserves, current corporate structure and accounting practices make it very difficult to do this, though not impossible. That should actually be an interesting business problem for the coming century: how to convince shareholders to accept delayed gratification. The more people can recognize the underlying trend, the more both of these seem like they would be realistic. The more the volatility clouds that underlying trend, the less likely it seems that reserve owners will be able to sell a production reduction.
"In a situation of broadly acknowledged / accepted post-peak-oil, whenever that is, a given increase in price may in fact be an incentive for a producer to REDUCE production."
Agreed. Conversely however, an armed-to-the-teeth consumer might be tempted to post a couple battlegroups off the coast of said producer to keep the exports running.
Precisely. All of the 'low hanging fruit' measures of demand reduction will already be exercised, leaving the suburbs and most lifestyles in place. Minor measures, economic downturns, and the like will help cut back some, until prices go down a bit, and too many people think "Ah, we're coming out of it now. Now if only they'd let us drill in the OCS, THAT'S the real issue...", which limits truly positive change. This mindset falls right in line with the Jevons principle, with people becoming accustomed to the 'new normal' in prices (I'm hearing all to often now "Hey, I just found gas for $3.60, it looks like we're coming out of this now" when two years ago $3.60 would have created fear and panic). Could more people carpool or telecommute? Yes, up to a point, depending on how bad the pain was. But too many will cling to "the way things ought to be, because the American Way of Life is non-negotiable" and listen to leaders who say "it's all [their] fault, let's show [them]", failing to hold up the mirror to the consumers lest they lose their positions of power.
Add to this the actions (or inactions) by oil producing nations, especially those that have been overestimating their reserves. With growth in developing nations, both population and economic activity, and the increased use of powered personal transportation, they realize that they are able to hoard and that adjustments will be made by many consumers, though too many will attempt to justify at least a semblence of their idealized lifestyle, even if it means all other areas suffer.
And also add to this the schemes of the refiners, who pick and choose when to make the most profit through a number of mechanisms, including refinery uptime ("Gee, another plant is out of action. Oh, well, we'll simply have to raise gas prices...").
The nice thing about predator-prey dynamics is that on a finite interval it can lead to any curve (as you can add any number of harmonics you want). It doesn't even need to be periodic, as the period can be bigger than the interval (there are probably variants for exausting ecosystems too). So that model, at that level of abstraction simply isn't.
Now, even without restricting the shape of the curve, framing the problem as a predator-prey problem is very usefull, it is a very simple and (for this case) powerful framework.
What you describe here seems the same as what is termed the commodity cycle in resource economics. However, the implication is that it may act on shorter time scales than are usually considered. Normally a commodity boom would be expected to have a duration measuring decades (ie. that would be 1/4 of the wavelength).
You have described the phenomena in a manner very useful for ecologists.
Over the shorter term, it is reasonable to suggest that the phenomena you describe should exert a force on the equilibrium position, but it is likely to be overwhelmed by other more 'grainy' influences like geopolitical events. At the very least, this has been the case in the past...
This model fit nicely with this graph produced by Jerome a Paris.
http://europe.theoildrum.com/node/4399
The yellow arrows are the periodic declines expected from this predator-prey model. The blue tendency line is the general trend of prices rising coming from the fundamentals.
This makes a lot of sense.
What do you make of Kurt Cobb's suggestion (http://www.energybulletin.net/node/46179) that queueing theory explains the oscillations of oil prices? The basic idea seems to be that when demands approach the capacity of a system, the queue of customers behaves erratically, because customers arrive more or less randomly. A few extra customers, and bang, suddenly the price shoots up. Then somewhat fewer customers (China cuts back on power generation for the Olympics?) and the sellers get nervous and the price plummets. If there was plenty of spare capacity, the price would not oscillate in this manner but would reach an equilibrium.
You could mesh this with the "predator/prey" model, perhaps, because predators tend to expand to the capacity of the system (see: Malthus, Darwin), interpreting predators as "customers." The oscillations are reflections of the randomness by which the prey populations are "available" (perhaps it was a bad year for the rabbits because of drought, etc.). Do you think queueing theory is the more basic explanation here?
Keith
My guess is that it's an issue of timelines. I think queuing theory is most useful on a shorter time-horizon, maybe on the order of weeks or months. I think that the several months to a few years time frame is where the price most directly influences significant energy-consumption choices (and hence demand destruction), which would be similar in many ways to the oscillation described by the predator/prey model. Production probably spans the various time frames: some production (at least production from storage near point of delivery) could respond in the time frame of weeks or even days, and might follow queuing theory, other production might be better modeled with the predator/prey concept as it probably takes many months or more of sufficiently high (or low) prices to force durable changes in production, etc. All these models are gross simplifications of the hugely complex and chaotic market reality, but I think they all can inform our understanding of the "real" dynamic.
As one of my favorite authors (Robert Anton Wilson) would say, the Map is not the Territory.
I don't really see the big distinction between queueing theory and the predator-prey or birth-death equations. The basic probability elements remain the same, i.e. that a probabilistic fraction of the population gets backlogged proportional to defined variables. Just like these equations, queues grow or subtract essentially with the same dynamics, however the Lottka-Volterra creates these non-linear dynamics along with the hard rail constraints to make the queues oscillate.
Jeff,
If your model allows a fairly large number of fluctuations (long undulating plateau) then the us is actually the next generation. This is the problem we often have with, for example, environmental degradation, where we push problems on down the road. At that point, we are shifting the problem to them and making enemies of our children. To avoid this, we need to be thinking about the future generations first, not just on an equal footing because the future generations do not yet have a voice of their own.
Chris
Nice work. Sort of unintentional biomimicry.
Hi All,
I see two different types of forces affecting the feedback loops that have been discussed.
1) Disruptive - Sudden interruptions in supply
2) Restoring - OPEC and others working to keep the price stable and reasonable
As a result, I think we will see a slightly modified version of what has gone on before. Moderately long runs of stability where the Restoring forces are able to dampen Disruptive ones, and then the occasional shock such as a war or a drop-off in a large oil field, and then the price runs will up, and then OPEC and others work to restore control of the market. However, I now see OPEC and the other suppliers working to maintain the higher prices. This effect will become more pronounced for exporters in decline, as they need the higher prices to maintain their balance of payments and economies.
As WisdomfromPakistan poited out, the upper threshold may be around $300/bbl unless everyone agrees to print money and pretend its not happening, I think that we will see the prices slowly drift back toward their peak, as the suppliers experiment to see what the maximum the market will bare is.
Is a predator-prey relationship based on chaos theory worth considering?
From http://en.wikipedia.org/wiki/Chaos_theory
Minimum complexity of a chaotic system
Bifurcation diagram of a logistic map, displaying chaotic behaviour past a thresholdSimple systems can also produce chaos without relying on differential equations. An example is the logistic map, which is a difference equation (recurrence relation) that describes population growth over time. Another example is the Ricker model of population dynamics.
More info on chaotic models and other stuff here:
http://home.comcast.net/~sharov/PopEcol/popecol.html
Strange attractors are probably the closest to chaotic versions of predator prey relationships.
http://en.wikipedia.org/wiki/Attractor
Any system with a strong natural frequency is probably not going to change all that much in its overall dynamics if its chaotic.
However of course the depleting resource adds a strong non repeating forcing function so its not strictly harmonic. So yes something like peak oil could cause a predator/prey like chaotic attractor to blow up.
This would be pertubations say of a chaotic map.
http://en.wikipedia.org/wiki/Duffing_map
Peak oil would cause the system to escape the oscillation.
Predator/Prey relationship are I think conservative of the total energy of the system i.e the assumption is that whatever the prey eats is not changing only the overall populations it may be finite.
If the predator/prey oscillation is chaotic then it does not really change the overall dynamics all that much. However the forcing function of depletion does.
But then you could simply reverse the problem and say its a predator prey forcing function on a logistic equation.
http://en.wikipedia.org/wiki/Logistic_map where predator/prey and also exponentially growing feedback loops are forcing functions on the system.
The outcome is what we would expect which is as oil production declines actual real output becomes highly chaotic and variable in the future the main drive of this of course is war/political moves i.e above ground factors but these are just named events in the overall dynamics.
So future oil production should be less than that predicted by the simple logistic approach and some years it will be much less. For example lets say I'm right and the US bombs Iran and Russia stays in Georgia short term oil production would probably drop by like 20 mpd at least if not more but longer term we can expect the world to always produced about 5mbd less than is prediction by models that don't assume we will see chaotic behavior.
If you think of it as a chaotic forced system then the most likely outcome is oil exports at least will drop off rapidly.
Not that the model needs more complexity but one more significant factor might be as simple as a voluntary reduction in production rates as OPEC can finally function as a true cartel. But this additional bump in the road highlights the real nature of complex adaptive systems. While we can design multiple viable models the oil delivery system may well evolve in some unpredictable ways while still following general paradigms. A small and relatively insignificant example: despite a solid history of anti-drilling sentiment, just yesterday Santa Barbara filled a petition with the governor's office supporting the elimination of the drilling ban. Not they are arguing any significant improvement in our import demands, they clearly state their new policy is an effort to increase jobs and raise additional tax income. Who would have added such a turn about in their model?
While there may be numerous ways to construct a viable set of responses to PO, the system will, perhaps, adapt in rather surprising ways. An extreme adaptation: OPEC's effective cartel reduces oil deliveries by 30% below its maximum delivery rate. Though oil is expensive there is still too much buying demand and OPEC must allocate. The US receives its requirements leaving the EU short despite the ability to pay. The US provides Saudi with military protection from threatening EU countries. A bizarre adaptation for sure. But impossible??? There are certain to be strong political and military factors coming into play as the effects of PO escalate. The inability to model such complex interactions may dominate beyond the technical and economic aspects of any model. A hypothetical example from history: had Japan understood the potential of the discovery of the E Texas giant oil field (making the US the most oil rich country in the world) just prior to WWII would they still have attacked us on 7 Dec? Or would they have just continued seizing the rest of Asia and building their capabilities? And, had they not attacked us and thus bring in a war declaration from Germany and Italy, would the US have continued sitting on the sidelines (as many in the US did support) and watch Europe and England be complete controlled by the Axis?
I’m certainly not knocking efforts to construct the models. It adds greatly to the discussion IMO. But as long as they exist in a static political/military construct their acceptance can only be conditional.
Wouldn't this merely open up a great business opportunity of shippping oil from the US to the EU?
Oh the great American saviour myth again!!! The US military came over here not to defeat Naziism but to stop the Red Army's taking over of Europe to establish a superpower greater than itself.
If oil rose to $300 a barrel, and then quickly fell down to $200 a barrel, it makes you wonder what the reaction to this might be.
"Oh, oil is cheap now, no need to do anything."
of course there is no empirical evidence that supports L-V predator-prey relation. However, i like your comparison. Although I think what might be more important is not the short-term oscillations represented in your P-P interaction, but whether the oscillations are following a long-term upward or downward trend.
Interesting analogy. I think this is quite similar to a pork cycle, which can be described by the cobweb model.
This seems to be a typical problem when a future development cannot or isn't foreseen (precisely) and there is a considerable time lag for mitigation. History has numerous examples. Just a few ones in short: In Germany, the pork cycle seems almost hard-wired to the employment policy of teachers: Each time when political leaders realize that schools have too few teachers they start an ambitious initiative to train and hire a huge bunch of new teachers. As soon as these start their new job this results in a huge oversupply of techers - and as soon as policymakers realize this they command a full stop for hiring and training of teachers, resulting in another wave of teacher deficit...a
The same happened with the buildings policy and other sectors. And as far as I understand this rollercoaster behaviour is also very endemic in many mining activities (e.g. metals), as mining develompent also has long delay times.
Sometimes there are proposals on the political level for measures to balance the extreme ups and downs or to "bridge" and "tunnel" them - as far as they are predictible.
As for the modelling community it might be a good idea to think about integrate patterns of this behaviour to advanced models of peak oil, e.g. the hybrid shock model. This means analysing the typical time lags needed for new measures (e.g. oil field development, fuel switching etc) as well as the respective historical behaviour patterns.