The challenges ahead for world oil

University of Leeds Professor Joyce Dargay and New York University Professor Dermot Gately have a new research paper suggesting that projections from the DOE, IEA, and OPEC are underestimating the challenges ahead for meeting world oil demand.

Research by Baumeister and Peersman and Hughes, Knittel, and Sperling, among others, has documented that oil demand appears to have been much less responsive to price over the last decade than it had been in the 1970s. My recent study in the Brookings Papers on Economic Activity (published version here, working paper version here) concluded that this decrease in the elasticity is one of the key factors behind the oil-price run-up of 2007-2008. The surprise to markets in 2008 was that even $100 oil wouldn’t be enough to prevent world demand from growing above 85 million barrels a day, and much more than 85 million barrels a day simply wasn’t going to be produced at that time.

Dargay and Gately’s new paper notes how different the recent experience was from the past:

compare two decades in
which the price of crude oil has quintupled: 1973-84 and 1998-2008. After the price increases of the
1970′s, per-capita demand fell by 19% for the OECD and by 13% for the world as a whole. In the past
decade, with oil price increases similar to those of the 1970′s, per-capita demand fell only 3% in the
OECD; worldwide it actually increased, by 4%.

The authors note that the overall responsiveness of oil demand to the price increases of the 1970s masks some very different developments. While there were substantial reductions in OECD use of oil for non-transportation purposes, changes in transportation demand and demand outside the OECD were much more modest.

Source: Dargay and Gately (2010)

Those trends are even more dramatic when you look at the numbers in per capita terms.

Source: Dargay and Gately (2010)

Dargay and Gately conclude:

The factors most responsible for reducing demand
since 1971 cannot be repeated. Almost all the low-hanging
fruit has now been picked; it cannot be picked
again. The OECD has already done the easy fuel-switching,
away from oil used in electricity generation
and space heating.

The authors’ inference is not an optimistic one:

If annual per-capita oil demand growth rates to 2030 were assumed to be held zero in the OECD, 1% in
the [former Soviet Union], and at its 1971-2008 historical rate (2.54% annually) in the rest of the world, total oil demand
will be 138 mbd in 2030– about 30 mbd greater than what is projected by DOE, IEA, and OPEC.

If you have a plan for how the world might produce 138 mbd, I’d like to hear it. If not, the challenges of 2007-2008 will return with a vengeance.

Transportation adjustments will be the key. Trying to make more use of natural gas as a transportation fuel should be a high priority for the United States.


37 thoughts on “The challenges ahead for world oil

  1. Indy

    Coal-To-Liquids is waiting in the wings. We’ll simply have to make a choice between supplying world demand for motor fuels at affordable prices, but tolerating increased CO2 emissions, or living with crushing oil prices, with the resulting cash flows to unfriendly OPEC countries. There’s also the “plug-in-hybrids” solution, but affordability there will likewise depend on increasing the supply of coal-burning electric power plants.
    Question: When the option for affordable, plentiful, and domestically-produced (and domestically job-expanding) coal-to-liquids technology is presented in an political context where gas is +$4 a gallon for an extended duration, how long would any commitment to CO2 emissions control in the US survive? And in other coal-reserve nations? China? Canada? India? Russia? South Africa?
    For a long-term bet, in a petroleum-constrained world, I’d have to go with higher coal utilization and higher CO2 levels.

  2. A.V. Suni

    There are plenty of unconventional sources left (see e.g. Rogner, 1997). Coal-to-liquids are profitable when oil price is above 30-35 USD/barrel. We’ll run out of nature much before running out of oil.

  3. ronald

    This is not news to those who have followed the oil industry for years but maybe this series of papers will help educate those who believe that our energy intensive lifestyle can continue on the cheap.

  4. Mattyoung

    Two new congestion pricing trials have reported, and transportation oil use seems to drop 10-15%.
    I have a post linking to the trials in Stockholm and the Netherlands (above). London reports similar results.

  5. Brian

    Correction, Mr. Hamilton, switching to natural gas should have been a priority for the US 10 years ago, at least–and at best, natural gas would have only served as a transition fuel while other infrastructure energy sources were implemented and developed. The time for that is long gone, and now we have a very rough and possibly catastrophic transition coming. It’s not just oil for gas, but we use it for everything, everything.

    However, to compound problems, the US would find a shortage in other resources needed (such as silver) for let’s say a power grid derived from solar power (assuming the engineering becomes feasible in time)

    Anyway, still happy to see more economists getting on board the coming oil crisis, even if it is a couple of decades late.

    Next perhaps can be addressed the infinite growth paradigm that your profession of economics seems enraptured by.

  6. Peter

    Here’s another analysis of the world oil production
    Reference Scenario in World Energy Outlook 2008:
    The assessment of future global oil production presented in the IEA‟s World Energy Outlook 2008 (WEO 2008) is divided into 6 fractions; four relate to crude oil, one to non-conventional oil and the final fraction is natural-gas-liquids (NGL). Using the production parameter, depletion- rate-of-recoverable-resources, we have analyzed the four crude oil fractions and found that the 75 Mb/d of crude oil production forecast for the year 2030 appears significantly overstated, and is more likely to be in the region of 55 Mb/d. Moreover, analysis of the other fractions strongly suggests lower than expected production levels. In total, our analysis points to a world oil supply in 2030 of 75 Mb/d, some 26 Mb/d lower than the IEA predicts.
    The connection between economic growth and energy use is fundamental in the IEA‟s present modelling approach. Since our forecast sees little chance of a significant increase in global oil production, our findings suggest that the “policy makers, investors and end users” to whom WEO 2008 is addressed should rethink their future plans for economic growth. The fact that global oil production has very probably passed its maximum implies that we have reached the Peak of the Oil Age.

  7. Bob_in_MA

    “Transportation adjustments will be the key. Trying to make more use of natural gas as a transportation fuel should be a high priority for the United States.”
    I think this is the key. Right now, gas is at a 30+% discount to oil per BTU, and a gas price increase of just half that amount would bring all sorts of supply back online. A lot of wells were capped in 2009.

  8. Cedric Regula

    Coal-to-liquids (CTL, Fischer-Tropsch) is probably dead due to high CO2 output of the production facility. Sasol has the largest operating facility in the world right now (in S.Africa) and it is the largest point source of CO2 in the entire world.
    Some cost studies and projects started in the US. They were competitive with $60 oil, but when carbon capture and conversion cost was included, the price went to $100/barrel. And this technology is in its infant stages and may never prove out cost effective. Underground storage is another possibility, but no one has started anything there yet. (other than using CO2 to recover oil)
    It will take CNG, hybrids, the more efficient clean diesel and electric cars to provide alternatives, and a steadily increasing CAFE mileage standard to force the gas guzzlers out of the showroom.
    NG is great for power plants too, and we need 3rd generation nuclear plants as fast as we can build them.

  9. Joseph

    This bodes ill for any attempt at mitigating the impending climate change problems with carbon taxes. Just as conservatives have been using the recession as an excuse that we can’t afford health care reform, regardless of whether that argument makes any sense, conservatives will likewise use rapidly rising oil prices as an excuse for not doing anything about CO2 emissions, regardless of whether that argument makes any sense. The country has enormous problems facing it that can only be fixed by government intervention. Conservatives are preventing us from addressing those important problems.

  10. Anonymous

    Dr., do you have any insights on natural gas? it looks like the supply-demand equation is foundamentally changed against to crude oil.

  11. Brian


    The problem with hybirds is that although they intuitively sound like a good alternative, in practice they’ll actually make little difference–as we can see that even over the decades as vehicles became more fuel efficient oil consumption still rose exponentially.

    The other issue with hybirds is that is takes oil to extract the resources to makes vehicles, and then it takes oil to conform the resources, and then ship those resources. Then of course the entire production process for modern vehicles is oil dependent (it takes roughly 7 gallons of oil just to make a tire). Further, if we were to transition to electric vehicles, the problem still is not diminished by a significant amount in oil dependency terms. Electricity, which is vital of course to industrial society, is itself not an energy source, but a by product of an energy source–for the US much of this already is hydro and LNG dependent.

    And what about nuclear power? Of course we’ll have to move in that direction, but the problem here is that we’re too late to make this process painless; and that’s because the incubation time of creating a nuclear plant is about ten years (from permits to environmental studies to coming online0. To compound the problem here, creating a nuclear reactor is extremely energy intensive and thus requires a mass amount of energy (in the form of oil).

    The oil dependence on the world, especially of course the US is quite extraordinary–the majority of our agriculture is oil dependent (from fertilizers to shipment) to where it takes anywhere from 7-9 calories of oil deliver 1 calories of food. It’s estimated that if oil becomes infeasible it would collapse the agriculture in the US to the point that the US would be capable of feeding only two-thirds of its population.

    Before the oil boom about a hundred years ago, the world population was about 2 billion, and now we’re approaching 7 billion in about a century, and this population boom is mostly due to cheap energy in the form of oil–and so it’s axiomatic that much of this population must go away when the oil does. The issue with peak oil isn’t about running out of oil, but the net return on extracting that oil.

    This problem was been well understood for awhile now, but as usual the can was kicked further down the road–and the only energy policy we have in place was when the Bush Administration militarized energy policy upon entering the White House (after then Vice President Cheney’s NEPDG finished its assessment of the energy situation, where peak oil is true or not, US policy certainly was conducted as if it were true).

  12. Vangel

    The problem is still on the supply side. Unconventional supply is incapable of offsetting the natural depletion being observed in conventional fields and does not scale up very well. Coal to liquid plants will not be cheap and will take a long time to build. Tar sands production is notoriously difficult and too capital intensive to make sense at real prices that are less than 200% higher than the current market price. Ultra deep water fields are far too expensive and too difficult to develop. Shale oil is fine at the margin but production levels are insubstantial compared to what will be required. And while methane hydrates show promise we are a long way from being in a position to count on a solution coming from that front.
    What the energy optimists have missed in this story is the picture that is painted by the data. The IEA has finally figured out a more accurate depletion rate than the optimistic guess that it had been using and we are now looking at close to 7% depletion per year. Just to keep production flat we will need to find and bring on line the equivalent of the production coming from Ghawar or the US. But that will not happen because there is no incentive for producers to sink massive investments in new production when oil prices are below $100. Given the risk of a double dip recession few producers will be betting the farm on significant new exploration and development projects. While anything can happen to the price of oil in the short term, in the long term we are very likely to be seeing massive explosions in prices due to the geological factors that the optimists are ignoring.

  13. benamery21

    All data is per EIA’s 2008 AER.
    As of 2008, 42% of U.S. industrial energy consumption was petroleum, making up 23% of petroleum used. Residential energy consumption was 16% petroleum(fuel oil and propane), making up 5% of petroleum used. Yes, only 1% of power sector consumption was petroleum, and 95% of transportation was petroleum, so there is a lot of truth to your story. Further, some of the “industrial” use is not easily displaced (asphalt and chemical feedstocks, for instance). However, there is still a substantial fraction of petroleum use, even in the U.S, which CAN be displaced by other energy sources. Further, substantial transportation use can be conserved or displaced without a shift to natural gas.
    If a shift to natural gas IS contemplated, additional physical hedging is required against the cyclical bust cycle in physical supply in that industry. We need a Natural Gas Economic/Strategic Reserve (capped wells owned by the government) to prevent recession due to gas price spikes. Making gas intercontinentally tradable (LNG terminals) is also advisable to cushion supply shocks.
    Residential:A shift to pipeline natural gas and wood (or pellets) from fuel oil and propane is desirable. It’s amazing how many people use fuel oil in neighborhoods that already have gas, or even in HOUSES that already have gas. Conversion would be cost effective. A shift to solar hot water in the sun-belt is desirable. A shift to ground-source heat pumps nationwide is desirable. These last two items would primarily conserve natural gas. Overall residential conservation is desirable and cost effective. This would primarily conserve electricity and natural gas.
    Industrial: Most of the petroleum consumed (still gas, etc) in the industrial sector is consumed in the refinery and chemical sectors to create process heat/steam. Coal could provide this, and most such plants are located in areas where C02 injection would not require long pipeline transportation (i.e. in mature oil producing regions). Of course, the product conserved is primarily a source of gas supply, rather than liquids supply. I’m not sure how much liquids supply could be created thru reforming, etc.
    All OTR trucking should require aerodynamic retrofits. At minimal expense, we could conserve roughly 20% of OTR diesel consumption.
    Modal freight shifting from OTR trucking to rail, could save even more. Further, Trains could be converted to LNG from diesel very easily, saving yet more petroleum, though little energy.
    Lifting ethanol import tariffs and/or entering into a long term contract with Brazil would displace significant petroleum. Brazil could expand production to 6mbd of ethanol given a market. To make this politically palatable, it would probably be necessary to include either quotas or subsidies for domestically produced ethanol. These should be sunsetting for ethanol production using fossil fuel to provide electricity and process heat input (2/3rds of end-use energy in U.S. corn ethanol is natural gas). Use of bio-mass (corn stover combustion) to produce corn-ethanol would give corn ethanol a roughly 3:1 net energy. Note that for Brazilian sugarcane ethanol this is about 9:1.

  14. Gus Satkowski

    Great post, proffesor. You are one of the few more prominent economists to recognize and warn of the unprecedented economic challenges ahead for world oil.

  15. colonelmoore

    Here is an interesting viewpoint on coal:

    China is one of the world’s foremost promoters of coal to liquids. Chinese plants under construction are using a variety of different methods to gain some real data on what works best. When they make a decision they will stamp out these plants like cookie cutters.

    China doesn’t care what the UN thinks especially when it comes to its economic growth. Its Chinese characters mean “central country,” and its mindset is that of a 7,000 year old civilization that was highly organized when Europeans were living in burrows. From its point of view the Europeans and the Japanese were the countries that forced unfair treaties on it and took part of its land until it pushed them all out. Their attempts to force it to rein in its emissions appear to it like another attemmpt of the colonial powers to weaken it. But now it has a human space program and a stable of ICBMs, so it need not heed them.

    It had every reason to stiff the UN when it came to negotiating greenhouse gas limits. Its economic growth is such that it has to run headlong in every direction – coal, wind, nuclear, gas – to keep up with domestic energy demand. It will not restrict its fossil fuel use because there is nothing that can compete with it for low-cost power. As it gets richer it will start adding more pollution controls because the air will become too fould to breathe, but not CO2 controls.

    What the United States does in terms of motor fuels is becoming increasingly irrelevant. China, India and the rapidly growing Mideast will overwhelm our consumption of fossil fuels in the coming decades, and no one is going to be able to stop them. If China can use divert some of its abundant coal resources from power generation to motor fuel at competitive prices, it will do so.

    CO2 limits require that everyone play along. The Massachusetts Senate election caused the bottom to drop out of the EU carbon market and all of the US regional emissions trading schemes. And shortly thereafter First Energy bought up Alleghany Energy, which generates 3/4 of its power from coal. The value of CO2 is strictly dependent upon politics, and this purchase is like an Intrade prediction of how likely CO2 limits are.

  16. gelboak

    Prof. Hamilton,
    This comparison of substitution from oil between the ’70s and the 00′s is very interesting.
    In addition to the opportunity to replace fuel oil with gas and coal in the 1970s that did not exist 30 years later, I wonder about how exposure to market prices differed between the two eras.
    One thing a number of observers pointed out during the 2005-2008 price run-up was that a large fraction of end users in the world (i.e. in China, Saudi Arabia and the rest of the Gulf, Venezuela, to a limited degree Russia ( do not see changes to the world oil price passed on to them, or at least with a great lag. Do you have any off the shelf data on whether a larger or smaller share of world consumption was thus in the ’70s?

  17. bryce

    Prof. Hamilton, a very interesting post. & thanks to Cedric Regula for the coal-to-gas background.
    Did the authors discuss the effects of the below market prices for gasoline within China, many oil-producing nations such as Saudi, & India[?] ?

  18. Cedric Regula

    With all the problems facing the world right now, I think there is a pretty good chance that in 10-15 years we will all be running around barefoot hunting rabbits for dinner with homemade bows and arrows. Not the least problem is how we get 7 Billion people back into living in trees, but I hear liberals are working on it. Plus the world population figure is estimated to go to 9 Billion.
    And if some of the 5 Billion or so that are not driving cars now decide to become car drivers, that will surely swamp anything we do in the US to improve our situation.
    A lot of what happens will depend on what governments decide to do about global warming. They may do nothing because it is very possible that “doing something” will collapse the economy. But the WTO already said economic sanctions are fair game with countries that don’t play along with the rules, and China would be sensitive to having their exports shut off by the ROW.
    China is also going full speed ahead into CTL and 3rd gen Nuclear. They licensed the Westinghouse reactor design and are building up the entire supply chain to build plants. CTL will need carbon sequestering to meet potential CO2 limits. Under the best of circumstances these projects take at least 8 years. But you have to start!
    In the mean time, we really aren’t running out of oil for quite some time yet. Half the oil used in the US goes to power cars and light trucks. So what we do there is significant(unless it’s offset by the emerging world). We might do more with public transportation, but it is only feasible in certain places. I don’t think we can afford to throw suburban America away and start over either.
    In the near term the available things are higher efficiency diesel, switching to NG, hybrids, and also plug-in hybrids and all electric cars on a small scale until we can build up delivery of electricity from NG and nuclear. We also need to improve on battery technology. There is also ultra lean burn gas engines coming soon (20% better efficiency).
    There is new technology, but here we are generally talking longer, or much longer, than 10 years before we can even start adopting it at commercial scale. There are promising things like effective ethanol processes (as opposed to the 1:1 oil for ethanol swap we do now) and other bio-fuel approaches like Exxon’s algae to fuel project.
    Almost forgot wind and solar. Here scientists think we may get as much as 10% of our electric power from these sources. But not much more.
    But I won’t bet we orchestrate all this smoothly.

  19. GNP

    Is the term demand an acceptable replacement of the term consumption? ‘Demand’ has to be one of the more abused, ambiguous terms in modern economics, hence the question.

  20. Steve Kopits

    I am completely in agreement with you.
    The role of the EIA and IEA here is quite pernicious. Their demand forecasts are often accepted even by the oil majors, to which I can attest as I have discussed it with at least two of their strategy groups in some detail.
    I first took on the EIA in June 2008, when I invited one of their directors to present on a panel I was moderating on the oil outlook at a marine transport conference in New York. At the conference, the EIA director and I agreed to disagree, and their long-term forecasts have not been updated materially since with respect to China and other emerging markets demand. Their 2010 Annual Energy Outlook (AEO), issued just a couple of months ago, continues to project China playing all but dead with respect to oil demand growth (3% per annum to 2030).
    I have taken to challenging EIA forecasts directly in my last two industry presentations (Houston in February, Rio de Janeiro in March). I did this because my analysis in late 2007 (consistent with yours) indicated that an inelastic oil supply combined with high demand growth in emerging economies would spell major trouble for the OECD downstream (refining and distribution) sector. And yet everyone seemed surprised that OECD downstream has been hammered during the recession! You would be, if you believe the EIA. However, if you read Econbrowser from 2005 or my work from 2007, the conclusion is implicit. In any event, using EIA forecasts in 2007 would lead to incorrect strategic conclusions for 2009/2010, and that needed to be highlighted to industry players. One can believe the EIA or the High Demand Camp (Hamilton, Dargay-Gately, Douglas-Westwood), but it needs to be understood that these two perspectives imply dramatically different views of the future and different strategic responses. That’s why I now have a Douglas-Westwood vs EIA slide in my standard presentation deck. (The presentations should be available on the Douglas-Westwood website or from me.)
    I dwell on the EIA outlook in greater detail in an article pending at Foreign Policy (assuming it makes the cut). In it, I discuss the EIA’s anti-China bias in forecasting, building on the assumptions that China is a special case and that Chinese could not possibly hope to drive as much as citizens of Taiwan, South Korea or Japan at similar levels of development.
    Finally, a closing note on the EIA. I doubt the institution has any greater fan or critic than me. Their STEO (the Short Term Energy Outlook) is excellent. It called the trough of the recession perfectly–better than Econbrowser or most economists, and its short term forecasts have been very good. Hats off to the STEO team!
    By contrast, the EIA’s long-term outlooks, the IEO and AEO, are and have been terrible for many years. For example, in May 2007, the EIA called for $100 oil–in their high case scenario for 2030. And lo, nine months later, it was a reality! They need a big change there in long-term forecasting, probably in all of methodology, personnel and political outlook (ie, they need a little courage). If I criticize the EIA, it’s not from a lack of affection for the institution, but because what the EIA says matters, and in a world where oil looks to be increasingly scarce and expensive, the EIA has to get the fundamentals right.
    From the Cathay Pacific lounge at Hong Kong International Airport in slow-growing China,
    Steve Kopits

  21. Brian


    I can’t argue with you on most of your points; however, the question isn’t about running out of oil, it’s about the net extraction costs, that is, basically the moment it takes 1.1 barrels of oil to extract 1 barrel of oil the game is over. So yes one could plausibly argue that we have only used up half of the world’s oil supply, the problem is that this is a deceptive concept–which I personally am not an expert on deceptive concepts, but I have fallen prey to them enough to make direct experience with them.

    The half we’ve used in terms of oil supplies is what we could term all the low lying fruit; and now, obviously, being able to pick those higher lying fruits will be a bit trickier. The Saudi’s have about 25% of the World’s known oil reserves–now we don’t publicly know much more than that because the Saudi’s keep their oil reserves secret as a matter of national security. What we do know is that the Saudi’s have yet to deliver on their promises to increase production for about ten years now (of course, not counting the current economic down turn recoverless recovery). Now, we have the Saudi’s investing in off shore drilling, which of course is that high flying fruit.

    More disturbingly, is just how fast these oil fields collapse, and so production output is very deceptive. Consider the Mexican oil field, Cantarell. Discovered in 1976, started production in 1981, was placed on nitrogen injection in 2000, peaked production in 2004 at 2.1 million barrels per day, and now it can barely produce 500k barrels per day. Even in this collapsed state, the Cantarell oil field is still one of the largest in the world in terms of production. Now with this in mind, Ghawar was discovered in ’48, production began in ’51; Burgan discovered in ’38, went online in ’48; and these are currently bearing much of the heavy lifting in oil production–the Saudi’s won’t admit Ghawar has hit peak production (and they have started using water in the fields to push oil up), but the Kuwaiti’s have publically acknowledged their field has hit peak. All of this in the face that we have not discovered a major oil field since the 70′s, and that field has collapsed. Here, we must be weary of the new oil field discoveries and the reserves that are claimed–sure everyone was and still is making a big fuss over the large oil discoveries in Iran and Brazil, however, the reserves being claimed are projected reserves, not proven; and they continuously keep being revised downward–just as we see the oil companies constantly revising their oil reserve holdings downward constantly. And now the new craze, or hope, is Anwar in Alaska, however, keep in mind that no infrastructure is in place for it, and to top it off: no one has any idea how much oil is really there, although they’re prepared to spend money and resource as if that oil is there. If one computes the numbers, even if we drilled every known oil source in the US, the barrels produced sound like a lot, but it wouldn’t even be able to supply the current US consumption for a year.

    Again, peak oil isn’t about running out of oil, no one argues we’ll run out of oil; the argument is that production declines as demand is rising. A deceptive games that many of these energy agencies play are now playing, as you’ll be surprised to find out that they’re very politicized, is that they’re claiming that we’ve reached peak demand; but this is deceptive because it ignores the the real driving force in oil prices and that’s production in this case (which many economists seemingly ignore). And remember, all of this decline of production in relation to demand has been happening even as we have been introducing fuel efficient technologies over the last 30 years.

    And to really put things in perspective, Exxon Mobile is currently spending $400k a day for oil exploration off the cost of Louisiana searching for oil, and this in spite of the fact that they don’t know if there’s even oil there.

    The other question also concerning hybirds is the other necessary resources to produce them, namely, the rare Earth metals needed for their batteries–and it is very doubtful that there are sufficient quantities to transition the current amount of vehicles over to hybirds. The energy issue really is one of national emergency, which is why we saw such aggressive action by the Bush administration in oil producing regions–and although Afghanistan is not an oil producing region one must remember that in the 90′s it was speculated that the central Asian countries (Kazakhstan, Kyrgzstan, Tajikistan, and Uzbekistan) were believed to have massive oil and gas reserves–and this is why the Clinton Administration was in negotiations with the Taliban in the late 90′s to build a pipeline through Afghanistan. Also, it was due to this speculation that allowed Enron to construct a massive power plant in India, on the hopes that the oil and gas would come from this region. Obvious the oil conjecture didn’t pan out at all (the oil there is in small independent deposits), although the area is rich in natural gas. Anyway, my long winded and babbling point is that our energy policy should have been at the forefront in of national policy in the 90′s, now it may be a matter of life and death–and, hence, this is what led the Bush Administration to militarize energy policy and literally secure US oil consumption with the US military.

    Of course everything we do will help, but at this critical juncture it is vital to come up with a viable solution quickly. Certainly oil won’t be an issue tomorrow, but it could be in a couple of years, and because it takes massive effort and time to get new infrastructure online, a few years is basically a few blinks of the eye.

    This is one reason why we see China on such a construction bubble–they know that their infrastructure is way over capacity, anyone knows this by just looking at the numbers, and they may not even be certain they can grow into it, and it’s not just about GDP numbers. The real reason they’re on such a construction craze is that they’re betting that the oil at these prices will not be available in the future to construct these projects, so better do them now. I predict the Chinese will not have that soft of a landing, and may even face a banking crisis of their own in the near or intermediate future because of this credit bubble fueling the construction boom; yet, I suspect the Chinese government view this problem as the lesser of two evils in the face of an energy crisis.

    Now, certainly, I could very well be absolutely wrong on everything I have said in the above, and in light of that one should not take anything I say at face value and should construct their own research.

  22. Brian

    PS Cedric,

    I had forgot to address the wind and solar energy aspects. The 10% estimate on the energy pick up from solar and wind is also a bit deceptive. Now don’t get me wrong, I’m a big supporter of the two, and I very much like the work that Matt Simmons is doing up in Maine with wind energy; however, that being said, the only way that the solar and wind estimate of compensating for 10% of our energy use is if the massive subsidies for these developments stay in place. Now, I’m all for the subsidies as well, after all, getting the engineering right is going to take a lot of resources in the hopes in pays off later. So if it will continue to need those subsides to pick up 10% this of course requires that another part of the economy pick up the cost, therefore, it’s not really reducing energy output as other parts of the economy would need to increase their activities to subsidize it (it could be argued that this is not necessarily the case, and that would be true if much of the population willing takes a hit on their standard of living to support the costs of these projects).

    Further, to construct these projects on a mass scale puts burdens on other resources that we have also abused and misused. For example, if we wanted to implement solar and wind energy on a massive scale, just for the US, it has been argued that we would fall short in the necessary materials like silver (which we’ve been running a mining/consumption deficit since 1990–and the price is still massively depressed, which the CFCT will hopefully address and cap the unnecessary concentrated short positions on the precious metals this month), as well as the need iron ore for construction; and there’s some other considerations as well. However, I think these deficiencies can be compensated with increased mining (as in silver, but it takes many years to get a mine back up and running) and with massive recycling projects.

    Again, this is not to be pessimistic on these projects, on the contrary, I support them greatly, but I think the reality may be dawning on us that we’ve begun a little too late in the game to not have to take drastic steps in the future, and possibly for the countries to be more cooperative on resource distribution worldwide, that is, before wars break out in the future over resource scarcity–however, I am not optimistic on a peaceful solution to this issue, at least that may not be the first option.

  23. RicardoZ

    I need to dig into the papers but something about the numbers just didn’t seem right. Dargay and Gately appear to have been biased in picking the dates for their numbers.
    For the 10 years from 1972-1981 the price of oil went up almost 10 times (9.93). For the 10 years from 1998 (the lowest price in the past 20 years) to 2007 the price of oil went up around 5 times (5.39).
    If the price of oil during the 2000s had risen like it did during the 1970s there would have been an even greater response to the price.
    It is also interesting to note that the price per bbl in gold has not changed from 1971 to 2010. Oil has traded in a 13-15bbl oil:oz gold for almost 100 years.

  24. Cedric Regula

    No doubt we are way behind on energy policy. I was in high school during the Arab oil embargo, and I have been hearing we need to do something different ever since then. It was even my first mini-career after college.
    Sure there is much uncertainty over proven reserves and what new potential is out there at what price. Part of it is oil producers are targeting higher prices for oil, so at the moment they are leaving some potential production in the ground to support higher prices.
    There will always be supply chain bottlenecks whenever we shift the economy in a significant different direction. That’s what makes it all a roller coaster ride. Engineering and project management skills will be in short supply too.
    The 10% wind and solar is a SWAG of course, but a better effort than the mainstream rose colored glasses stuff we get.
    It’s variable power and needs to be backed up 100% with reliable base load. (which means fossil fuel right now) It’s expensive, because the costs don’t amortize well and still require the old infrastructure for 24X7 power, and in the case of solar the tech is inherently very inefficient. Therefore it is heavily subsidized.
    And we should also wonder whether windmill generators are our highest and best use of copper!
    Some good news on the solar cell front is First Solar has a thin film process that cut cell cost by a third. But “installed cost” still doesn’t go down by a third. The next evolution beyond thin film has been developed by Nanosolar. They basically are ink jetting PV material on a plastic film substrate. We have to wait and see if they can ramp that to significant production levels. Brightsource has a promising solar thermal design and has an active large scale project going with PG&E.
    But changing where the world’s energy comes from is the biggest challenge since Man moved out of caves, and the fact that the developed world seems to have gone nearly bankrupt before addressing this problem isn’t helping much. (well, ok, Europe is ahead of us, Japan is ahead of us, and China seems to have got it into gear…Brazil too…I guess we had more than one lost decade…)

  25. JDH

    Anonymous at March 14, 2010 01:49 PM: I have some discussion of the oil-natural gas relation here.

    gelboak and bryce: Dargay and Gately note that the price response in China is essentially zero. The rising share of non-OECD consumption is one of the key statistics they are pointing to.

    RicardoZ: We are talking about the real oil price here, not the nominal price.

  26. Cedric Regula

    Just noticed I miss spoke here…
    “First Solar has a thin film process that cut cell cost by a third”
    I should have said “to a third”, ie, cell cost went from $3 to $1.

  27. aaron

    I attended a conference on robotic transmission systems a couple of years ago. Many suggested that hydrogen can be extracted from coal pretty cheaply.

  28. Cedric Regula

    That’s called coal gasification. It is the first step in a CTL process. But it releases a LOT of CO2. That is also the problem the “Hydrogen Economy” had. 97% of current hydrogen production comes from fossil fuel. The other 3% comes from electrolysis (power plants).

  29. don

    So, if I am reading the excellent and informative comments correctly, instead of an oil shortage slowing global warming, the exact opposite may be the case (with CTL). If it comes to a head between easy short-term (short-sighted) solutions and more immediately uncomfortable but better longer run solutions, based on past behvior, it seems pretty clear which will prevail. For one example, the U.S. should have much higher gas taxes. This is no long term solution, but it is such an obvious step in the right direction, that its failure is most disheartening. For another example, the SUV craze is simply outrageous.

  30. Nick G

    it takes roughly 7 gallons of oil just to make a tire
    Brian, this looks way too high for a tire for personal trasport (as opposed to a commercial truck) – could you provide a source?

  31. M Thomas

    Don’t forget “shale natural gas” as a means of achieving energy self-sufficiency (or something closer to it)! The USA has more natural gas through this source than even Russia or Saudi Arabia. Now all we have to do is stop the EPA and DOE from regulating it out of existence much like they have done to offshore and onshore drilling.

  32. Brian

    Cedric: one thing is for certain, it is interesting times we will be living in–after all, what would people do without their “problems”, and one might even argue that one is not so easily entitled to their problems, and this could apply for a generation as well: are we not inevitably defined and measured by our problems? I suppose this may be too philosophical and off topic for an economic blog, or at least how mainstream economics defines and specializes itself today. The philosopher F. Nietzsche had once commented that the world is in a state of flux and chaos, occasionally spontaneously, but temporarily, experiencing outbreaks of structure. I don’t know if this is indeed true, and perhaps it is a matter of perspective, but history does tend to add some support to this notion. Unfortunately, I’m at a loss for a real solution to this energy quandary, and so my hope is that this perplexity of mine is solely due to the limitations of my own imagination and a derivation of nothing more than my own ignorance; however, I do suspect, maybe even too dogmatically, that modern in vogue economic theory and its legion of practitioners are not properly considering resource depletion when they go to influence policy decisions regarding the economy.

    Nick G: regrettably it was many years ago that I had read the research concerning oil consumption and its calculations, and I did a quick survey of the Internet to see what I could come up with and didn’t turn up much (although it was a very insufficient search). Additionally, my cognitive abilities are very limited and so I must admit it taxes me quite a bit just try to remember my opinions, and so it is many times out of my ability to also recall how I derived those opinions–that is, I try not to bog down my limited cognitive abilities in memorization and instead try to reserve it for analysis. This is just to give you a background on any information coming from me, and many times my primary concern in from an investment perspective (although there are exceptions).

    To further exasperate the problem, many of these research firms withhold their findings from the public (understandable so they can charge and so fund said research), but even in these reports their methodologies are not fully expressed, in order to protect it of course. As I recall the research centered around Toyota’s business model and their plan to expand their business based on the Priuses model sales–so basically it was a company evaluation and I believe the research firm did not conduct the “oil” numbers themselves but referenced a University of California environmental study (and the results were foot noted).

    However, let me explain what my initial impression was when I had come across this claim about 7 gallons of oil goes into producing a tire, because I share, or initially did, your skepticism. What I had first thought was that the 7 gallons was directly used to literally construct a tire; however, as has been many times the case in my life, I was utterly incorrect. To give a simplified example of my first impression it would be basically I thought there was some kind of tire mold and oil was poured into it, and so I was skeptical that a conventional tire seems too small for such a thing. I’m not saying that this is your impression, but in a very rudimentary I did, that is, until I read the accompanying footnote.

    Basically it presented the raw numbers it terms of BTUs in producing a tire, and this included everything from extracting the raw material, shipping the raw material, the use of machinery, the construction of the tire factory, the human labor (they eat food that is also oil dependent), then shipping the finished tires, then putting them on new vehicles or packaging them (which is made from oil), and so on and so forth. Since most or all of these processes are dependent on oil in some form, then the notion was to do a rough estimate of energy used in BTUs and then divide that aggregate number by 5,800,000 which is the amount of BTUs in a barrel of oil. I wish I could find the original research to post the estimated BTUs for each of the processes for you to evaluate, unfortunately I can’t.

    I do think there is some room for skepticism because although I did not see the original research’s methodology, I would suspect there was some statistical reliance and of course some guess work. However, one might argue that if this was an overstatement that may be off set by other factors. One such factor would be the energy plant that all these process relies on actually operates 24hrs a day, so even when these operations are shut down there is still energy being created because it is too costly to shut down a power plant and start it back up (not to mention it takes about a week to start one). Further, the study was conduct with US factories and since many tires are constructed in China, I suspect there is a lot of wasted energy in output due to inefficiencies and poor power grid structure (which the US has as well). These two factors were not considered as far as I know because much of it would be speculation. I further realize that many of the power plants in the US are coal driven, however, since that coal is extracted, shipped, etc through the use of oil, the offsetting of coal use may or may not be that significant.

    Still, I am somewhat sympathetic to your doubts as the input of 7 gallons of oil to produce a tire may not be accurate or may be overestimated, however, my belief if that I would side with the actual number being closer to the 7 gallon mark than off. I realize everything I have said from your perspective is hearsay, and so I don’t suspect that your skepticism will be fully satisfied, or if at all, and nor should it. However, knowing that I did not have the data right in front of me or that I had no where to immediately direct you, my above statements were not meant to convince you in any way as it was to influence on how we should look at the issue of oil consumption, and that is in terms of not just direct product production but also in terms of product support and other indirect uses. As always, though, one must not take anything I say at face value and should never relinquish thinking for themselves.

    Sorry for the length, but as always I find it takes a lot more time to write with brevity.

  33. Brian

    M Thomas: the problem with is the shale extraction process requires massive fresh water expenditures, and currently the world is starting to feel the effects of drought, as well as many parts of North America; and this problem is predicted to worsen.

    Also, personally I would advise caution here in that the research on environmental effects and cost production are extremely inadequate to justify the hopeful optimism surrounding shale gas–and so yet again the ole saying, “if it’s too good to be true, it probably is,” may be applicable here. Again, shale gas may prove to be the magic bullet to fend of the energy shortage beast, but at this point, at least to me, the excitement behind shale gas seems to be a product of desperation more than fundamental analysis–again, I may be wrong, and I certainly hope I am.

  34. Cedric Regula

    “…I do suspect, maybe even too dogmatically, that modern in vogue economic theory and its legion of practitioners are not properly considering resource depletion when they go to influence policy decisions regarding the economy.

    It’s easy. You just print money and then tax it back. A multiplier greater than one is what makes it all work. Do it enough and you get GDP growth, which is how we can pay any incurred debt off.
    Nothing to worry about with a plan like that.
    It even works with healthcare too!

  35. RicardoZ

    JDH wrote:
    RicardoZ: We are talking about the real oil price here, not the nominal price.
    The real price is a soft number. Any number of economists will get different measures of “real price” depending on their assumptions.
    I included the fact about the relative price of oil in terms of gold has really not changed. That is the real price. But that said when the nominal price changes it creates expectations and hardships and that changes behavior. In the 1970s the general belief was that the price of oil would keep rising forever and that OPEC has a strangle-hold on the west. People changed their behavior.
    Today people understand better that OPEC cannot control the price of oil beyond a very limited range. The price of oil today in real terms is the same as it has always been so people are not concerned. Energy takes up about the same percentage of their budget as it always has. But additionally, expectations of inflation are not high because the contraction has created falling demand holding down prices.

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