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EIA: If This Is Peak Oil, Then I’m Not Sure What The Problem Is
Posted by Rembrandt on June 10, 2010 - 10:33am
This is a guest post by Michael Levi who is a Senior Fellow for Energy and the Environment at the Council on Foreign Relations. It is a critique of Steven Kopits of Douglas Westwood's recent guest post. The version of the guest post Michael Levi is commenting on was published on Econobrowser under the title EIA: Hard Core Peak Oil Forecast. It was published earlier this week at The Oil Drum, under the title EIA: From Forecast of Oil Supply Abundance to Decade of Stagnation. The post was about the crude oil production scenarios in the US Department of Energy's International Energy Outlook 2010.
Steven Kopits claims [in the Econobrowser version] that the new EIA oil supply projections are a “Hard Core Peak Oil Forecast”. His argument is that the EIA has been steadily reducing its oil supply projections for 2020 over its last four annual projections, and that this is a sign that EIA has “placed its fortunes firmly with the peak oil crowd”. I think he’s wrong. In any case, if this is what counts as peak oil, then I’m not sure why anyone is so excited about it.
Here’s the graph that attempts to make the case:
Sure enough, EIA has been steadily reducing its projections for 2020, from 104 million barrels per day (mb/d) in its 2007 projection to 92 mb/d in its most recent projections (released last month).
But why have the projections gone down? It’s possible to more than explain the whole difference through revised expectations for economic growth. The decreased projections for oil supply have almost nothing to do with changed beliefs about the prospects for oil supply development. They are pretty much entirely explained by external factors.
The 2007 projections pegged total world GDP in 2020 at 107.1 trillion (2000) dollars, which is equivalent (XLS file) to about 118 trillion (2005) dollars. (I’ve used a “world” GDP deflator, rather than a U.S. one, to convert from 2000 to 2005; switching measures doesn’t make a big difference.) The 2010 EIA projections expect GDP in 2020 to be 97.5 trillion (2005) dollars, for a 17% reduction in expected GDP. Contrast that with a 13% reduction in expected oil production. If the GDP-elasticity of oil demand were 0.64, the reduced GDP expectations would fully explain the lower oil production estimates. As is stands, long-run income-elasticity of oil demand is almost certainly higher than that, so revised GDP estimates more than explain the lower supply projections. Indeed the interesting puzzle may be why oil supply is so high in the new estimate, rather than why it is so low.
The only way out for someone who wants to blame the lower supply projections on peak oil is to argue that the lower GDP projections are themselves a consequence of peak oil. The argument would say that the lower GDP projections are the result of the current recession (true), that the current recession was the result of high oil prices (possible [PDF] but debatable [PDF]), and that the high oil prices of 2002-2008 were the result of peak oil (who the heck knows). But that is not the case that the EIA is making: It projects oil prices to rise to about $110/bbl in 2020, and to over $180/bbl [PDF] in its “high oil price case”, but in neither case does it project a recession. Indeed the impact of the high oil price case on economic growth is tiny.
Moreover, if $110/bbl oil counts as “peak oil” (since, after all, we’ve agreed to use the EIA forecasts), then I’m not sure what anyone’s so worried about. Are people really claiming that $110/bbl oil will be catastrophic?
The EIA may be wrong about how well economies can withstand sustained high oil prices and about how much oil the world can produce at a given price if called on. But it is clearly not in the peak oil camp.
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As I see the issue, the problem is that most of the financial variables follow an exponential growth pattern, as does population, while energy variables cannot be expected to grow exponentially indefinitely--in fact are hitting limits. We have discussed these issues a number of times on The Oil Drum. This is a new report by the financial intermediary Tullett Prebon called Dangerous Exponentials that says the same thing.
The report was also summarized in an Economist blog called Buttonwood's Notebook.
These are a few graphics from the report:
The problem is that the financial variables seems to be tied to the energy variables. If energy production stalls out, and in particular oil, all of the exponentially growing variables could crash at close to the same time as the drop in the physical variables. The EIA model just assumes that all of the variables will continue to rise together--rising demand will pull up rising oil supply. The results of their modeling is what one would expect, if the world is hitting a turning point, and exponential growth no longer is continuing as in the past.
The "Dangerous Exponentials" report shows the above graph as an idealized slow decline oil curve. But this would require huge investment, in an era of declining Energy Return on Energy Investment.
This is an alternate oil decline curve, if the huge investment cannot be managed, to keep up oil production.
This is the net energy cliff that we have talked about many times here. It is taking more and more energy (and investment, since this reflects energy) to get energy resources. And the new energy resources are mostly not directly substitutable for oil.
And this is one of the exponentially growing variables as well. It is hard to see it can continue, if energy resources are constrained.
It does seem to me that there are, in Tim Morgan's words, various black holes in how various forecasting agencies (including the EIA) do their work.
Whether it is declining EROEI or the inability to muster capital to get the most expensive oil or oil nationalism (hoarding by countries; though the word is pejorative I can hardly blame a country for waking up one day and saying, "Just why are we selling our resources to other countries as they are beginning to run low?") or more oil wars or the shrinking of net available oil (Export Land Model), it's very difficult for me to see the world oil export market seeing much of the other side of this production curve:
The conclusion I've drawn is that we have only several decades left to get completely off oil, not until 2100 as a cursory inspection of the graph would seem to indicate. But between now and then is likely to be more or less, er, a very interesting time in which to live.
P.S. I'm with Michael...I think Kopitz is reading too much into the latest EIA report.
The problem is that declining EROI is related to the funds available for investment. As the energy return declines, the output from Charlie Hall's energy slicer becomes less and less. See this post.
The amount available for investment is the purple fat line going up. The portion of the purple line going for energy investment is the dark blue line at the top. As EROEI declines, and especially as we hit peak oil, we reach a situation where not only is there less coming out in the form of the purple line, but to maintain or increase production, there needs to be more energy investment going in as the dark blue line.
Peak oil, to me, means that time occurs when a huge jump occurs in the amount of investment that is needed in order for oil production to continue to grow. This occurs because the easy to extract oil is mostly gone. There are other resources, like oil sands and oil shale, but these require huge upfront investments, to provide anywhere near the kind of day-to-day flow of conventional resources. Thus the need for the dark blue line to get much broader.
I think too that the availability of debt has confused all of this. With the availability of debt, to some extent the actual output of the "Cheeseslicer" has been hidden. Companies could make guesses as to what future production would look like, and get capital lent into existence to handle their needs. This lending of capital into existence raises the demand for commodities, and thus price, and thus production. But as limits are reached, even this approach doesn't work. Debt defaults rise, and the illusions underlying the debt financing model become more clear.
The alternate oil decline curve looks the same as the other oil decline curve, just plotted over a longer timeframe (0-4000 AD instead of 1900-2150 AD) to me. On the first, the 2150 level looks to be somewhere just above the 1500 mmtoe/yr line, say around 1700 mmtoe/yr, while on the second, it looks like the fall below 1500 mmtoe/yr takes place about 2200 or so, for example.
If they really meant for them to show different scenarios, then their plotting was a bit off.
Fig 17 & 18 are not good. Not up to TOD standards!
Comparing Fig 17 & 18 is an excellent example of false graphing as per that wonderful book "How to Lie with Statistics"
Fig 18 is just about the same as 17, but on a longer timescale. So no way does it show what the author says.
Looks dishonest to me, so I discard the rest of the article. On this blog we use real graphs!
Ben
I agree it is sloppy. I will admit I didn't sit down and read the material in detail--the content is not terribly different from what we have been saying all along. But perhaps they reach a different audience.
Clearly the person doing the graphing messed up on this one.
No, it's not sloppy. These two graphs do not represent two different cases. From the text of the report it's clear they depict the same scenario from two different vantage points (i.e. time scales).
Of course this sort of comparative depiction seems to assume social evolution time scales are a slow and steady moving beasts--lots of room for debate there.
But we may have found the source of memmel's 'shark fin' though I think 'orca dorsal' might be a more fitting description.
The problem is Memmel never even drew a picture of his "shark fin". The most he ever did was refer to a hand-drawn sketch by Ivanhoe when I asked him:
http://europe.theoildrum.com/node/5899#comment-553948
That looks like a cusp to me! Apparently, anything can look like a shark fin, even a symmetric Hubbert peak.
The two graphs are as honest as the sun rising in the East.
The graphs are clearly labeled with the intended time scales on the X-axis.
The clear intent is to show that the oil consumption phenomenon is a spike when looked at over anything other than short timescales.
I utterly fail to understand what you think is dishonest about this graph.
I think the truth hurts, and that this truth hurts more than most.
Looking at an irrefutable constraint which will upset all the apple carts is a mega-bummer.
We all need to deal with it.
Gail,
Figures 17 and 18 appear to actually be the same curve on different timescales. Both have a long tail compared to the rise time, and both seem to have a full width at half max of ~150 years.
I believe that Figure 18 should be one of the figures showing a decline more rapid or equally rapid to the rise.
Thanks,
Two things may be going on with the fat-tail in the consumption curve.
#1 is the possibility that they have combined different energy types.
#2 is that it is virtually impossible to maintain that extended a tail. According to depletion dynamics, the only process that can keep consumption elevated is a correspondingly accelerating extraction process. If you live by the exponential on the front side, you suffer on the backside. One way around this is to assume the front-side acceleration was closer to a power-law growth with a relatively small exponent. This gives more volume for a fat-tail.
(from http://www.theoildrum.com/node/2712)
The general form of fat-tail resource discovery is
g'(t)/(1+g(t))^2
Depending on what g(t) does, you can make the curve do some interesting things. g'(t) is the derivative, which can increase sharply, yet when g'(t) increases, g(t) also increases and since it is squared in the denominator, it can't go on indefinitely. So you can generate some fat-tails but you have to do it from the perspective of a limited constrained resource.
Also the possibility of reserve growth but that is a variation of #2 where we have a slower more dispersed discovery process to begin with.
Th huge problem with all this discussion is that the people that generate these graphs just make assertions and they have no formal justification for anything they do.
To displace 10 million barrels of oil a day, about the current US import number, would take 60 billion cubic feet of nat gas.
current US nat gas usage is about 22 trillion cubic feet per year. 60 billion * 365 would be another 20 trillion cubic feet per year. Current reserve estimates for the US are around 1700 trillion cubic feet of natgas. Or about a 40 year supply assuming no other substitution such as electric from nuclear. So while somewhere down the road we will certainly run out of fossil fuels if we do nothing to substitute, we are hardly in dire straights at the moment.
The switch to electric vehicles while in its infancy, is starting up for real as several manufacturers start to introduce all electric and hybrid electric cars. Electric cars plus nuclear power is going to happen. Peak oil, nat gas, coal etc, will happen but not any time soon and when it does come around it is most likely that our energy requirements will be met through atomic reactions for baseload and maybe a small fraction of alternatives so that the 'environmentalists' can feel good about themselves.
I've always liked the idea of trashing all domestic vehicles and replacing them with solar-powered golf carts. Of course, this will never happen, but like the idea of "slowing it all down".
I've yet to be convinced all-electric is the way to go; it's the volume of batteries required for BAU, not to mention all the new infrastructure. Perhaps something new and compact that packs a punch may come along in the next few years (nuclear-powered?), but it seems doubtful at this point we'll get much past Lithium-Ion. Again, it's about the scale. Then again, I guess there's always Mr B Swan.
BTW, forty years is only about one generation away. That's a blink of an eye these days!
Regards, Matt B
Maybe in forty years I'll have my own terminator robot, it seems about as likely as a massive nuclear build out. In regards to natural gas, that peaks too. It's not as if we can use 80 tcf a year for twenty years and then it runs out. Domestic gas extraction has essentially been plateaued for forty years now.
on a battery related note
My old electric drill works as good near twenty years after I bought it as it did when it was new. I just have to plug it in and pull the trigger. I bought a 9.6v cordless drill at that same time, have bought at least three new batteries and one new charger for it over the same time span and actually pretty much retired it three or for years ago when I picked up a 14.4v cordless impact. The new impact already needed one of the two batteries it came with replaced last year.
An ICE vehicle, much like my old 120v AC electric drill, loses little future life just sitting or getting minimal use. Battery powered rigs will likely be a lot more like the cordless drills and the replacement batteries for the drills usually go for about 20-40% of the cost of a new drill. Rig batteries probably won't be that dear comparatively but replacement cycle is going to be a consideration.
Of course each new generation cordless drill performed better than the last and did things that would have been brutally difficult to do with a 120v AC drill...but that is another story and it has no relation to the 'slowing things down' tale.
Hand held drills use a variety of battery types, some better than other. More importantly, cordless tools have no battery management to protect them for excessive drain or temps.
Batteries don't die, they're murdered.
sure cordless tools have battery management, its called the users senses. Now days the instructions (yes I read them) tell you so swap out the battery as soon as the tool starts to slow--of course sometimes you just want to get that little bit more done and the charger bank is the other side of a 20 acre site by the lone temp power hookup. The user sensor battery management system has its flaws ?- )
The old NiCad batteries were fairly forgiving but had a slower less discernable dieoff time than the Nickle metal hydrides I prefer now--the latter seem to give me the best bang for my buck. There probably are some good lithium power tool batteries now but the ones I have encountered the last couple years were fairly cooked after less than a year of use. Not acceptable. Bets that the batteries in electric vehicles don't have uneven performance across their spectrum of operation even with fairly sophisticated power management systems (or will it be more profitable for the manufacturers to have the batteries murdered so power management systems will be engineered to guarantee just enough battery life to keep the annoyed consumer coming back for more)?
I too don't think it will be all electric but the gm volt idea is pretty good. Electric for 40 miles then ICE or other power plant to drive a generator to simultaneously recharge and drive. The 40 miles covers a huge amount of commuting distance so in theory someone only driving 40 miles per day needs no liquid fuel. This car will be available this fall/winter and in probably 2 years will be pretty ramped up production wise.
Hard to be doubtful about batteries. Yes at the moment LI is the one of choice but given the amount of dollars at stake there is a full court tech press on to move the needle. Some kind of super capacitor may show up out of nowhere or some other quantum leap in battery tech based on nano-scale engineering.
The world went a lot of years without high temp super conductors and then one day out of the blue voila.
There is a whole host of tech which is being investigated and no one really knows where the next big thing is going to pop. One thing is for sure, knowledge is accelerating and its cost is dropping as fast. Think of all those millions of tech brains in the third world that never had a chance and now can hook into an MIT classroom from nowhere anywhere. That's an amazing amount of brain power that just got lit up and is by far the most important resource on the planet.
In US there are 60 million households with multiple cars. It makes perfect sense to replace all but one car with EVs. Use the ICE for occasional long trips. 100 miles range covers over 80% of daily drives.
We plan to buy Nissan Leaf in December and a PHEV like Volt later to replace our 2 cars.
As an Average Joe, I continue to be blown away by the latest and greatest advances, however at the end of the day, it boils down to a simple objective for most of us: Business-As-Usual. And of course, that's the ultimate problem, pure and simple; the basic math of compounding growth.
My sister in law just had her fourth kid. Will switching to batteries mean her four boys, over their lifetime, won't consume TWICE as much as their parents, all things considered? Seriously, I doubt it.
Sure brain power is a key player in our future, but it's not a physical resource. We live on a finite planet and as long as "growth is good" remains the mantra, there will be physical limits.
Timing is the only thing in question.
My wife and I made our single biggest contribution to to humanity: we had two, and only two, children, then I had a vaso.
I cannot understand the greed, stupidity, and selfishness of people who sire more than two children. Replace yourselves and be happy with that.
If you look around the world, As I have at least in India where I grew up, you will see the folks who can least afford to have kids are the ones having lots of them. My vague explanation of this phenomenon is that the folks with least amount of resources also have very little discretion to walk away from the basic instincts.
Also, I think there is evolution at work too here. basically, the chances of survival of some offsprings would be maximized if you had many of them. One of the major developments happened in India was that we found cure & vaccines for a lot of diseases in a short while & hence greatly increased the life expectancy but the underlying survival mindset were still pushing people to have more kids. Now that was also coincidental with really cheap oil based energy & green revolution so for most people it really was not 'a concern'.
This is about to change with declining net energy. This is one of the reasons I disagree with Nick though I agree with most of his 'solutions', but, at the end of day the fact is that WE DO NOT HAVE SUBSTANTIAL DISCRETION over our instincts. especially in a distributed decision making kind of atmosphere. Another problem with distributed systems is that if I make sacrifices today to be green & sustainable that just means its all the more for the guy who is not. You will see this play out when they implement some kind of carbon credit kind of scheme.
We will keep on growing till we are restricted by natural limitations. Pain is the only real discretion for masses.
Sometime I wonder if Bush & co really did humanity a favor-in-disguise by taking one of the few non peaked oil producing nations off the market ( with all due respect to lifes lost both american & iraqi).
Hello Heisenberg,
My IQ's around 105, hence my avatar. Most in my circle are well above that (my wife's is 140-something and even my kids are smarter than I!). However, because I GET the reality of "Limits to Growth" and they don't, I believe "stupidity" isn't really a reason for why we have more kids, consume more and all that.
Much the same for "greed" and "selfishness" - all the people I spend time with, not that many really, simply work toward their retirement and spend as many hours with their loved ones as they can along the way. Though the brother-in-law with the Ferrari may be the exception, none of us are really striving for millionaire-status.
Lack of "awareness" is the problem and I think it's that simple, which is why I hold out hope...
If a dope like me can follow TOD's general messages for the most part, most others could as well. I'm sure that if my fellow Joes and Janes had the basics clearly and simply explained to them today, the Titanic might begin turning those few minutes sooner. If the residents of the GOM had been told ten years ago in no uncertain terms what WOULD happen if things go wrong in deep-water - that most likely, the fishing industry would be devastated for decades - would such high-risk, unregulated drilling have continued?
I myself have three young teenagers, but only stumbled onto all this about three years ago (film, "A Crude Awakening"). No doubt you could call me names if I began procreating today, that'd be fair enough, but not a decade ago, because PO, finite resources and all that in-plain-sight stuff simply hadn't been bought to my average-IQ attention back then.
Of course, obstacles remain. Lack of general common-sense is an issue (I can build an entire house while most others couldn't lay a straight row of bricks, much less try). Also, it's still the pollies and big business that need to do the explaining, not someone like me, or even TOD. Which is why I remain concerned. Even Green parties are doubtful to come on-board the Ship of Prevention.
Sorry for the rant, but thanks for the vent (wish these threads lasted longer than they do. Then again, perhaps not! :)).
Regards, Matthew Blain
Melbourne, Australia
Hi Average Joe,
Good comment!
Yes, I also think this is the problem - most people do not understand the "problem". Which begs two questions:
Why don't they understand the problem and how can we facilitate such understanding?
From birth to around 4 years of age (or there abouts), children are able to absorb hugh amounts of training to learn language and cultural norms. Along with language comes belief systems about god stuff, political leanings and how economic systems should work (among other things). Once these "beliefs" are absorbed, very few folks can shake loose of them.
So, we tend to think that humans are "created in the image and likeness of god" and have "divine rights" to dominate the planet. Some believe that republicans are superior to democrats and vice versus. Some of us "believe" free markets are superior to socialism (and vice versus) - and a bunch of other fixed ideas and ideologies.
So most of us have a blind spot when it comes to human population issues, resource depletion, limits to technology, etc. We tend to have "Faith" that god, free markets, democracy, etc will protect us from the miserable fate of those "backward" countries that have the wrong religion, the wrong political systems, and the wrong economic system. God bless America and Support our Troops.
Mindless beliefs in our religions, politics, and economic systems are the root causes of our predicament. Survival strategies need to embrace an entire paradigm shift whereby we recognize that humans are just one small part of the planet Earth's biosphere - where we respect the rest of nature and bring ourselves into some semblance of balance with all other life forms on the planet.
How can this shift occur - I'm still searching for that answer.
Gail,
Why are you giving wind an EROEI of only 12 when even turbines <750kW have an EROEI of 18 and modern 3MW turbines >40? Nuclear is way above 5, for reactors having 40-60 year working life.
Add to this the substantial undeveloped hydro power and it appears we have peak oil, and possibly peak FF but definitely not peak energy.
Indeed, even relatively inefficient mechanical-drive wind power was(is?) quite profitable on an energy basis.
The British Empire was built on good timber and wind!
and rope and canvas. Surpisingly, the British sailing ships were not the best built ones of their time, but their warships had the best officers and best-trained seamen--human capital.
And they had Vitamin C. The "limey's" could beat their opponents because they weren't sick.
This is a new report by the financial intermediary Tullett Prebon called Dangerous Exponentials that says the same thing.
"financial intermediary" makes them sound like a large bank. According to the end notes, they're a "broker". In other words, these are salespeople.
The report seems to rely heavily on Chris Martenson's materials, which aren't especially authoritative.
Figure 17 seems too optimistic about how long the bumpy plateau will last.
Points about the EROEI numbers in the figure 19:
1) Putting tar sands and shale oil in the same EROEI bubble does not make sense. Tar sands is much higher. I've read claims it is around 4 or so.
2) We can expect solar's EROEI to rise since its costs have been dramatically falling in recent years. I wonder how old the data is they are using for it.
3) Similar point on nukes: The newer nuclear reactor designs are supposed to last a few decades longer. Won't that double their EROEI?
4) Current oil and gas finds do not have a single EROEI. Oil and gas should be separated. Onshore and offshore should be separated.
"I’m not sure what anyone’s so worried about. Are people really claiming that $110/bbl oil will be catastrophic?"
I've had a good bit of practice lately condensing complex technology to more digestible tidbits. Let's try it here. A man has to start getting up more frequently in the night to pee. And sometimes there's the urge but not the results. And then there are long periods with no problems. But the problem starts occurring more often. So what? "I’m not sure what anyone’s so worried about?" And a year later the man is diagnosed with prostrate cancer. Had he addressed the problem earlier he might have had a chance to change the outcome. But not now: his future is clear: an agonizing death with very little chance of remission. Let’s see…how did this story start? Oh yeah…"I’m not sure what anyone’s so worried about. Are people really claiming that (getting up to pee at night) will be catastrophic?"
Rockman you are one of only a very few people I wish I knew well enough to have you over for a long lazy afternoon of drinks, bbq, and serious talk!
The man is not a fool of course, but he is simply blind to physical realities,probably because he is functionally illiterate in respect to the basic sciences.
Or maybe he is just running his mouth because that's his day job, while he is quietly buying up oil and gas leases after 5pm.
I do think it is interesting to note a parallel between the thinking of such obviously well educated and intelligent people and the thinking of religious people;
A man can believe whatever he likes, and having once decided what he believes, all evidence to the contrary runs off like water off a ducks back.It doesn't matter if he is an Ivy League PHD or an illiterate hillbilly Baptist, the rule holds as firm as good concrete.
I want to know how this crap wound up as a key post.
It was inserted as a counterpoint to the earlier post on the EIA projections in order to stimulate discussion. And to provoke foul language.
It is my humble opinion that it is better to attack/refute/disprove the message, not the messenger.
Everyone has their 'spin' which may have nothing to do with apparent intelligence or morals.
The message was 'so what?' and I think some key comments conveyed 'this is why' (eroei, exponential growth not showing limits, etc.)
Rockman, I hate your metaphor as must many others here. Anyway, I've got to go ... .
Well, it seems some of them are starting not to bother getting up at all, because based on multiple previous experiences nothing came out...(see silver lining) the rare occasional night time spill on a large dry mattress is just a minor
inconvenience, incontinence...That's what pads are for.
Damn you Rockman, you do realize that a very large portion of the folks who read this site are males in the 50 plus age category >:-(
Good message targeting, I'd say.
Course, I'm in my 40's, so I have no idea WHAT you guys are talking about.
I wonder if BP has been buying up a lot of Depends inventories? Seems it could help in the Gulf AND the Boardroom!
Bob
Sir, I can help you. We'll just need to get a little blood work and some high tech digital tests (a digital rectal exam), after which all we need to do is insert an electric drill into the urethra and presto, you'll be good as new. Please call my office and we will be happy to schedule an appointment for you.
Dr. H
Rockman,
I have to join the rest of those agreeing with you on that statement. To my knowledge, no one has claimed $110/bbl is in any way catastrophic. I was hoping while reading through the comments I wasn't going to be the only one who would catch this.
To my mind, it says a lot about the authors general feelings on peak oil. My suspicion is he thinks the whole idea is baloney and we have enough supplies of fossil fuels available to us to last well into the next century. If so, then he totally misses the point.
$110/bbl is nothing to worry about. $200/bbl oil, which is very likely to occur before 2020, is what will force the drastic changes that should be taken now. Unfortunately it will be too late when that does finally happen, because alternatives will do us absolutely no good with oil at that price range.
Do the people touting the supposed saviors of "technological advancement" really not think about the fact that if oil is too expensive, none of the alternatives (having a total reliance on cheap oil to be affordable) will be affordable for mass market use at all?
It's dangerous, and misguided to assume technology will save us this time, because this is the first time any of us have experienced this level of change.
Wake up folks!!!!
The price won't matter nearly so much as that distribution will get spotty as supplies start drying up.
Oil might be only $30/bbl in Cushing and completely unavailable in Atlanta.
The distribution problem is what is driving the Chinese in their pattern of acquisitions. They are guaranteeing their share of the oil. Later, when prices go up, even if their production drops they can sell the oil rights.
Craig
Hi Rockman,
Of course, I have no way of knowing if your metaphor comes from personal experience observing a friend or relative, but I can attest to the relevance of the metaphor.
My brother taught college classes for a masters program sponsored by the US Air Force. He rotated between air bases in places like Japan, South Korea, Hawaii, Okinawa, etc. He totally loved his life and the job. He ignored the "getting up more frequently in the night to pee". He was devoted to his job and his lifestyle - no time for dumb doctor visits.
I watched him die a miserable, protracted, painful death. No technology could save him.
On the other hand, the old retired guy I bike with all the time, got the same symptoms. He checked into the best local teaching hospital, found the cancer in its early stages, had surgery and made a full recovery. Yesterday, we had a nice 50 mile, hilly, bike ride - beautiful Wisconsin landscape to enjoy.
I think your metaphor is very appropriate: The US should be a world leader in recognizing the problems facing planet earth - but we are too busy enjoying our lifestyle. Anyway, god will provide. The DOE said we would need a 20 year head start on PO to mitigate its worst consequences. Maybe we only need half of that. Maybe PO is still 10 years away. Maybe it is not too late see the "doctor". On the other hand:
The US should be a world leader in recognizing the problems facing planet earth.
I agree. We can only educate other people, slowly and one bit of information at a time. People take time to process really new information.
OTOH, a quibble: the 2005 Hirsch report ( http://www.netl.doe.gov/publications/others/pdf/Oil_Peaking_NETL.pdf ) wasn't really useful - it was concerned exclusively with finding new sources of liquid fuels.
And, it wasn't endorsed by the DOE. Please note the disclaimer:
"This report was prepared as an account of work sponsored by an agency of the United States Government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product, or process disclosed, or represents that its use would not infringe privately owned rights. Reference herein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply its endorsement, recommendation, or favoring by the United States Government or any agency thereof. The views and opinions of authors expressed herein do not necessarily state or reflect those of the United States Government or any agency thereof."
Hi Nick,
To be honest, I skipped over that disclaimer. Perhaps this was just a weasel move on the part of the DOE - don't know and probably don't care.
The real question remains: how much time would be required from the point of real mobilization on the issues of PO/GW/habitat-degradation to mitigate the worst consequences of these problems?
I respect that you have a long list of very good "solutions" - I would not hesitate to recommend you as a great source for how to deal with these problems. OTOH, I suspect the world is ignoring you - no offense intended - I just don't see much evidence that the actual causes of global problems (current and predicted) are understood by any critical mass of decision makers or folks who can influence decision makers.
how much time would be required from the point of real mobilization on the issues of PO/GW/habitat-degradation to mitigate the worst consequences of these problems?
The answer for PO is very different from GW or habitat. PO is a human problem, and can be fixed anytime we choose to, and certainly quickly enough. Heck, the world could reduce oil consumption 20% literally overnight, just by reducing the speed of freight and personal transportation, and carpooling.
OTOH, GW has enormous latencies and feedbacks which are out of our control. Most of the solutions for GW are the same as for PO, but action is needed at about 10x the scale and speed. That's why I'm optimistic about PO, and pessimistic about GW.
Hi Nick,
Basically, I agree with you - the only catch is:
I just don't see any evidence that this will happen soon enough to avoid serious problems. Certainly, when it is my turn to be god and supreme commander, we will ensure that the "speed of ... transportation" is reduced to get an overnight 20% reduction. Unfortunately, I would be tarred and feathered for suggesting such action.
Optimistically, people will be smart enough to take appropriate measures when the first signs of PO become obvious and this will be soon enough. I would not bet on it. Only a fool would deny the evidence related to GW - and yet your pessimism about this shows how foolish people can be.
I really hope that your optimism proves correct - I really do. This is a case where I want my fears to be proven false.
Optimistically, people will be smart enough to take appropriate measures when the first signs of PO become obvious
Well, we're already way past that point. Oil imports have been harming the economy of OECD countries for decades, and making a mess of the US's foreign policy.
The point is, though, that we can recover from our oil problems any time we choose to. There are some risks with financial volatility challenges from capex lag, but basically these are all under human control. If we have to go to a partial command economy, a la WWII, we can (not that I think that's likely).
Excellent metaphor guys.
Especially the part about how stopping to take a deeper scientific view will be bad for business, will detract from "maximization" of profits.
"It's just a scratch..."
I was surprised also by Kopits' work, and said so on Hamilton's blog where the piece was published originally. There is nothing about the EIA 2030 forecast that is a "hard peak oil" forecast. Indeed, the conflation of liquids in both the slide deck that was used on the day of EIA IEO release, and in the body of the report, cry out to be made Job #1 for any analytical response. The IEA is strongly making the case for supply growth, and is using lower energy-density sources to do so without making the distinction to crude oil. As for crude oil supply, both in public remarks by Howard Gruenspecht and in the report, future supply of oil is once again ceded to hopefulness from KSA, and Iraq. When asked about the growth of domestic oil demand in OPEC producers, Gruenspecht said: "Higher domestic demand for oil from OPEC producers will drive them to NG, thus freeing up oil for export."
No, really. That's what he said.
G
You notice, we did not include those words in our version of the post. Our title was "EIA: From Forecast of Oil Supply Abundance to Decade of Decline", and we did not include the words "hard core peak oil" in our post at all.
The main problem with using bbls as the measurement and making no difference between crude oil and something like tar sands is that even though you might show an increasing bbl figure, the EROEI dictates that the barrels that come from tar sands are NET less because they took more energy to produce (with associated double-counting) than the same barrel of normally produced crude. Even among "normal" crude you can have vast differences in return, particularly on ground vs. deep water.
In the case of Iran he is correct, at least in the transportation sector; total NGVs went from 1k in 2004 to an estimated 1 million in 2008, 23.91% of their total vehicle fleet. International Association for Natural Gas Vehicles (IANGV) Their net exports have held steady over the last decade by and large, averaging 0.52% YOY 2000-2008.
[EIA] "But it is clearly not in the peak oil camp."
It will take a few more times of bumping against the supply limits before the forecasters have a historical basis with which to plot the inflection point of limited oil growth. By then it will obvious to all. The first step obviously, is to plot periods of reset to slower infinite growth. That's the limit of EIA forecasting backbone. Even this is somewhat useful to urge policy along the right direction, but it certainly does not a provide a "corrective" feedforward policy hook.
American Oil Production peaked 40 years ago. World Oil Discovery peaked 50 years ago. Neither is obvious to all, and neither will ever be obvious to all. Don't misunderestimate the power of wishful thinking and self-deception.
Decades from today, people will still believe oil production will increase forever, if only corporations had more freedom. 10% of Americans polled said that the BP leak was caused by environmentalist saboteurs. Perhaps decades from now, we'll have internment camps for environmentalists, set up with the goal of ramping oil production back up to today's levels.
I don't think peak oil will ever become common knowledge.
Likewise, the 9/11 demolitions will never become common knowledge.
Here's a new idea: nowhere on the Internet is there any controlled demolition video that looks as clean and orderly as these: http://www.wtc7.net/videos.html
If you search YouTube for "demolition" the top result is an excellent montage of sloppy, lopsided, disorderly collapses that begins with the caption "All WTC comments deleted, you'll be banned!"
In emotional terms, accepting the demolition is like accepting American Peak Oil or World Peak Discovery. Hey it's so obvious! Look, it happened decades ago! Unfortunately, these facts can not compute emotionally with 99.99% of people, because the consequences are unpleasant and ideologically jarring, and it doesn't match any of the patterns of thought presented on TV as mainstream.
For those who hope to educate the world about peak oil - go tell a mainstream news organization or the Market Ticker or friends and family, and see your words enter the memory hole...
Peak Oil means something different depending on who you talk to. But these projections imply that supply will meet demand which is tied to economic growth. Not much belief in Peak Oil in there in any form. The most charitable interpretation of Kopits claim is that EIA has continually projected growth from our current level for 5 or 6 years now and it's just not happening. He's taking the series of EIA projections as evidence of Peak Oil itself, but foolishly expanding this claim that the EIA is taking a position on Peak Oil.
Whether economic growth will be constrained by increase in cost of energy extraction remains to be seen. What I have seen in the last 5 years leaves me hopeful, however. The economy has a difficult time growing at $110/bbl, but it's not a disaster. And there are sustainable sources of energy that become available at those price ranges (and whose price will actually likely come down over time). The price at which oil can be reliably replaced by alternative energy sources will play a big role in determining the global peak oil curve. We may run out of resources eventually (and plane flight might get really expensive again), but I don't think running out of oil in particular will be our downfall.
"...EIA has continually projected growth from our current level for 5 or 6 years now and it's just not happening."
"The economy has a difficult time growing at $110/bbl, but it's not a disaster."
EIA has never predicted anything but growth and peak oil/no peak oil people argue endlessly over the rates of the projected growth, yet no one wants to discuss the real cost of that growth.
I agree $110/bbl oil isn't a disaster, no, it's a friggin nightmare! $40/bbl or is a disaster and when we add on the $100/bbl war premium, the $50/bbl socioeconomic decline premium and the $450/bbl ecological disaster premium. It becomes a global friggin nightmare!!!
Here is something you guys need to get your hands around, $20/bbl in 2020, $10/bbl oil in 2030 and negative $50/bbl oil in 2050. There will always be plenty of oil in the future, because like coal of the last century, there comes a day when ruining lives, destroying the environment and killing people just isn't sustainable business model anymore.
As global awareness of externalities becomes the focus of the energy debate and true low-cost alternatives present themselves, look for a mass exodus from oil, peak or otherwise.
There is a new day coming and every grade school on the planet is singing the same song. Good riddance!
I'm pretty optimistic about the mid-term future, but...
I will still take that bet.
Is this a joke? Does someone really need to plot you a graph of global coal useage stretching the last two centuries? Do you honestly think global coal extraction and consumption has fallen?
Our lead article focuses on a sensible definition of "peak oil": a point beyond which the elasticity of oil supply decreases more and more rapidly. A given price increase stimulates less and less new production as time goes on. The question asked is whether current observations of economic activity and current predictions of future economic growth show that such an effect is visible right now.
Hubbert was able to use a simpler metric, total production, in his prediction for peak oil in the US because oil was and is available from external sources. As long as other substitutions are available at some price (oil sands, natural gas, nuclear/electric) world-wide peak oil will be a matter of economics (how much are we willing to pay?) rather than of absolute scarcity (have we pumped the last drop yet?)
“Meeting the projected increase in world liquids demand will require increases in conventional and unconventional supplies of 25.8 million barrels per day”
http://www.eia.doe.gov/neic/speeches/howard052510.pdf
My question to anyone here who may have the answer, is there reserve capacity which has not yet been discovered to cover the increase of 25.8 million barrels per day by 2035-?
My guesstimate is that global net oil exports in 2035 will be down by 80% to 90%, versus the 2005 rate. When the 2036 EIA data are released, I'll guess we'll find out how accurate this projection is.
If you are right--and I think you are right--then John Michael Greer is wrong in his prediction of a gradual bell-shaped decline from Peak Oil. I still do not believe, however, that the descent from Peak Oil will bring apocalyptic collapse. In other words, I think that Greer is mainly correct, but that he has not carefully studied ELM and ELM2.
My concern in the possibility of huge number of debt defaults in the next few years, and these debt defaults disrupting the international trade system.
If the international financial system starts unwinding, I am afraid the descent won't be terribly slow. Of course, we will still have the things we have right now, that that still work. And financial systems within countries may work reasonably well.
The problem will come a few years down the road, if international trade takes a big hit. All of our high-tech goods require materials from around the world, and we need a fairly high level of international trade to keep making these goods. Our real problems will come in a few years when we cannot repair all the equipment we have, and cannot make replacements for the high-tech goods we have today.
Thanks for your thoughtful reply, Gail. I've studied and used to teach U.S. economic history, as well as college classes in Environmental Economics, Macroeconomics, and Microeconomics. My MBA is in finance.
It is by no means certain that the international financial system will unwind over the next twenty years. Central bankers are a lot smarter than they used to be, and they have much better data than was available during the Great Depression. It is possible that central banks and the IMF will be resilient enough to manage economic decline from now until, say, 2030 and possibly considerably longer.
Even if international finance does collapse, as you point out, the real resources and real capital (ships, buildings, equipment, tools, not to mention human capital of skills) remain undamaged; it is not like the destruction of the German and Japanese economies during World War II. We might very well make an abrupt transition from market economies to command economies. Indeed, I think the rise of authoritarian and even totalitarian governments is a likely response to mass unemployment and falling living standards. In other words--and I hope this does not happen--the U.S. might transition quickly to a society like that described by George Orwell in 1984. I think it is more likely that we might respond to deflationary depression followed by increasing inflation with some sort of fascism, perhaps similar to the kinds that arose in Spain and Italy during the years preceding World War II.
Mr Sailorman,
You make a great deal of sense;on days I'm feeling optimistic I can see things working out just about as you describe them,or maybe marginally better,if we are lucky.
But most days I think some random event or combination of events,physical, financial, or political, will create a situatuon that spins out of control and we either collapse, or we fight WWIII, or something of that nature.
If you have written any books intended for laymen, I would like to read them.
My pet theory as to inflation is that the federal govt will try to inflate away a good portion of its debt with inflation in the range of four or five percent or maybe a little higher;that there will be a crisis of some sort, and that the money spigots will be opened wider to deal with it;that the crisis will get worse instead of better;and that lacking any other politically viable short term solution,congress in combination with the administration in power will print (or force the fed to print ) even more money in a panic;the situation snowballs and we have a runaway inflation.
I have considered all the usual arguments about who gets screwed,and how the screwees are numerous enough and influential enough to stop it, why rising interest rates will automatically precent it from happening,and why deflation means there is no way for enough money to be printed to inflate.
In a sxxt in the fan situation, when a collapse seems iminent, I don't think these ordinarily sound arguments will hold.
I would never under any ordinary circiumstances drive on a busy road at a hundred plus mph, but if I were to be transporting somebody to the hospital who will hopefully live if I make it and die anyway if I don't, I would estimate the odds of making it and if they appeared to be favorable I would floor it.
Even though the people in power may realize that a runaway inflation is as bad as or worse than the crisis that causes it, if no other short term solution presents itself, I believe they will risk it,in hopes of "something turning up" before they loose control of not just the financial and banking sectors but control of everything.
Am I making sense?Anybody?
I have no training at all in finance and only a couple of years of introductory econ classes taken back in the dark ages.
The only book I've published is ECONOMICS: Making Good Choices, by Don Millman, 1996. It is easily accessible to the layman, and you can get a used copy really cheap from amazon.com There is even a few pages on the price elasticity of gasoline in it. In order to get it published I had to leave out a chapter on environmental economics and also to praise economic growth as the solution to economic and social problems. To get a college text published it must be 90% the same as the best-sellers in the field. The uniqueness of my book is that it emphasizes critical thinking and leaves out math and very complicated graphs.
That is my biggest fear for the post peak oil era. I fear that versions of faschsim will be the easiest way to create percieved local security and make more resources available by isolating and then removing other consumers.
History seems to indicate that it is easier to spread fear and hate and start self perpetuing conflicts that gives an alibi for ethnic clensing etc then to get people to cooperate and lower their standards at a faster pace to get surplus resources for common long term investments.
As I see it we have a race where the constructive market mechanisms and idealistic politicians must get solutions in place asap before things start to slide too fast and we get nasty solutions instead of peaceful ones. But the bulk of the efforts seems to be about continuing business as usual and keeping as manny of the political/financial pyramid schemes going as long as possible.
I expect that lots of responsible people with power are genuinely scared about the effects of crashed financial institutions and unfulfillable promises about pensions etc. This is a small problem compared with inadequate investments in production of energy and food that can replace what is lost thru emptying recources and environmental destruction.
A period of shrinking economy can be handled if people in general can lower their expectations, take on new lower paying jobs, invest all they can instead of getting status thru consuming, share more thru investments, gifts and taxation and use lots of manual labour to not let pysical resources go to waste. There is for instance lots of slack in the food processing chain in rich industrialized countries. Physically we could instead of trowing half of the food away at home and the store use more time for cooking, utilize the stock of freezers and fridges to minimise spoilage and have a boom in new neighborhood cafeterias where those who are skilled in cooking makes a living from using the whole hen.
But these market solutions to the problems needs a calm an orderly society with low crime rates and good morale. If the faschism trends start to take hold they create tensions and violence that hinders the constructive solutions.
The end game for these trends is probably kind of bitter sweet, faschism is inefficient and thus self destructive. The regions that chooses that path are probably dooming themselves to perpetual shrinking comparable to north korea and will thus destroy themselves after making neighbours and every local hatable ethnic group miserable or dead.
(peak oil is not good for my mood, but it has been worse, I have found some solutons I think are usable, largely thanks to the The oil drum! )
Not at all. As Scott Fitzgerald said, the rich are different, they're not like you and me. A little tinkering at the margins and a pleasant surprise now and then are enough to keep us in coffee and wifi. What more could B citizens want?
economic decline from now until, say, 2030 and possibly considerably longer.
Don, why do you expect decline?
I've read all of the literature (Hamilton, St. Louis Fed, Hirsch, Ayres, etc, etc), and I can't see evidence for it. What are you looking at?
You can not see evidence for it? Open your eyes, go read some financial sites, the world is turning to garbage.
Nah.
We had a bank panic (to which Peak Oil-Lite contributed somewhat, certainly). People are still suffering, and the financial superstructure is a bit shaky, but the world and US economies are slowly recovering.
Don Sailorman, Nice to see you grace our presence again. Have missed your blogs.
In 2035? I'm pretty certain 2035 will come and go no matter what, but for there to be net oil exports in that year presupposes no collapse. That some version of BAU will continue enough for oil trade between countries vs. a Kunstler style localization, seems at best a stretch.
I get your point, i.e. if one were to simply extrapolate into the future those numbers could very well be accurate, but I don't see us getting there. This house of cards is going to start dropping hard once oil supply begins to drop in earnest from this stretched out plateau. At least that's how I see it.
Speaking of which, I think it's remarkable the plateau has lasted as long as it has, and wonder just how long it can last. Most on TOD seem to be certain of 2012 as the beginning of the drop, but that story is still to be written. It seems like there will be a huge effort to keep supplies at this level or slightly higher for as long as possible, which could conceivably be until 2020? However, the greater the effort to maintain the plateau by way of super straws, more tar sand type operations, more ethanol, etc. the faster and harder the fall will be from peak.
One of the three principal characteristics of net export declines is that the decline is "front-end loaded," i.e., the bulk of post-peak Cumulative Net Oil Exports (CNOE) are shipped early in the decline phase.
For example, Sam's best case is that the (2005) combined top five net oil export volume in 2013 will only be down by 13% from their 2005 net export level, but he is projecting that they--Saudi Arabia; Russia; Norway; Iran and the UAE--will have shipped half of their post-2005 CNOE by the end of 2013. In other words, the post-peak net export depletion rate tends to far exceed the post-peak net export volumetric decline rate.
This is the irony of our predicament--that developed countries are borrowing money in an attempt to maintain our high levels of overall consumption, which in turn is contributing to the sky high CNOE depletion rate.
Regarding the global economy 25 years hence, my guess is that we will see a lot of global trade gradually being reduced to principally trade between net food producers and net energy producers.
Which may be a bit different from having it drop like a stone all the way to zero as in the most naïve model. Countries like Britain or Indonesia that have flipped from net export to net import generally seem to have economies that include more than oil. Can't say that about those in the Middle East. If the Saudis quit selling oil, how do they eat? What else could they possibly export in quantity that anyone could conceivably want?
Edit - heck, they were even importing sand at one point, their own sand apparently being poor for making concrete!
"Regarding the global economy 25 years hence, my guess is that we will see a lot of global trade gradually being reduced to principally trade between net food producers and net energy producers."
Here is an updated version of the graph I posted yesterday showing how these EIA forecasts have evolved:
'07/'08/'10 all included year by year projections, 2009 for some reason reverted to only forecasting every 5 years, which this graph uses as well, for clarity. 2010 is also the first year to project to 2035.
One could build a similar chart of ASPO or Colin Campbell forecasts, of course. Truth is in the middle, perhaps? Another curio in the 2010 forecast is that they project very steady growth 2022-2035, at an average 1.26 mb/d yearly growth. This is unprecedented, in the past up to a handful of years have shown growth, and in excess of this average, too. These are interspersed with years with much shallower rates of growth, or the odd year with contraction. The EIA is calling the 20s to be the decade of Roaring Unconventional, I'd imagine - cellulosic ethanol, XTL, even oil shale.
Possible evolution of future IEO forecasts; year of publication is X axis:
Take it directly from a farmer to the bank-unless they are able to convert thier infrastructure over to renewables on the grand scale,and get thier population under control,the ME oil exporters are going to go to hell in a hand basket within a couple of generations at most and probably a lot sooner.
Whoever is occupying that part of the world and making everybody more or less play nice, excepting the odd bomber every couple of days and the snipers,will eventually take off the gloves and simply allocate the oil and gas production as they see fit.
Of course it is theoritically possible that thses countries might grow some serious military muscles,and kick everybody out, but that doesn't seem likely.
There is very little to zero chance of the general area being self sufficient in food , given the water issue and the likely future population.Starvation over the longer term is a very real possibility.
" my guess is that we will see a lot of global trade gradually being reduced to principally trade between net food producers and net energy producers."
Yep it gives perspective to look at what an oil importing nation must produce in order to pay its bills. The largest industry in NZ is dairy, for instance. In 2008 the entire dairy production (for export) was a pretty close match with oil imports. So all those cows, all the support infrastructure, the trucks running around picking up milk, the processing, the cheese making, the powder - the whole huge operation - gets swapped out for oil. 2009 is looking better not for using less oil but the lower price across the year. Anyway the only difference today is that there is not clean alignment between those buying the oil and those wanting the milk powder...
http://business.newzealand.com/Economy/15264.aspx
You've got to add together milk powder, butter, cheese exports to appreciate the combined dairy market.
Didn't know that - very interesting.
How fast can we drive towards that cliff? Get your surf & turf while the going is good.
It is indeed dificult to predict our future, Earl. My crystal ball, at least, is quite cloudy.
The best we can do is to consider probabilities. Overlaying that we have our hopes, desires, and needs. The scenario that best fits those is selected despite clear evidence to the contrary. This is just human nature, also known as wishful thinking.
I would like to have nice gradual ease down. I agree with Don that there could well be some strong man dictatorship in the future, accepted as a means to keep things going for just a little while longer. It is equally likely that there will be some violent uprising as the economy worsens and joblessness and hopelessness create the necessary levels of frustration. Whether this leads to dictatorship or anarchy is uncertain.
Yesterday's news about the unemployment statstics is an example of selective interpretation. Investors rejoiced in learning that there were some 250,000 fewer people receiving continuing unemployment compensation checks. Because they are looking for any facts to support their hope that the economy is recovering, they interpreted it as lower unemployment, and by inference more employment I suppose. What actually happened, though, is that these people fell off the end. Now, instead of receiving a check for 50% of what they were earning when employed, they are receiving $0.00. How they are going to help the economy is a deep mystery. I think it involves "unlocated jobs." Sort of like all those "unlocated sources" for oil that will keep BAU going.
So, best wishes for understanding economics!
Craig
It’s a time scale issue.
There is a disconnect between the horizon of analysis and the horizon of income / reward of an analyst.
Yes, there is a real problem with oil supply in the long(er) run but it is highly unlikely that this will come to bear by the time the next annual review / bonus comes around. There is no incentive to be not optimistic.
Rgds
WeekendPeak
In early 2008, when oil prices went towards the $120 mark, ABC TV had an interview with Geoff Dixon, the former CEO of Qantas. He said his airline can't make money at these kind of oil prices.
The $147 price spike can be explained with an extra demand of 800 kb/d in June and July 2008, by China, for the Olympic Games. In 2007/2008, Saudi Arabia could not produce enough oil to keep oil prices down.
When peak oil (=limited oil supplies) hit in 2005, the world had a "pre-condition" of accumulated debt and we know what happened. The patient had a heart attack. Irreversible damage. Stimulus money is supposed to make the patient run faster again. If that succeeds, the next heart attack is pre-programmed.
And a reminder: Our suburbs were built for $20 oil. That is the problem.
This is such silly compartmentalized thinking.
If the price of crude is lower because of reduced economic activity then "reduced economic activity" is the problem. How do companies balance increased external costs? By screwing with labor. And governments do it by cutting back services. And people do it by consuming less. And also, they borrow, especially if they think the price rise is temporary.
GDP is not lower because more of these people just borrowed. But the balance is coming due.
Relative on gasoline taxes around the world, many countries have effectively used and prospered on $110 oil. Other countries have floundered on domestic oil priced at $.25. Japan uses oil at 8 barrels a year per capita and Europe is at around 13 barrels a year per capita. Here the usage is around 25 barrels per capita per year. It would take 10 to 15 years and great discipline to achieve something similar here.
China is building 18,000 kilometers of high speed rail in a few short years and gets $500 million a day for its US treasury holdings to pay for its oil imports. We are building 84 miles to get from Tampa to Orlando Florida and adding $4 billion a day to the Federal debt. Our total private and public debt is a greater risk per se than oil at $110. But until we control our debts, oil will be a problem here at any price over $80 IMO.
China... gets $500 million a day for its US treasury holdings to pay for its oil imports.
China has about $1T in t-bills, right? At current interest rates that would pay about $20B per year, right? That's about $55M per day.
About :
"The EIA may be wrong about how well economies can withstand sustained high oil prices and about how much oil the world can produce at a given price if called on. But it is clearly not in the peak oil camp."
Seems to me it is now time to realize that between these reports and what people at the EIA really think it might be quite different ... Don't think peak oil is viewed as a "tin foil theory" by these guys anymore (let's hope, considering the banality of the fact that finite resources are not infinite), and if we consider the kind of "pressure" that occured around the IEA reports, see for instance :
http://petrole.blog.lemonde.fr/2010/05/18/how-the-global-oil-watchdog-fa...
Don't see why similar things do not or did not happen for the EIA
I think it's important to distinguish between what we think will happen and what we think the EIA thinks will happen.
The point of Kopits' article is to say that the *EIA* now believes in peak oil. I thought that was overstating the case, personally: they still seem to be trying to paint a forecast of inevitable growth, they just have to revise it downward every year to match it with reality.
Levi seems to be making the same point. He does, however, step on a land mine for this forum when he says "The only way out for someone who wants to blame the lower supply projections on peak oil is to argue that the lower GDP projections are themselves a consequence of peak oil." As I understand some of Gail's earlier posts, that's *exactly* what she claims.
Personally, I think that the economy will inevitably become a slave to energy supply in the future. As for whether it's happening *already*, that's a chicken-and-egg problem that I've yet to see cleanly untangled.
One last plea: y'all are using a common language of charts and graphs that you've all seen before. That's fine, but as a new user who hasn't seen them, can I beg you to link to graphics with readable font sizes?
That is *exactly* what I have been saying.
We will try harder on graphics font sizes. I know on the graphs I make, I usually make the fonts fairly big. The problem is talking other folks into making more readable graphics.
I imagine some people read these posts on computers with pretty small screens. That makes the problem worse.
As I understand some of Gail's earlier posts, that's *exactly* what she claims.
Yes. Unfortunately, there really isn't much evidence for it - it's an underlying assumption (and yes, I've read all of the various related posts on TOD).
Another way of looking how politicians and society in general looks at peak oil is to compare it with the debate on climate change.
In climate change we still have the deniers, especially those who use any little disagreement between scientists to debunk the whole thing. I suspect that many of the politicians denying climate change found it politically expedient to do so - such as the oil-backed Senator Inhofe from Oklahoma. Why put one's gravy train at risk?
Or maybe they recognize it but have more immediate problems to face, such as avoiding foreclosure as their wages get cut. Nothing will happen in terms of mitigating it until it comes knocking on the door like a large earthquake and forces us to respond.
Peak oil is here. There are still the deniers who, despite overwhelming evidence to the contrary, think that its a rosy future or that at least we will be able to survive oil above $250 a barrel. Thus, why change what we are doing now? Its not politically or economically expedient. The oil companies themselves know that we will be running out soon - otherwise, they wouldn't allow their infrastructure to simply rust away as its held together with bailing wire and duct tape. Society knows it yet one still sees people driving newly-bought gas hogs with paper plates.
We were complacent in the late 30s and 40s and felt we could ignore what was happening in Europe and Asia. We had just had the Great Depression and were still crawling out of that muck. But then came Pearl Harbor and we heroically responded and joined the effort against fascism and aggression. Similarly we are complacent now, ignoring the real threats to our security of climate change and peak oil. This oil spill may serve as a good wake-up call for some but most go on with their lives as if its no big deal (as long as you aren't living on the Gulf Coast). So instead of a shocking attack like Pearl Harbor, its death by a thousand cuts.
I suspect the EIA is simply trying to paint a rosy picture still, though its less rosy than previous pictures they painted. Sounds familiar? Remember back in the good old days when BP said that the well was only spewing 1000 barrels a day? Then 5000? etc.
That attack may come when oil surges in price, and everyone is shocked! shocked! that this could happen here. But between now and then, only the smart ones are preparing, if they can afford it! The rest are too busy keeping one step ahead of their creditors or are mind-numbed by The Biggest Loser and other television shows.
Nobody denies "climate change", but we do seem to have passed peak warming for now, which will sure increase the impact of passing peak oil.
In what sense have we passed "peak warming"? You've seen this, right?
http://nsidc.org/arcticseaicenews/
To Casey's point: If we want to link FF depletion with climate change then let's do it!
I recently wrote this post which describes the impulse response of CO2 atmospheric concentration to the consumption of fossil fuel:
http://mobjectivist.blogspot.com/2010/05/how-shock-model-analysis-relate...
The two camps have a lot in common. The climate scientists love doing convolutions on forcing functions and that is all the Oil Shock model is, which is arguably the only realistic oil depletion model available.
To me understanding CO2 dynamics is very intuitive based on my thinking about depletion dynamics. You would think the climate scientists would reciprocate in their thinking.
If you follow the arguments closely you will find that the recent warming (roughly 1976 through maybe 2006 if you are doing a running smooth) is simply an extension of the long warming since the LIA, has not been unusual, and probably was less warm than the late 1930s period. The long (ca 175 year) cycle probably peaked about 1940, so we now have both the 170+ and 60 year cycles on the downslope. The approximately 60 year climat cycle has shown bottoms near 1850, 1910, 1970 and one might be reasonably expected near 2030. Solar inactivity is also suggestive of cooling. SST has been cooling since at least 2005 (maybe 2003), and the raw data for surface instruments shows a slight cooling trend from mid 1997 through mid 2009. Arctic sea ice is a subject of much discussion right now, but "extent" is not really significant at this time of year. The low extent this year is probably due to unusually high concentration, so let's wait until mid-Sept for any sea ice input. If you believe GISS surface temp. data, read Chiefio in detail. There is quite simply no good scientific data supporting unusual recent global warming or potentially catastrophic climate change, and there is a lot of recent data suggesting a recent onset of cooling. Murray
The LIA ended at about the same time that the Industrial Revolution began, bringing with it increasing use of fuel. The period since that time is a poor baseline for assessing what natural climatic variability looks like.
Nonsense. The ice core record shows no significant increase in CO2 before ca 1850, 150 years after the bottom of the LIA, and the major increase (see the Mauna Loa splice to the ice core) has been since about 1950. The supposed warming of concern has been since ca 1910, but mainly since 1970+. Cooling from ca 1943 to ca 1975 is not consistent with increasing CO2, so aerosols were invented as an explanation, but the source of the aerosols has never been identified or measured in any paper that I can find, nor has the reason that the aerosols became ineffective after 1975. And then note the cessation of any warming trend since ca 1997, while CO2 concentration continues to increase. All of the useful proxies tell us that the Holocene optimum, the Roman optimum and the MWP were warmer than now, so we can be very sure that recent warming is well within the range of natural variability. You are grasping at unsupported straws, but hey, that's OK if you are attached to an unsupportable belief.
When did we last have an arctic ice cap only in the winter? That would be an good place to start some climate comparisons. I do keep a weather eye on the NSIDC site but I really haven't seen much out there that tells me just when similar arctic ice conditions occurred last. I'm guessing we don't really have a good handle on when that was since nobody seems to be talking about it much.
The way to figure that out is by looking at seafloor sediment cores. However, there are very few seafloor cores in the Arctic ocean, because drill ships don't handle sea ice very well.
Here's a map of current Ocean Drilling Program core sites:
http://iodp.tamu.edu/scienceops/maps/iodp_odp_dsdp.gif
To my knowledge the only data that could answer your question is from the ACEX mission, which used a team of icebreakers to protect the drillship. However, it's not clear that that data has been analyzed with your question in mind.
Thanks for the links. Lack of arctic sea bottom cores might remain a problem until a time when there is a whole lot less ice--which might not be all that many decades distant if the current trend continues. The positive feedbacks from the decreasing albedo look to be very real and measurable.
NASA: Easily the hottest spring — and Jan-May — in temperature record
Plus another record 12-month global temperature
http://climateprogress.org/2010/06/10/nasa-hottest-spring-on-record/#mor...
The term "peak warming" could have a meaning similar to the meaning of "peak oil". The price elasticity of remediation is becoming smaller and smaller.
Yes, I'm curious as to what you mean by "peak warming," as well.
My understanding of the climate science is that we have a further increase 0.5 degrees C and 0.7 degrees C baked in just due to the existing CO2.
I fear that your understanding of the science is limited. There is no solid science demonstrating that CO2 drives warming in the complex earth atmosphere open system. To the extent that CO2 causes warming in a closed system, the warming varies logarithmically with concentration, and atmospheric concentration is already at a level where further increase would have little impact in any case. The "catastrophic" warming projected by models depends on an assumption of positive feedback mechanisms in the atmosphere which have not been demonstrated and which are intuitively improbable. Some evidence does exist supportive of negative feedback mechanisms. We have now had about 12 years of flat to slightly negative temperature trend, while atmospheric CO2 concentration has continued to rise. This is not the forum for a detailed discussion of this subject, and I don't have time just now in any case, but if you do some holistic and open minded digging, I am confident you will be reassured relative to both CO2 and warming. I truly wish there were hard evidence for the "warmist" case, as it would provide a strong incentive to do something about energy. Regretably, using AGW as the driver for a sound energy bill is likely to prove counterproductive. Murray
Look up how to calculate the "black-body" temperature of non-stellar astronomical objects (such as Earth).
From an Astronomical perspective the surface of Earth isn't changing temperature, but the emission surface is not the land surface, nor the water, but is rather somewhere up in the atmosphere.
As the concentration of greenhouse gasses in the atmosphere increases that emission boundary is free to move up in the atmosphere until Earth is in radiative equilibrium with the surrounding space, so the limit to how much warming we can get from CO2 (or Methane, of water vapor) is not limited by the opaqueness concentration but rather by the total amount available.
The specific details are of course more complex than that, which is why we have so many scientists devoting their lives to studying it, and I'm not convinced that we have enough.
Nonsense. When there is enough CO2 in the atmosphere to soak up all of the reemitted photons in the CO2 sensitive spectrum, then adding more CO2 will have no effect. We were demonstrably near that point more than a decade ago. See the work of Heinz Hug.
Murray said:
But you earlier said this:
I fear that the climatologists whose day job it is to study these things do not agree with you, and neither do the measurements themselves. I could wish it were indeed otherwise. See here: http://www.giss.nasa.gov/research/news/20100121/ . The decadal averaged global temperature for 2000-2009 was ~0.18 Celsius higher than that for 1990-1999, which in turn was ~0.2 Celsius higher than 1980-1989. The pattern is of natural annual variations from ENSO etc superimposed on a steady averaged upward trend. Anyone can cherry-pick a nice above-average year (say 1998) and then declare that things have been cooling off since then. It might seem "intuitively improbable" but science is not based on intuition, but on basic physical laws and measurements.
Sorry, but GISS manipulates the raw data out of any intelligible usefulness. See http://chiefio.wordpress.com/ and go back several months and read all his analyses. Note that he also posts his SW if you want to check his work. Forget GISS.
So. GISS data is worthless because you and chiefio Declare It To Be So. Right.
Raw data HAS to be adjusted before you can begin to compare like with
like. Different stations have different microclimates, altitudes,
enclosure types, instrument manufacturers, intstruments develop offset
errors or fail completely and are replaced, the site is relocated,
measurement times change etc etc. Adjustments for such things have
been necessary throughout the history of the temperature records.
In order to show that GISS is in error with its warming trend, you will have to show that
(a) the corrections were improperly done, AND (b) that such corrections
introduced, on average, a recent warming bias rather than a recent
cooling bias. Futhermore, that this bias persists when averaging over
the many different types of stations (not to mention the radiosonde
and satellite data) to obtain the global average. You can easily do this, of course,
if you assume that There is a Big Evil Conspiracy going on.
No such accusations have yet stood up to scrutiny. Allegations by
Anthony Watts and D'Aleo and parrotted by many others have been refuted:
http://tamino.wordpress.com/2010/02/25/false-claims-proven-false/
http://clearclimatecode.org/the-1990s-station-dropout-does-not-have-a-wa...
and others.
The general issues are discussed further here:
http://www.gilestro.tk/2009/lots-of-smoke-hardly-any-gun-do-climatologis...
Oh yeah - the steadily averaged upward trend starts about 1700, Where was the CO2 for the first 200 years of that trend? Go back 5000 years and we have cycles about a steadily averaged downward trend, using the best peer reviewed papers available to reconstruct Holocene temperatures. And I wasn't cherry-picking 1998. Start with mid to late 2007, when we were only about 1/2 way up to the 2008 peak, and we still have a slight downward trend to mid 2009, ie 12 years, using CRU data, without any correction for positive temperature bisaes (see http://digitaldiatribes.wordpress.com/2008/10/24/october-2008-update-on-... for a sample plot). Unsupported assumptions about "positive feedback" needed to make the models give the desired answer are not science and are not based on any measurements or physical laws. If you can demonstrate where I am wrong please provide references. Intuition, based on known climate mechanisms is certainly adequate to judge unsupported assumptions.
You are mistaken in your view that the Earths atmosphere is an open system. Other than solar radiation and a few daily pounds of interplanetary matter, Earth functions essentially as a closed system, atmosphere and all.
That's one big "other than"! And then there is the outgoing energy that is not trapped by the "greenhouse". Do you have any real idea of what a closed system is?
The planet is at quasi-equilibrium and really the issue is how the planet reacts to perturbations to this equilibrium.
Once scientists discovered that CO2 has this huge residence time, that essentially makes it inert for long periods of time, we found the perturbation that can effect the equilibrium.
Please provide references. The measured reaction to increased CO2 is a very slight reduction in atmospheric water vapor, which nicely balances the perturbation, ie a negative fedback. Negative feedback is what keeps our climate in "quasi-equilibrium". See http://www.met.hu/idojaras/IDOJARAS_vol111_No1_01.pdf M
Not from my point of view.
Kids stuff really.
http://ga.water.usgs.gov/edu/earthwherewater.html
Of course that basic reality escapes most pseudointellectuals.
You're not from this galaxy, are you?
The original poster is quite correct. Picking up a single geology book is enough to convince anyone that it is impossible to deny climate change.
I think the problem is with some of the more recent shenanigans in the name of "climate change" which are at issue.
Regarding that supposed controversy about "hiding the decline"? (In temperature that is, which would negate global warming)
Yet the bigger "hiding the decline" is exactly what this post is all about. Hiding the decline in oil production levels, by intentionally mixing all liquids with crude, etc. is the real issue. Here we have governmental agencies misleading the public, not some academics sharing opinions.
Yet the oil decline issue hasn't registered on the public's consciousness, even though that same public knows where East Anglia is. Such is the power of certain media outlets.
I don't consider the collection of all liquids with conventional crude to be "hiding" anything. So there is less conventional, and more liquids from either unconventional sources or built from other types of resources. No problem in my book, and it would appear to fall right into a traditional economic theory related to substitution.
As long as the average American consumer can pump it into their gas tank I don't think they care in the least if the gasoline came from conventional crude, Bakken unconventionals, GTL based fuels, polar, deep water or coal.
I think you missed the point.
Possibly. If the point was a vast conspiracy put into motion decades ago to mix conventional crude numbers with the liquids number in a bid to distract all but us super smart forum tramps from noticing, in a bid to disguise the horrifying and earth shattering consequences of conventional peak oil.....5 years in the past now....yeah...that point is pretty easy to miss.
They also hide the decline by making projections that look like production will increase a significant amount!
That is the big "etc." I stuck in there.
But that don't be foolin us smart ones! We just keep gessing it only goes down and sooner or later, we bees wright like a clock!
And then it gets us back to the approach of the climate change deniers. The smart people are not fooled by "hide the decline", but all the right-wingers fall for it hook line and sinker.
I thought we had already agreed their can't be any deniers, because its obvious to everyone that the climate has been changing since time immemorial?
Single geology book, fish fossils in the mountains, riverbed gravel on top of a mesa, fossil coral above sea level, etc etc?
I know there haven't been any refineries built for many years in the US, and many of the operational ones are being shut down, but I hadn't heard they are letting the infrastructure rust and be held together with crude fasteners. Is that true? I suppose it makes sense, but if that really is true, then that lets us know the oil companies know their days are numbered and have no illusions about peak oil. That's downright scary! I mean bailing wire and duct tape?
I work in oil refining, and I don't agree that oil refineries are being allowed to "rust away" or otherwise fall into disrepair. That's not my experience. By the way, please explain how bailing wire and duct tape can hold flanges together when the process is at 2000 psig, or 800 degrees F.
Bailing wire and duct tape was symbolic - not intended in the actual sense.
There are all sorts of reports about how the oil infrastructure is rusting away such as
http://www.ngoilgas.com/article/The-rusty-oil-and-gas-industry-a-tale-of...
Financialsense.com commonly has articles and discussions on this topic.
A friend of mine worked for a sulfur recycling company next to the refinery in Anacortes. He frequently said that things were falling apart at the seams all the time and that work was fixing one emergency followed by another on its heels - and that the refinery next door was run this way as well.
I've also seen it up close. I was just down in southern California working near the Sespe Condor Sanctuary. And close to some pipes coming down the hill. The pipes had minimum support, were in an area vulnerable to landsliding, and were fully rusted on the outside. Yet one was labeled in chalk or paint "high pressure gas". I heard that a similar such pipe in the area burst and exploded and two were too close and died. This type of thing doesn't instill confidence.
I'm a chemical engineer who works for an oil company in refinery support. I've worked in a number of different US refineries. For over 20 years I've been on the inside, not the outside looking in.
US oil refining companies have cut way back on most project work that would expand capacity or otherwise improve profits. But spending to keep existing facilities maintained, to modernize instrumentation, and for regulatory compliance is still on-going in all of the refineries I'm aware of.
Regarding the article you referenced, much of it is about upstream, not refining.
The article is misleading about refining. Corrosion has always been a challenge in our business, it's not something that arose in recent years. From my perspective, both materials science and inspection work processes have significantly improved.
The article says:
"The core refinery unit of a large refinery owned by Shell and Saudi Aramco located in Port Arthur, Texas, was originally built in 1902. Parts of many of these aged facilities have been replaced over time, but like an old office building or house, some core components still stand and some must now be almost beyond saving."
I don't know for certain but I doubt if any process component from the 1902 refinery is in operation today. And to state that "some must now be almost beyond saving" is irresponsible speculation, with no facts to back it up. That refinery is also an odd example to pick on given that Shell and Saudi Aramco are spending billions of dollars to more than double its capacity, which will make it the largest oil refinery in the United States.
I support a refinery that was first built during World War I, and there's nothing there anymore that's remotely that old. The "old" part of the refinery was built in the 1960's and is well maintained. The main downside of "old" refinery units is they don't incorporate recent knowledge about how to design a more efficient process. If they are well maintained they can last indefinitely.
If the EIA thinks that $180 oil wont cause a recession then perhaps they need to relocate their office a little further down the street from the medical marijuana clinic. They must be getting too much 2nd hand smoke.
Do they mean $180 in 2010 dollars, or do they mean $180 in 2030 dollars? Who is to say we will even be using fiat currency with pictures of dead presidents in 2030? Will $180 buy a bag of groceries in 2030?
From what I've read, the EIA report was traditionally considered optimistic, which might indicate some sort of bias.
This latest report seems a bit tighter, and we have to assume any bias remains. The report also was released during a new ban on offshore drilling. If a bias existed, then the industry would want drilling to resume, and hence a tighter report would be in their favor.
I'm just throwing it out there.
Good Grief!
'Joe Blowe' upstairs is a representative 'establishment' economist. He went to school, he got a bumcha degrees, he's a Señor Fellow for Energy and the Environment at the Council on Foreign Relations. Who pays this dude? How does he earn it? Break into cars in the Council on Foreign Relations parking garage and steal the radios?
$100/bbl is catastrophic if you can only afford $35/bbl.
You have to borrow the rest.
The costs of borrowing bankrupts your businesses first, then your banks, then your countries.
Does all this sound familiar? How long has this 'bankrupting' been taking place? About ... five- six years?
When oil costs $20 a barrel again, it will mean that great mass of citizenry in America has no money at all. This isn't high- level economic theory, it's common sense.
Oil will cost $20 a barrel ... then ... $10. At that point there won't be any industrial production because there will be no liquid demand for it. Out of the great mass of pseudo- economists wssting space in the establishment ambit, Kunstler - a novelist - is right.
None of the economists dare break ranks with the establishment dogma for fear of stampeding the friggin' stock market.
People have less money today than they had two years ago. Their real estate adventures have turned turtle. Their credit cards are maxed out. Their student loans are being deferred with interest and penalties skyrocketing, their work hours have been cut, they've lost their jobs or cannot find any, their pensions have been 'defunded' by Wall Street, they are getting sick and going to the doctor which costs thirty times what it cost twenty years ago. Apparently, Joe cannot make out this trend.
The Joe Blowe's tell the gullible that there is plenty of oil, naming 'Bakken' and 'oil shale' and 'deep- water and arctic' all being held off the market by 'environmentalists'.
Where is this oil?
The same Blowes tell the world the government is printing money, there is too much debt, that programs must be cut, that the denger is inflation.
Where is the money?
In terms of decision making, it's pretty clear that $80 is catastrophic. And the cheaper it gets, the dumber the decision making. It was amazing how smart we started getting at $145. We might even become half smart at $200.
IMO all you can say about EIA predictions is ... for the last 6 years their projections of future use, even a year ahead, have been wrong - nobody knows what the future will be - real world historical data (generated by the EIA, so can you fully beieve it?) says we have been on a plateau of ~73 million barrels per day for 6 years now, we had most affordable oil 11 years ago!
Don't forget ... peak oil is about crude oil not all liquids, which is what the EIA is muddying the waters with.
Quote: "Oil will cost $20 a barrel ... then ... $10. At that point there won't be any industrial production because there will be no liquid demand for it." From now to 2030 say, oil production will be getting harder and harder and consequently more and more expensive. Therefor it is inconceivable that oil can be put on the market for $10-$20. Even if now one needs oil, the cost of production cannot sink to that level.
ngass you are correct that as the easy to get oil deposits are getting harder to find, the cost of oil exploration is getting higher, and thus price must be maintained at a certain level to support tar sands and deep offshore drilling.
As the price of oil rises, it pressures the economy to slow, which reduces the ability of consumers to purchase products, which in turn reduces oil consumption and if the price drops too low, then oil exploration and tar sands will slow or stop, and then the descent from peak oil occurs that much faster. Essentially we reach a point where the oil available is the stuff already being pumped out of the ground, which will cause a much faster depletion and the drop in production accelerates.
I actually think that due to these economic feedbacks, once the descent from peak oil begins in earnest, it will feel like a freefall with loss of complexity shattering our daily routine in very short order.
The basic laws of supply and demand have not been repealed. As the price of oil fell from its highs in 2008, demand in US has picked up - albeit with some delay.
Oil product demand is now a strong 7% over last year, with distillate demand rising a rapid 12% year over year. I'm not seeing the signs of an upcoming deflationary depression that you are seeing.
Granted unexpected financial events, resulting in short term financial panics, can and will have a strong temporary influence on oil prices. The financial panic of 2008-2009 was perhaps the worse since the 19th century in the US. It's not impossible that something like that could happen again, but that is unlikely, at least right now, and a $20 oil price is not something we will see anytime soon.
Keep in mind that oil will be expensive, but money will be more scarce - and much more valuable as a consequence. The increased value of oil has had an effect on the value of money.
I completely disagree with those who say the money supply will expand and money will become cheaper. If this was so it would have started already. There would be credit expansion. dollar prices of crude would rise and challenge the 2008 high price and exceed it. The trend would be your friend; higher highs and higher lows. The oil price following the trend would imply increasingly cheap money.
When? What is going to make this happen? What are they ('They') waiting for? Where is that cheap money?
Peeps aay that oil will go to $300/bbl. How long will that price last? Fifteen seconds? Nobody has any money!
Over 10% of the US population is on food stamps! Europe is going broke with 'instant austerity' leading to debt compounding spirals. How the hell are these countries going to afford to buy $300 oil?
Answer is they can't and won't and nobody else will be able to afford it, either. Not even the Chinese.
The issue is the value relationship between crude (and other products) and the return on labor.
If oil cost five times what it does now and wages remained at current levels, nobody would buy oil and prices would collapse. If oil cost five times what it does now and wages increased five time as well, the value relationship between crude and wages would remain the same as it is now. This is inflation; the classic 'wage- price spiral'.
The current trend suggests the value of crude is constantly increasing relative to labor returns. The value of labor is declining. This can be seen in the sharp increase in unemployment since 2008 along with stagnant wages since 2000.
The unspoken assumption behind the $300 price and other big numbers is that people are just going to ante up greater amounts discretionary income - which the same people don't have - with no effects being felt in any other areas of the economy which will mysteriously somehow keep motoring along as always. This is typical economic 'thinking'! If $140 oil crushes the world's economies with that world being stuffed with excess credit and the 'wealth effect' from millions of overvalued houses on consumers' balance sheets, how would the price ever get that high when a massive percent of the country's 'consumers' are flat broke and its businesses limping along on life support? Who would bid for oil at that price level? Space aliens?
Discretionary income is shrinking.
These Fed charts show the decline in available credit since this recession bagan. How will prices increase of the means to support the prices disappears? Show me the (easy) money!
Supply and demand for money is intertwined with that for oil. The current value relationships are not cut from granite. With shrinking final demand self- amplifying (see I. Fisher and debt deflation) there is no guarantee that any asset or commodity class value will escape being revised sharply downward.
The 'inner deflation game' has the dollar becoming first a proxy for business activity, then a proxy for oil, then a proxy for conservation (hoarding itself) then being another commodity currency, perhaps subject to inflation against a backdrop of few real assets left to use as hedges against it.
What matters is the real price, not the number. The real price is the energy cost of output. What is output? It is the amount of goods produced with the oil, not the cheezy GDP figure that measures gambling winnings on Wall Street.
Energy return on energy inputs gains a lot of attention; EROEI. What about the energy return on energy outut? Nobody asks that question. Why? Because there is almost no return at all on energy consumed - near zero EROEC has been socially promoted to a 'given' and is simply assumed (or ignored).
EROEC is a lot more important than the other ERs. Unfortunately it is the invisible energy return. Invisible as in 'Zero' along side the invisible concept. Almost all economists understand the effect of high price on demand. What isn't followed up on is the realization that long- term unrequited demand becomes structural as the productive base becomes defunded. Without customers with money there is no factories making goods to satisfy those customers' desires. No customers means no advertising to inflame desires, no transport to connect the non- factories to the non- customers. This has already happened - Great Depression - people had money and the government periodically created more of it. But the money was swept out of circulation and hoarded so the practical effect was that people had no money. Depression- era dollars all became 'marginal'; each one was the 'last dollar that anyone might ever make'.
Better to hang on to it.
Units of energy invested in solar panals will gain a return on the investment - provided there is enough oil at a low enough real price to provide solar panels long into the future. Units of fuel energy invested in wind turbines will gain a return on the investment as well. So will energy invested in farmland.
Units of energy 'invested' in jackasses driving in circles in 8,000lb personal transportation devices gain absolutely no return at all, theirs' is the negative return which represents oil wasted that cannot be used ever for other potential gainful purposes. The negative return - an uneconomic investment as Herman Daly might put it - is deflationary on its face.
It isn't hard to see the connection between the insanity of current car- culture and deflation. Just look outside!
I've gone on and on, over and over again on this blog about, "What is the energy going to be used for?" There is no answer. 70% of the US economy has negative return on energy invested, the 70% that is consumption. The negative return shows up as expanding deflation!
This form of deflation - grounded in thermodynamic reality - cannot be countered by central bank monetary policy; the central banks are irrelevant! Central banks adding liquidity would trigger a panic and runs on money markets. It would trigger just the effect that central banks seek to avoid by adding the liquidity. Without added liquidity, the money panics take place in slow motion. Note the increases in libor and OIS spread; these increases represent claims on cash in exchange for the so- called Most Liquid of all non- sovereign forms of credit. That beinf of short term loans of one bank to another.
Just like inflation is the negative value of currency measured by the increase in business activities when times are 'good', so is deflation the negative value of business activities - caused already by declines in available crude oil - when times are bad.
I define inflation and deflation in terms of price-level indexes such as the Consumer Price Index and the GDP deflator. This is the first definition given in an ordinary dictionary and also the usage favored by most economists (but not by the Austrian economists).
Most of us here at TOD believe that the Consumer Price Index understates inflation, and so do I. The Consumer Price Index is still increasing, though at a low rate close to one percent. The true rate of inflation is probably several points higher: See Shadowstats.
So I ask you: Where's the deflation?
We may have further financial collapse that drives us into a deflationary depression, but we're not there yet.
(Yes, I know that M2 and M3 are both falling. So what?)
You just answered your own question.
Part of the reason for the decline in bank credit outstanding is that banks have written down bad loans.
The main reason for reduced credit availablity is not due to reduced bank lending. The main reduction is by non-bank lenders who then sold the loans to securitizers for bundling and sale to investors. Securitized lending by non-banks was a large part of commercial lending, and it is greatly reduced. Note, however, that some non-bank lenders became banks during the rescue of the financial system, e.g. GMAC.
Another part of the lending blockage is that banks are doing exactly the opposite. They're dragging their feet in acknowledging the current value of bad loans and repossessed properties because when they do so the losses will show up on their balance sheets. This is what the "mark to market" talk was about during the bailout debates last year, the desire to flush bad loans out of the banking system.
If a bank writes down bad loans, it has to offset the writedown by a deduction from bank capital. With less capital, it has less ability to lend while staying within the regulator's required ratio of loans outstanding to capital.
The bank would have to sell equity to raise capital.
Mark to market helps hedge funds and equity fund investors, e.g. Warren Buffett, who can provide capital infusions and wind up with bank equity on the cheap.
If a bank doesn't write down bad loans its capitalization looks better on paper but isn't a realistic measure of its strength. Right now it's gradually becoming easier to get a home loan, though it takes much longer than it did a few years ago. Small businesses are in worse shape than are home buyers. I think this is happening because bankers are uncertain about the trends in home prices, in regulation, and in the overall economy. If the economy doesn't bounce back the small business won't be able to pay back their loans. If the bankers don't loan to small businesses the economic recovery won't reach down to the large number of people whose salaries pay their home loans.
First, the home mortgages are less available because mortgages generally have to meet Fannie Mae and Freddie Mac requirements. Investors are not willing to buy mortgage backed securities that are not guaranteed by the Federal government.
Second, as noted above, a lot of commercial loans and other forms of credit, such as financing of receivables, were provided by non-bank lenders who sold the loans on to be securitized into bonds, which were in turn sold to domestic and international investors. Investors are not willing to buy these bonds anymore. Bank lending is probably about where it was, but bank lending was only half of commercial lending. Banks could probably lend more, but they are pretty choosy about the qualifications of the borrowers. They cannot expand lending to cover the shortfall created by the demise of the commercial loan securitization business while still increasing their capital ratios to meet the expected levels for financial reform.
domestic and international investors. Investors are not willing to buy these bonds anymore.
Where are these investors parking their money??
In sovereign debt or debt that is government guaranteed. There has been a big expansion in Treasuries, for example, as well as Fannie and Freddie, which are now explicitly guaranteed by the taxpayer. The investors still trust Uncle Sam and his power to tax, but they don't trust a mortgage backed bond containing mortgages from non-recourse mortgage states that is "insured" by a CDS from an insurance company.
they don't trust a mortgage backed bond containing mortgages from non-recourse mortgage states
Are CDO's from recourse mortgage states doing any better?
if money (debt) is being destroyed in vast amounts in the credit unwind and the price of oil stays at $80 or so then effectively oil is becoming more expensive...
expanding deflation the new stagflation...
Your analysis is very interesting and insightful. Have you written on this topic anywhere else?
That I can agree with. They seem to be making starry eyed predictions about resurging oil production supply growth. According to the 2000 Outlook, we should now be producing 124 million barrels per day (34 billion barrels per year). Clearly, we're not...
http://www.eia.doe.gov/pub/oil_gas/petroleum/presentations/2000/long_ter...
What is meant by "catastrophic"? Recession? Deep recession? Depression? Major depression? Collapse?
At $110/barrel, the cost of petroleum based goods and services would rise significantly, likely inducing stagflation which could result, due to our current heavy debt, in a return to deep recession or worse. Which should result in a drop in oil prices, until a 'recovery' again rises from the ashes. If it does at all.
I believe we are looking at permanently lower median incomes than we had in the 2004-2007 Heyday. Since we've been eating our seed corn of oil resources, we likely will not have the ability to transition over to a non-oil based infrastructure. Riding bikes for shopping and commuting will become more commonplace, if we have jobs to go to or money to shop with.
Our lifestyle might resemble that of the early 1900s - to some, that would be catastrophic - to others, they would simply make the best of it, if resource wars don't drag us into perdition...
As noted up the thread, a variety of developing countries showed much higher oil consumption in 2008, when oil prices averaged $100, than in 1998, when oil prices averaged $14, e.g., counties like China, India, Morocco and Kenya.
WT, when prices were on the rise, consumption was volatile. When economic hard times hit, consumption fell. Even after prices dropped precipitously, consumption still fell. It wasn't until almost 2009 that consumption started to pick back up.
Here is what the EIA shows for annual Chinese oil consumption through 2008:
And the other three developing countries that I referenced:
India:
http://tonto.eia.doe.gov/country/img/charts/IN_cons_large.png
Morocco:
http://tonto.eia.doe.gov/country/img/charts/MO_cons_large.png
Kenya:
http://tonto.eia.doe.gov/country/img/charts/KE_cons_large.png
Notice a consumption pattern in response to the 20%/year rate of increase in annual oil prices from 1998 to 2008?
Due to the bursting of its real estate bubble, I think China's GDP will decline in the near future. It will take them a while to recover from a deflationary recession. The limitations of exponential economic growth apply to China as much as they do to the U.S. insofar as both economies grew largely due to unsustainable bubbles in real estate.
But that is where the Thirties Model comes into play. It appears that global oil consumption fell only one year, in 1930, rising thereafter, and US oil prices, after hitting bottom in the summer of 1931, rose at 11%/year from the summer of 1931 to the summer of 1937. And there were reportedly three million more cars on the road in the US in 1937, versus 1929.
China is obviously to our current predicament as the US was to the Thirties, with the key difference being that hundreds of millions of people worldwide now want to buy cars.
My guess is that the coming economic downturn in China will be sufficient to choke off demand for cars among the Chinese. The bigger the bubble, the bigger the crash from the bursting of the bubble. In some respects, China's real estate bubble has been more extreme than the U.S. real estate bubble. Look what happened in Japan during the fifteen years after the bursting of its real estate bubble--more than a dozen years of economic stagnation. It is possible that the same thing will happen to China. Trends can reverse abruptly, and they often do.
New BP Stat Review continues with their helpful regional consumption data series, including China; here's their results for 2009 diff YOY:
Haven't checked yet how this compares with EIA or JODI. The JODI figures seem to show a very sizable gain, judging from eyeballing the graph. Good to see they continue to move away from fuel oil, which was 13.43% of their total in 2008. Unfortunately this is a sizable portion of the low hanging fruit. Their continued mandates for higher vehicle efficiency are wise too; but when the OECD nations went down these two avenues of conservation in the late 70's the result was actual contraction in demand, whereas China continues to burst at the seams economically.
Why stop the analysis at 2008? The price response shown above was in 2009.
I'm also appalled at the glib tone in this statement. The result of 2008's oil price runup was a 'mere recession' in the US, but it absolutely shredded the middle class in several developing countries, especially in the non-OPEC middle east. They are not yet back on their feet. Stable democracy requires a thriving and secure middle class, so we may slide further toward instability in many parts of the world.
How nice for him that he (and many of us) can afford oil at this price, but for much of the world 'catastrophic' is not too strong a term.
Egypt is probably a good example of non-OPEC Middle East. I'm not arguing that people haven't suffered, but I am having trouble seeing much evidence of declining oil consumption in developing countries, in response to rising oil prices.
Egypt's annual oil consumption (EIA):
In contrast, the decline in developed countries' consumption has been quite apparent. I suspect that this pattern--developing countries outbidding developed countries for declining net oil exports--will continue. In fact, I think that the US is well on its way to becoming largely free of our dependence on foreign sources of oil--just not in the way that many people anticipated.
So, ask not for whom forced energy conservation comes, it comes for those of us in developed countries.
So, ask not for whom forced energy conservation comes, it comes for those of us in developed countries.
Maybe because we have so much waste and hence slack to cut?
But of course so much of the US economy, something like 70%, is dependent on discretionary spending. We should be discouraging consumption, but governments in developed countries need to maintain close to current levels of overall consumption in order to maintain or increase tax revenue, so they are borrowing money trying desperately to maintain BAU.
Here is an except from my "ELP Plan" essay:
http://graphoilogy.blogspot.com/2007/04/elp-plan-economize-localize-prod...
I've used your Dallas socialite quote in talks with many friends on this subject.
On the subject of borrowing, indeed, if we stop spending, the mirage of perpetual growth starts to wobble and fade, prompting aspiring politicians to promise they can restore it's prior luster.
On the subject of economize-localize-produce, we're certainly on the same page. I've been touting this for quite some time. As you'll see in this news segment, I produce food (meat, fruit, nuts, vegetables) and energy (solar PV, passive solar heating);
http://www.wusa9.com/news/local/story.aspx?storyid=72750&catid=158
p.s., the number of fruit nut trees is now over 60, and fruit shrubs/vines is over 50.
Those who wait to react to future downturns from oil shocks and related events will be relegated to a fate similar to the one the Dallas socialite must be going through now...
westexas,
as someone travelling several times a year to Egypt: it is a country that is practically self-sufficient on oil and gas. Diesel costs below 1 EGP/Liter, about 15 US-Cent/Liter, Cooking Gas about the same per Kilogramm. This price has been kept stable over the last at least 7 years while the subventioned basic food prices (specially wheat bread and rice) have more than doubled over the period of 2007-2008 which lead to an absolute outrage against the administration of President Mubarrak.
As many Egyptians before already had spent 30% - 50% of their income on food one can easily imagine how this has crippled the locale economy- though they had stable internal oil prices.
Egypt, based on EIA data, slipped into net oil importer status in 2007. Egyptian Net Oil Exports/Imports:
http://tonto.eia.doe.gov/country/img/charts/EG_net_imports_large.png
This is a classic example of "Net Export Math," and I used Egypt as part of my IUKE model (Indonesia, UK, Egypt).
The reason why the IEA forecast seems to be a peak oil statement are the "unidentified projects" that are filling the difference between the hubbert curve and the "supply curve"
Here is an article with the "unidentified projects"-image:
http://petrole.blog.lemonde.fr/2010/03/25/washington-considers-a-decline...
Or you can download directly from IEA (the image is on page 8):
http://www.eia.doe.gov/conference/2009/session3/Sweetnam.pdf
Interestingly enough the slide show dates back to April of 2009.
this GDP vs oil price argument is allows couched in terms "the oil price triggered the recession"
I disagree... the price could have been anything (well not quite)..people are missing the point..
the crisis was triggered by an inability to increase oil production
how the market reacted to all that and priced everything is ATEOTD a arcane and IMO arbitrary game of of musical chairs...
the connection between the price and GDP and production is largely psychological.. market psychology
... with a large dose of Game Theory thrown in. Strictly talking price leads to this path because everyone will game everyone else to get ahead monetarily and these are largely intractable problems to solve.
But the oil production problem is obvious and has no relation to market psychology or game theory or musical chairs.
so I agree that everyone is missing the point.
Where does EIA get its background information for the forecasts? I have read that much of it is self-reported by the various countries and it is not independently audited. And, the way OPEC sets its quotas encourages exporters to inflate their reserves.
Is this true?
I tried searching past posts looking for a discussion of the underlying data, but it resulted in too many hits.
I think they just make it up... seriously. I see no method at all
I would think they use the official OPEC numbers otherwise that would imply they were lying and we cant have that now can we.
I rest my case
Rembrandt, you may have a lower level point about the fitness of the wording about the EIA forcast etc. but remember the real point and the proper framing of the issue: even if oil supply goes up somewhat over the near future, we are facing a decreasing trend line of supply:demand. So even if supply goes up e.g. 10% in ten years but 30% more people want to drive (simplified way to characterize the net demand level), then we have a problem. Yes there will be oil but it will cost a lot, and that's bad enough (not to mention other issues like environmental consequences.) You mention that, but it will dampen economic growth and look at the credit problems etc. we already have. So we must avoid red herrings about specific "plateaus" etc., that is not the right way to put the issue.
OTOH, if we can at least put sales taxes on trading of commodities and futures, etc. and tamp down speculation, then the price of oil won't shoot past the natural true S&D curves like it did a couple years ago. We just might have the grace period to seriously start getting off oil, develop renewables, and not have a long slide down. But we really have to start now, do the right thing, and make no major mistakes (like putting irrational forces into political power.) Don't you agree?
(PED=Price Elasticity of Demand)
Wikipaedia Price elasticity.
I think that the strength of the coupling between Oil and the Economy needs to be understood in elasticity terms.
The question is how inelastic is Oil?
Can we generate a co-efficient?
There has been a large quantity of high-quality research done on the price elasticities of demand for gasoline. There are also some (not many) studies of the income elasticity for gasoline and perhaps some other petroleum products.
What we find is that in the short run, the price elasticity for gasoline is very low, and the shorter the time period the less is the price elasticity of demand. On the other hand, the price elasticity for gasoline rises considerably as time goes on, and over a period of years it is probably somewhere near unitary price elasticity of demand.
Note that oil is a commodity that hardly anybody uses in a crude form. The price elasticities of demand that are meaningful are for gasoline, home heating oil, diesel, jet fuel, etc.
And, of course, there's an element of non-linearity here. If oil prices stay high long enough substitutes will enter the market, as we are seeing with EVs and EREVs. If they stay high longer still, substitutes will develop economies of scale which will enable their costs to start falling, and eventually replace oil entirely.
Then we may have high-priced oil, but it won't matter much: it will be used for a few minor things (petrochemicals and aviation), and eventually become an historical artifact.
Just a thought.
Do yo think that the IEA is using iteration a la Runge Katta?
In which case it is a rear-view mirror projection.
Answer . No.
An iteration would not have produced the puzzling sharp kink in their latest projection.
It looks more like wishful thinking.
These projections are pure garbage. The model used is held secret but is clearly nothing more than some hand drawn lines. Basically an insult to one's intelligence. Any attempt to sum up existing megaprojects for the next 10 years bears no resemblance to these hand-drawn curves. What happens in 2030 is just fantasy land. Maybe some genius thinks that the global oil supply is infinite since, after all, the sum of a harmonic series diverges. So even if we are finding smaller and smaller fields there is no limit to them...
An honest question from a newbie here:
It seems to be taken for granted around here that the 2008-2010 economic downturn was caused by oil -- either lack of production or increase in price or both.
What *evidence* do you have of this? Showing GDP and production/price curves wiggling together in correlation is insufficient to prove that oil caused the recession -- it could just as well be the other way around, or the result of an unknown third factor.
I don't think the 2008-2010 economic downturn was caused by the rise in the price of oil. I think the recession (which may or may not turn into a deflationary depression) was caused primarily by the bursting of the real estate bubble, which was based on great excesses of debt and fancy derivatives.
How many others on TOD share my opinion I don't know. There are few economists who hang out at the Oil Drum, and I'm one of the few.
Don.
Deflation is the opposite of inflation.
Inflation can be caused by someone printing money.
So,why not cure deflation by printing money?
Or would that be too easy?
We are in a liquidity trap. Regardless of the quantity of excess reserves that the Fed creates for banks, they are afraid to lend money. Prospective borrowers are also afraid to borrow--both consumers and business firms.
To get out of deflation the economy needs a massive dose of fiscal stimulus, comparable to what it got with the deficit spending that began in 1942 to finance U.S. participation in World War II.
Using only monetary policy to fight deflation is like pushing on a string. On the other hand, tight enough money will always stop an inflation--typically at the price of causing a recession, as happened in the U.S. under the Volker Fed in the early 1980s.
I agree Don.
However, the early 80's was exacerbated by Volker going with the St Louis Fed and Friedman economics, and the failed model that that presented. Friedman had left out the velocity of money, and the very suspect analysis just about put us in the ditch.
Volker was not and is not a monetarist! Volker used discretionary monetary policy to crunch inflation down; such an approach is anathema to Milton Friedman and other monetarists.
Sailorman,
Welcome back !!!
I don't know if you've seen my occasional rants on "money" ($$$).
This is also in response to the newbie at the top of this thread.
One way to think about "money" is to think about an almost endless queue of people through whose hands the money travels backwards in a quest to extract end-of-the-line real value.
Most of us are stuck somewhere in the middle of the long line and our primitive brains cannot wrap themselves around the notion that there is a line and there is a real end of the line.
"Money" has value only because its promise is believable, where that promise is that someone at the "end of the line" (i.e., farmer, lumberer, miner, oil rig worker) will ultimately deliver the real goods and real services that give money its value in the first place. Those goods/services then move toward the front of the line and most distributors as well as consumers don't know (and don't care) where it originated from.
If the few people at the end-of-the-line (i.e. the farmer) can no longer deliver the real goods, the game is up. The line collapses.
But guess what?
If the lumberers can no longer bring the wood (due to Peak Oil);
If the miners can no longer bring the graphite (due to Peak Oil); and
If the rubber collectors can no longer bring the eraser tips (due to Peak Oil),
Then that pencil ain't going to be made!
Irrespective of "monetary" policy.
Freight requires much less oil than personal transportation, and can be delivered via electric rail. Heck, even diesel rail uses only 1/3 as much fuel as trucks.
Freight will out-bid other uses for fuel for a very long time, and in the meantime transition to electric transportation.
Electrified rail does not power the lumberjack's chain saw,
or the crane he uses to load the lumber onto the truck ...
Probably not. We'll need short range electric trucks, cordless power tools, and electric cranes...all of which exist now.
See: http://energyfaq.blogspot.com/2008/09/can-everything-be-electrified.html
Tight money policy only works if the banks pay attention to it. The Fed and Central Banks do not control the money supply, it is created through the debt market (or lending market). I agree that pumping liquidity into financial institutions will not create demand for bank money. The government should be pumping the trillions into the pockets of consumers and companies. They will stimulate lending.
Tight monetary policy always works to reduce rates of inflation. I challenge you to find a single counterexample to this generalization.
Bank lending is limited by the excess reserves of banks. The Fed can lower excess reserves as much as it wants to by selling Treasury securities through Open Market Operations--or it can directly increase reserve requirements, which is a more drastic tool of monetary policy.
I really, really do hope you are kidding ... please tell me you are ...
I agree, Don. Someone upthread noted that people are holding their money as if it will be the last money they make. And, who knows, they may be right.
From all I have seen, the Fed, and Treasury are doing everything they are able to do to get inflation up to 5% or 6% nominal (real inflation of about 10-12%). Fear and unemployment conspire against them. It is lack of circulation of money that is the worrying condition. And, that no one really seems to know how to correct it.
Craig
Well just a little hydraulic pressure in that string and a bit spinning at the end of it you have what TOD is pretty much all about ?- ) I couldn't help being a little flippant on that one, but yeah that is a good description and it would be damned hard for drillers to push a string without gravity on their side--if gravity ceased to pull on the drill strings they'd have a heck of time controlling the direction of the hole--when demand quits pulling the economy monetary policy has a heck of time directing its flow.
Don,
What do you think of James Hamilton's argument that the Fed has the power to prevent deflation?
My own guess is that the oil price peak initiated the economical bubble burst but it would have blown up anyway in a few years. And the oil price peak followed from the failure to increase production, it only held steady with increasing production costs for new oilfields while prices got higher.
I have never advocated that myself, at least I never wrote a blog post suggesting that point of view. I have however nodded my head in subjective agreement because that's what subjectivity is all about.
The intriguing second-order effect that I have heard is that the housing market partly collapsed because people could no longer to afford to drive huge distances to their exurban houses because of pricey gasoline. So the thinking goes that in many cases they defaulted rather than not eat.
people could no longer to afford to drive huge distances to their exurban houses because of pricey gasoline.
The thing is, even with a price rise from $2 to $4/gallon, 15 miles per gallon, and 100 miles to work, we're still looking at fuel cost increases which are a smallish fraction of U.S. median household income. I think that's a fairly thin thread to be hanging the entire U.S. economic downturn on, especially in the light of the obvious widespread real estate shenanigans going on during the bubble.
Also, if fuel prices were the controlling factor, foreclosure rate would be highly dependent on driving distance and availability of public transit. This does not appear to be the case.
Now, I can see a case for a more systemic influence of fuel price on the wider economy, but I haven't seen convincing data for that idea yet.
That's why I prefaced it by saying it was an intriguing second-order effect and why this is all subjective in any case. You can always find evidence that supports either view.
Check out the 90+ day delinquency rate for Kern, San Bernadino and Riverside Counties versus LA, Ventura, and Orange. Also, Merced versus San Francisco.
U.S. Credit Conditions
the thing to bear in mind that just discouraging GROWTH in uptake of exurban home ownership would have impacted value...the "system" is predicated on expansion and as it expands the absolute value (as opposed to percentage values) becomes excessive..
you either go upstream in ever expanding amounts or downstream.. there is little inbuilt incentive/mechanisms for treading water... expand or die...
This "argument" is so transparently bad I don't know why people dare using it. No one here is pimping this straw man.
Gasoline is just ONE feature of high oil prices and the economic downturn. You have to figure in high DIESEL prices and the consequent passing on of costs to consumers for ALL shipped goods and ALL food. You have to figure in high HEATING OIL prices, especially in places like New England where we were absolutely crushed by this. You have to figure in high MATERIALS costs for everything that takes energy to produce or that uses petrochemicals as raw materials....
Do I need to go on? Stop mis-characterizing the relationship between the recession and oil prices as strictly an issue of GASOLINE costs. You're sounding stupid, like ilargi.
I'm countering an argument related to me word-for-word by a long-time user here. It's not a straw man of my own invention. Both he and I understand that it's only a small part of the picture, but the question remains: is it true?
I understand that the control energy supply exerts on the economy is far more complicated than just gasoline prices. But the general idea that "energy controls economy" is a core belief here at The Oil Drum. It's a belief I happen to share with y'all, or I wouldn't be here, but intellectual honesty forces me to admit that I don't have good clear-cut evidence to back it. Do you?
I think you are asking the wrong question
clear cut evidence using economic terms is nigh impossible because the terms are self referencing...
what do i mean by that? I'm not good at expressing myself...
the cost markers have a constantly shifting underlying value that does not represent external reality in the way most discussions here attempt
perhaps a better question is why isn't there clear cut simple evidence one way or the other, after all this market thing is supposed to be a barometer of something? how come no one really knows what that "is" looking at the price movements alone?
no one understands it (the economy) I think because it is inherently subjective and will shift under scrutiny....
what do we know?
we know that oil production plateaued out May 2005 and the price increased.. then dropped
there was no real market response that shifted production to unconventional oil in the volumes that market theorists espoused despite numerous price signals being triggered. Total liquid fuel production of all types plateaued out as well..
of further note the price has dropped but total liquids production has effectively stayed the same.
however as Merril pointed out the total amount of money has decreased so the value of that money has increased. Yet debates still reference the dollar price as the fixed point of reference, rather than the barrel of oil. Some would argue that value in a true economy would be measured by the exergy of said barrel (not all barrels are created equal). How is that reflected in the price? Probably more in the production cost and reduced profit margin perhaps? Your not going to find the clear-cut evidence I think your looking for because the market system in use is currently incapable of describing the problem.
I mean its not like anybody has demonstrated the opposite or demonstrated anything for that matter!
all I know is the rate at which oil is coming out of the ground is not on the up... I cant count the number of failed attempts to predict price movements.. but the estimations on production have faired better from many quarters at TOD which raises the odd question whether the price really effects our ability to extract oil nearly as much as we may think..
Goodman,J,
I've basically answered your question upthread here
The farmer has to harvest and deliver the crops.
The coal, iron, copper, etc. miner has to dig up and deliver the raw materials.
The oil rig worker out there on the precarious GoMex rig has gotta pipe out the crude.
Break any of these vital, end of the line activities and the whole house of cards comes a collapsing down.
Economists like to mollify themselves with an abstract theory of "substitutes".
But there are no substitutes!
OK. So now I'm the one who sounds like the crazy person.
But then you tell me ... what are the substitutes for:
1) Bees (assuming they go extinct)?
2) Cod fish (assuming they go extinct)?
3) Fresh water (assuming it starts disappearing)?
4) ___________________ somebody else jump in here and help me fill in the list (oh yeah, planet Earth assuming it becomes uninhabitable)?
Goodman,J,
I've basically answered your question upthread here
The farmer has to harvest and deliver the crops.
The coal, iron, copper, etc. miner has to dig up and deliver the raw materials.
The oil rig worker out there on the precarious GoMex rig has gotta pipe out the crude.
Break any of these vital, end of the line activities and the whole house of cards comes a collapsing down.
Economists like to mollify themselves with an abstract theory of "substitutes".
But there are no substitutes!
OK. So now I'm the one who sounds like the crazy person.
But then you tell me ... what are the substitutes for:
1) Bees (assuming they go extinct)?
2) Cod fish (assuming they go extinct)?
3) Fresh water (assuming it starts disappearing)?
4) ___________________ somebody else jump in here and help me fill in the list (oh yeah, planet Earth assuming it becomes uninhabitable)?
Yes, there are some important parts of our environment that are in trouble. OTOH, there are substitutes for oil.
And, energy-related things are the majority of our "footprint".
There are only lesser runner ups.
There are no substitutes for oil.
Sure there are.
An extended-range EV, like the Volt, is better in every way compared to a conventional vehicle. Better performance, similar range. Slightly more expensive purchase price right now (before economy of scale kicks in), but much lower operating costs (fuel, maintenance). An EREV reduces fuel consumption by 90% over a conventional US vehicle. That's good enough for the moment - in the long run the battery size will grow, and whatever small % of fuel consumption that remains can come from ethanol.
Inter-modal electric rail is every bit as good as long-haul trucking.
Heat pumps provide nicer HVAC vs gas-forced air, or heating oil.
The first signs of the Apocalypse of '08...
Oil (C&C) peaked in '05. Peak 2 in 12/05
By April, '06, we find
Apr 20, 2006 11:16 pm
Texans Going To Pawn Shops To Get Extra Gas $$
"Some of the construction people tell us they are having to pawn their tools to buy gas, but when they pawn their tools they can't go out and work in the construction business 'cause their tools are in pawn. So it kind of a catch-22," Costner said.
http://cbs11tv.com/local/Gasoline.Prices.Pawn.2.493562.html
Quest For Gas Money Leads To Pawnshops (Orlando)
As Fuel Prices Climb, Drivers Hock What They Can To Fill Up.
May 03, 2006|
"This morning there was a contractor who pawned his tool set to go out to a job," said Jack Mulvihill of Action Pawnbrokers, in the 3700 block of N. Andrews Avenue in Oakland Park.
"Many of the roofers in town are pawning roofing tools for gas for their trucks. We had a teacher pawn a television set."
http://articles.sun-sentinel.com/2006-05-03/news/0605030246_1_high-gas-g...
==
Gail, Jeff Rubin , and now James Hamilton (warning- pdf) of the University of California – San Diego have produced literature correlating either this financial collapse or recessions more generally with peak oil and oil prices. The take-away message of their work is that oil prices played a fundamental role in causing the current recession and many previous recessions. In this post I, along with Steve Balogh, a fellow researcher here at the EROI Institute at SUNY-ESF, will add to this discourse.
http://netenergy.theoildrum.com/node/5304
Gasoline prices were delayed and more variable than the chart of oil prices. If you go to GasBuddy and click on the 6-year quick chart, you can see that there was a spike in Fall 2005. Then prices went down until the spring of 2006 when there were high prices all summer. By this time, the housing market was saturating in spite of the most "creative" efforts by the lenders. The real damage was done when the high prices of the summer of 2007 did not decline much in the fall. Prices stayed high until the economy collapsed.
If one is trying to make the case that the price of oil/gasoline was the precipitating event that caused the pop of the real estate bubble, Elizabeth Warren makes the related case that discretionary income of Americans had shrunk to essentially zero during this period.
See:
http://www.youtube.com/watch?v=akVL7QY0S8A&feature=related
The effect was most pronounced in CA and AZ, where developers were building new planned communities far from the existing cities. Employment in these new developments was limited to retail and services for the new homeowners, with the only primary production jobs being related to building more houses and retail space and selling and financing it. So long as credit was cheap and people could be persuaded that driving 2 hours to work would allow you to live in the home of your dreams (which was certain to go up in price before your mortgage adjusted), the party continued.
When the price of gasoline went up, the sales of homes in these areas dried up, the homeowners who were employed building and financing them lost their jobs, and the whole cycle reversed as homeowners went underwater on their mortgages and could not pay the higher, reset rates.
So the effect of higher oil prices was not a straightforward one of an increased cost of an input slowing economic output. Instead, low oil prices helped set the conditions for the housing bubble, and the sharp rise in oil prices was one factor that pushed the real estate bubble past the bursting point and into a housing price collapse, which then cascaded into a financial panic.
good point.. often we portray events as falling away from the "normal"
Yes, but be careful: You're merely pointing out one straw in a whole strawstack of effects:
The exurb situation you describe is clearly untenable, but it's a losing proposition *regardless* of energy prices. An economy based on import retail and continual growth is going to fall like a house of cards as soon as there's a minor shift in balance of trade, exchange rate, credit availability, etc., even if energy prices stay reasonable.
These places are potential canaries in our national coal mine (an apt phrase given that we're digging a hole for ourselves), but energy prices are not the clear culprit here.
Get off the grass, WHT ... do you have to be a patronising wanker EVERY time you tap the keyboard? You either agree with something or you do not ... and it is ALL subjective. Good grief.
it is ALL subjective.
Not, it really isn't. Some things are objective and observable. Others aren't quite as clear, but with good effort we can figure them out. And others are harder to figure out, and it's just honest to say so.
If that's the worst, I feel pretty good. I hope no one thinks I am an Ayn Rand fan though.
Did you ever see the movie "A Serious Man"?
I just posted this:
http://mobjectivist.blogspot.com/2010/06/mentaculus.html
You dissected the Mentalaculus ??
(You will no longer be allowed free entry into Vegas)
((Yes, I saw the movie))
(((afterwards,)))
((((I sought out help from my rabbi, to explain to me vwhat it all might mean ))))
I can't understand the title of this post "I'm not sure what the problem is"
'The Idea of State Aid to Opel Is Absurd'
"After months of stalemate this would have been the worst possible moment for giving aid to Opel. Right after its savings package, the government would be facing questions about how it could introduce sweeping cuts to welfare, parental pay and other social services and then a few days later throw a huge part of the money saved at an automaker that is not sustainable."
http://www.spiegel.de/international/germany/0,1518,699910,00.html
This is a remarkably dumb post. For years peakists have been saying that peak oil will have a larger effect on the economy than economists allow for, and peak oil will come sooner than expected. This post says that peak oil is coming sooner than expected because our economy is not growing! Ass backwards, compare with this post from June 9'th: http://www.theoildrum.com/node/6542 in which the author is dumbfounded by economists naive thinking that oil production doesn't effect the economy.
The caricature of an economist is someone who fits economic data to the closest exponential function. The caricature of a peakist is someone who fits the same data to a bell shaped Gaussian distribution. Well, the data is looking more Gaussian with each passing year and this guy continues to question the role of oil production on the economy.
Furthermore, the peakists have more and more theory backing up the view of tight interaction between exergy production and economic growth.
tight interaction between exergy production and economic growth.
IIRC, exergy is very different from primary energy input. And, of course, total primary energy input is very different from oil.
The term, Peak Oil, is used as a bludgeon to scare the crap out of people, but new drilling technology and the ability to detect new sources of oil keep moving the goalposts.
Timewise, we should have reached peak oil in the 60s had we believed the experts then. There is plenty of oil and there are plenty of sources including shale, oil sands and even Iraq where oil cannot be refined due to decades of neglect of pumps and pipes, aging and deteriorating infrastructure. We have been told over and over that Iraq has the third largest amount of oil reserves, as yet untapped.
According to statistics, most suburban drivers log in less than 60 miles per day going to and from grocery stores and other routine errands. This means electric cars will play a much bigger role in calculating existing and future oil supplies. The more miles driven using either hybrid plug-ins and electric cars, the more oil surpluses will rise. The Nissan Leaf, an all-electric car that has about a 100-mile range before it needs to be recharged, will be watched carefully when it comes on the market late this year.
You can bet, if it's successful with average drivers there will definitely be plenty of competitors scrambling furiously to gain part of this growing market. Even at $25,000 after incentives and rebates, the Leaf is a bargain. Competition will bring down the price.
Ergo, lots more oil for those upscale types who will suffer no pangs of guilt if they buy the new 556 horsepower, super-charged Cadillac which gets about 9 miles per gallon. Oil lives on. If carmakers didn't think so, they would not be producing higher horsepower, higher gas consumption engines. So, gulp up the oil for at least another 40 years. By 2050 electric may well rule the road. Gluttony, however, never goes out of style. It isn't until we confront a Horizon oil well spill that we realize how easy it is to foul our own nest.
If it's money that BP and their shareholders are fretting over, just remember, during the Enron rip-off of California, the rolling blackouts cost that state nearly $40 billion. But when Big Oil companies like Exxon and BP report quarterly profits of over $30 billion, there are lots of ways to make up for the "losses" -- like once again bumping up the price of a barrel of oil to over $150.
That's a relief. If they averaged more than 60 miles going to the grocery stores, I would get worried.
Not to belabor the point, but I did say "other errands" with round-trips you can easily put 60 miles a day on your odometer. In any case, I didn't dream that number up. It came from an article in Scientific American.
I think "easily" is possibly the wrong adjective here - stupidly, selfishly, outrageously, unthinkingly, and obscenely - would all seem to be a better fit. But carry on with your burb dream.
Why has oil extraction been declining in the U.S. for forty years then?
Most of that time oil has been pretty cheap. Now that it's slightly more expensive in dollar terms, US oil production is rising.
In 2008 oil reached $147 per barrel. States like Texas where oil drilling and extraction became less profitable prior to the huge jump in prices suddenly found themselves re-opening wells and began pumping. Oil production costs and lower profitability are the main reasons why oil extraction has fallen off in the U.S.
Even with new oil detection and drilling technology the U.S. produces only 3% of the world's oil while we consume 25%. Not all oil is worth it to refine into gasoline either. California has plenty of oil but it is low grade, high sulfur and much more costly to refine.
Think of it this way: Saudi Arabia can convert sea water to fresh water using desalination plants. But, they spend only the equivalent of 50-cents per gallon to drive their turbines. Wouldn't it be nice if we could do the same in the U.S.? But, unless we come up with cheaper energy, oil costs to convert sea water make desalination hugely expensive.
So extraction rates are only dependent upon price? Why has gold extraction been declining since 2001 then? Oil has gotten much more expensive over the past few years, why had oil extraction been on a plateau despite the price increase?
Not "only" dependent on price, but price is still important.
The gold question is interesting - I don't think anyone knows the answer. We've looked at the production stats, and seen the apparent peak, but do we know why? Not yet.
Oil has gotten much more expensive over the past few years, why had oil extraction been on a plateau despite the price increase?
Clearly oil is getting scarcer, but things aren't simple. For instance, the prices we follow are for light sweet crude, which has pretty clearly peaked. OTOH, prices for heavy sour are lower. Another point: prices are in dollars, which declined during the last few years (until very recently), which exaggerated the appearance of the price peak. OTOH, prices really did rise like that in the US, hence rising production.
Problem is, the technology developed over the past two decades has not translated into more oil being discovered per wildcat drilled. We're better at finding it, but with less to find out there, the net result is less oil to produce.
Factwise, you are mistaken. The only person predicting a peak anywhere then was Hubbert, and that was for the US. His prediction for the world (a couple decades hence) was off, but a lot happened during that time, including embargoes etc. One thing that hasn't changed, though, is the falloff in the discovery of oil.
Automakers, especially US domestic, can't see much beyond the end of the year.
In case you missed the memo, the multinationals don't have much control over the price of oil. That falls to Saudi Aramco, and even that has been in dispute. Oil from Iraq will play a role, as will some more expensive substitutes, but all the existing production will declining as fast or faster such that maintaining (not to mention increasing) production is not as likely as you think.
No, but what is currently frugality may one day be gluttony.
Joules, all good comments and points well taken. I mentioned the Nissan Leaf since it will be the first real (modestly affordable) electric car other than the Chevy Volt which gets only 40 miles from its batteries before the IC engine kicks in. At $40,000 it's doubtful people will be storming the showrooms to buy it.
Electric cars of course are more practical in Europe where gasoline prices are steep. But, in any case, the Chinese are jumping ahead in this field. Even the Japanese took their prototype Ellica to China to try and come up with better battery and converter technology.
We need to get serious about electric cars or we will be sitting on the sidelines whining over the price of a gallon of gas.
I agree we need to push EVs. Below are a few quibbles:
The Leaf is cheaper than the average new US car, which goes for $28K.
The Volt doesn't have an official price yet, but it's likely to be lower than $40K, and it will get the $7,500 credit, so my guess is the effective price will be likely to be less than $30K.
Chevy Volt which gets only 40 miles
That covers 80% of driving. The Volt will get about 50MPG on the ICE, so it will reduce fuel consumption by about 90% overall. That's good enough.
Electric cars of course are more practical in Europe where gasoline prices are steep.
Not really. Europeans drive their vehicles much less, so the payoff is actually worse.
the technology developed over the past two decades has not translated into more oil being discovered per wildcat drilled.
That's not a very strong statement. If the oil discovery per wildcat hasn't declined, that's pretty good. Is that the case?
HOW DARE YOU NOTICE!!!
Ever since we started running out in 1886 or so, its been fashionable among the pessimists to divide reserves by consumption, furl their eyebrows with the difficulty of the calculation, unfurl them 5 minutes later when they get the right answer and then scream, "THE END IS NIGH!!" or words to that effect.
Don't sweat the connotations of the term, they had to change the name from "running out" in the 70's because then they would be forced to admit that this has all happened before and that would blunt the fear factor more than a little.
Who knows what other people may do, but I don't divide reserves by consumption and then jump to conclusions.
I have a complete model of discoveries and then a production model that is convolved with discoveries. What you need to do is attack this model, not some heuristics that someone has dreamed up.
Its a chore trying to make the study of oil depletion more analytical, probably because so few people consider this important.
in the last decade it has been advancing by inches rather than miles.
The USA (we) did hit Peak Oil in 1973.
North Sea did hit Peak Oil.
We are running out of new frontiers on this finite planet.
I think Michael Levi's points make sense. If EIA was getting more realist at minimum they'd be showing the demand slope getting less steep each year. Instead they are just delaying resumption of their previous demand slope.
BTW, the "over $180/bbl [PDF]" link is broke.
As for $110/barrel oil: Not quite a catastrophe. But certainly slower economic growth. The
The real impact of the high oil price case of $180 per barrel would be far more than tiny. If we hit that price any time in the next 5 years I would expect an economic downturn deeper than the one we are currently in. If the downturn does not bring the price of oil down then I would expect an economic depression with a 20+% contraction of economic activity. The economy's adjustment to that price level would require really big restructuring.