Here’s a prime example of what I complain about in some of the discussions about how to deal with peak oil.
Robert Hirsch, Senior Energy Program Advisor for Science Applications International Corporation, and Roger Bezdek and Robert Wendling of Management Information Services, Inc., circulated a report last February titled Peaking Of World Oil Production: Impacts, Mitigation, and Risk Management. Their report has been widely promoted by many of those concerned about depletion of global petroleum reserves. For example, last week Energy blog declared:
I, and a few others, believe that the Hirsch report is the most important, comprehensive and authoritative message on the mitigation of the peaking of oil.
If the content of the Hirsch report is to be believed– and there is every reason to think it should be– then this is a document that deserves the close attention of every leader of government and industry in the U.S. Newspapers and newsmagazines should be running excerpts and summaries.
Here is a flavor of what one finds in the Hirsch report:
World oil demand is expected to grow 50 percent by 2025. To meet that demand, ever-larger volumes of oil will have to be produced. Since oil production from individual reservoirs grows to a peak and then declines, new reservoirs must be continually discovered and brought into production to compensate for the depletion of older reservoirs. If large quantities of new oil are not discovered and brought into production somewhere in the world, then world oil production will no longer satisfy demand. That point is called the peaking of world conventional oil production….
Some economists expect higher oil prices and improved technologies to continue to provide ever-increasing oil production for the foreseeable future. Most geologists disagree because they do not believe that there are many huge new oil reservoirs left to be found. Accordingly, geologists and other observers believe that supply will eventually fall short of growing world demand– and result in the peaking of world conventional oil production.
I’m sure that most of my economist readers are shaking their heads in disbelief at this point, but for the benefit of anyone who is not, let me spell out exactly what the problem is with this kind of analysis. How much oil is demanded at any given time depends, among other things, on the price. A very, very large quantity would be demanded if the price were $1 a barrel and practically none would be demanded if the price were $10,000 a barrel. The quantity that is profitable to bring to the market also depends on the price. The reason economists want to pay so much attention to the price is because it is the one variable that is guaranteed to adjust and adapt to any and all unforeseen circumstances that may develop so as to ensure that demand always equals supply. Supply equals demand today, supply will equal demand in 2025, and supply will equal demand in 2050. Whatever Hirsch means by “peaking of world conventional oil production,” it certainly isn’t the condition that “production will no longer satisfy demand.”
I suppose that if one did have the view that demand was something that just grew on its own without any regard to the price (as this study seems to me to do), the claim by economists that supply will always satisfy demand would seem profoundly bubble-headed. From such a perspective, I’m sure it requires great restraint and civility to pretend to recognize the opposing view that some economists think that supply will equal demand, before dismissing it on the basis of the opinions of those who really know how much oil is in the ground.
Since Hirsch is using this notion of “world oil demand” in a way that he presumes holds meaning to any reader, but is definitely not the way mainstream economists would use the expression, I simply have to guess about what he thinks he means by the phrase. My best guess is that he has in mind something along the lines of the answer to the question, if prices don’t change too much from where they are now, what would the quantity demanded be at any given point in the future? Confirmation that this assumption is not just Hirsch’s definition of “demand” but is furthermore the foundation for the whole analytical framework comes from the report’s later assessment that
As world oil peaking is approached and demand for conventional oil begins to exceed supply, oil prices will rise steeply.
So now I think I’ve got the picture. The price stays stupidly frozen for ten or so years, and then all of a sudden starts shooting violently upward.
Readers of my earlier remarks or related points made by Steve Verdon will know my opinion about this idea. Basically, if Hirsch is right, he would be able to turn himself a handsome millionaire by buying oil, or oil futures, or oil options, before that rapid price increase. That opportunity would be available not just to Hirsch and his two co-authors, but also to all their cousins, and my nephews, and all the people in China, to take a few examples. For Hirsch’s vision to be accurate, none of those people, not one of us, is going to be clever enough to take our profits. Because if we did, that of course would cause the price of oil to rise well before we get to the peak, and people would begin making all the adjustments that Hirsch wants to discuss, on their own, without needing any good instructions or advice from him.
And good instructions and advice he has plenty of– what kind of engines to put in our cars, which energy sources to be developing, all with a dramatic and forceful timetable spelling out exactly when we need to do all this. He’s quite certain that nobody will act on those implications of his analysis that could make anyone who follows them quite rich, but at the same time hopes that we we will believe in his analysis sufficiently to want to implement policies that would render those who are forced to follow them unambiguously poorer.
Now that’s an interesting model of human behavior.