Thanks to the comments from many of you, I think I now have a better idea about why
economists have a hard time communicating with others about the issue of peak oil. But I’m not
quite sure what to do about it.
Let me again thank those of you who contributed to a lively discussion
about how economists may think differently from some of you about the question of peak oil.
I initiated this discussion by trying to lay out what economists would expect a transition from
increasing global annual oil production to decreasing global annual oil production to look like.
Specifically, I pointed out the opportunities for anybody to make huge profits if production or
price was expected to change precipitously, arguing that the natural consequences of individuals
trying to earn these profits would be to help direct an orderly and planned transition.
A great number of you responded with detailed critiques and examples of where market
valuations were imperfect or reflected erroneous forecasts. In one of the most sophisticated
and informed arguments along these lines,
Jeffrey Miller called attention to this study by Stefano DellaVigna and
Joshua Pollet. These researchers examined the extent to which the number of babies born in
year t – n might help to predict the stock returns in particular age-sensitive industries such
as children’s books and toys in year t. If you could successfully predict those stock returns
based on information available years in advance, that would be an indication that markets are
not fully efficiently incorporating all available information– the stock price should have
risen in year t – n, not in year t, for reasons similar to those I gave in my original post as
to why oil prices would rise before production peaked. DellaVigna and Pollet found
statistically significant evidence that you could predict the stock price changes for some
particular industries from such demographic factors.
I do not want to get sidetracked here, but I would be remiss if I did not call attention to
some of the difficulties in drawing too strong a conclusion from such evidence. Over the years
there have been many hundreds of related empirical inquiries into whether stock prices
efficiently incorporate this or that piece of information. Most have found that they do, and
for those studies that reached the contrary conclusion, the relationship that they reported was
often found not to hold up in the data that became available after the paper was published.
Notwithstanding, I see this as a side issue, because I am perfectly prepared to concede, as any
reasonable person must, that markets are imperfect, and that they can and do make mistakes all
the time. Indeed, as I suggested in my original post (and as the DellaVigna and Pollet study
attests), more than half the published papers in economics study market imperfection in one form
or another, and certainly participants in our little discussion have brought up any of a number
of other good examples, such as the market valuation of dot-com stocks, Google, corporate
expensing of employee stock options, and the failure of markets to anticipate the run-up in oil
prices since 2001.
I can agree with you on all of that, at least up to a point. But here’s where I get stuck.
What I see many of you then in effect concluding is something along the lines of the
following:
If markets are not perfect, then we should put no faith in them.
This strikes me as a very inappropriate conclusion to draw from that kind of evidence. If you
reflect back on my original argument, it
had a qualitative as well as a quantitative dimension. If someone makes a calculation along the
lines I described using too high or too low an interest rate, or too high or too low a future
price, then sure, the specific quantity of current production would be different from the one I
talk about. But the qualitative conclusion that I was drawing– that any move in that
direction would produce some smoothing of the price and quantity available to the market over
time– is still very much going to be there.
More to the point, I argued that these profit opportunities would be available not just to
the Saudis, not just to the oil companies, but literally to anybody in the world. I don’t see
how any view of market imperfection or stories you might tell about this or that group could
lead you to dismiss the power of an incentive of that kind. Perhaps some of you maintain that
the potential contribution of those who are not themselves oil producers is inconsequential,
reasoning like FT that
Playing this game in the longer term means you’re fighting those with underground reserves.
Fancy taking on Saudi Arabia or Iran with your storage tanks in Rotterdam?
But the point is, under the scenario I described, you’re not fighting Saudi Arabia, you’re
taking their money. Every barrel you buy low and sell high is money from their bank account
into yours– the bigger they are, the more money you can make.
You count on the effectiveness of market incentives every day, supposing correctly that they
can be trusted to ensure that most of the items you seek will be at the grocery store when you
arrive, and that the oil companies will continue to move into more and more difficult terrain to
try to extract oil from the ground. So why would you believe that profit incentives won’t make
any difference for how peak oil plays out? Because that’s a much more important issue, and the
societal changes are more profound? If that’s your reasoning, I would suggest that you have
things exactly backwards. The more important the issue, the more profound the societal changes,
the greater is the profit to be had for those who recognize and respond to those incentives, and
the more confidence you should have that many, many people will try to do so.
I submit to you that the opportunity to take the wealth of Saudi Arabia and deliver it into
your own back pocket is a powerful incentive indeed, one that– and I mean this very, very
literally– can move mountains. That the peak oil community would dismiss such incentives as
being of no practical consequence, and insist instead that greater change in the world is likely
to be instigated as a result of their own earnest exhortations, continues to be a source of the
greatest bafflement to me.
Does your analysis hold up if the Saudis, by manipulating supply, are able to set the price of oil? What would you predict the markets would look like if we went from a long period in which the former was true (i.e., the Saudis could set, within a wide range, any price for oil they chose), to a period where the Saudis no longer had enough excess production to act as a price setter? What do you think would happen to the price of oil in such a case, and in what ways would it differ from what we have seen over the last few years?
Toward what end would the Saudis wish to protect a particular price, Felix? Are you thinking of that price as above or below the price that would result from a competitive market?
Towards a political end whereby for playing that role they are rewarded by the US with protection and arms deals, and a price that is, most importantly, relatively stable, whether it is above or below that of a competitive market.
This sounds like an interesting point but I’m still trying to understand it, Felix. Is Saudi Arabia trying to fix the price of oil at $20, or trying to fix the price of oil at $60, or they used to be aiming at $20 and now they’re aiming at $60, or they used to be aiming at $x and now they’re irrelevant? Just want to make sure I understand what you’re suggesting.
Well that’s what I want to know, too. I was hoping you had the answer. 😉 My best wild guess is that one of the two following things is true: either the Saudis have lost the ability to keep the price of oil relatively stable (they claimed, a few years ago, that they would keep it around $20, give or take), or they have lost the desire to do so. What would the difference be in the behavior of markets if one of those was true rather than the other?
JDH, I don’t know of anyone in the peak-oil community who would “dismiss such incentives as being of no practical consequence, and insist instead that greater change in the world is likely to be instigated as a result of their own earnest exhortations”. What we are afraid of is that market incentives, on their own, will not be enough, because the problem is so huge and seemingly intractable. To repeat an example I mentioned earlier, Matt Simmons thinks we should be investing heavily in railroads. But this can’t be done by any entrepeneur without significant cooperation from federal and state governments. And governments, in a putative democracy, are indeed subject to earnest exhortations.
So it’s not that the market can’t move mountains, it’s that the market will need all the help it can get to move this particular mountain.
Avo, if Matt Simmons is right about investing in railroads, it is presumably because he believes that mode of transportation will be particularly well suited to the post peak world. Railroads may be more energy efficient and transport more goods for less oil than their competitors.
If so, then private investors already have incentive to invest in railroads, and other companies that will do well post-PO, once they come to believe that we are approaching a peak. By buying now, while railroad stocks are low, they can reap windfall profits once the crisis hits and railroads steal business from their competitors.
The profit incentive is very strong. If the story about Peak Oil were truly credible then Simmons wouldn’t have to urge people to invest in railroads; they’d be investing in them already, just to put money in their own pockets.
BTW that market-inefficiency study about overlooking predictable demographic impacts is still unpublished as far as I can tell; DellaVigna has a newer version as a working paper on his home page at http://emlab.berkeley.edu/users/sdellavi/ under the title “Attention, Demographics, and the Stock Market”.
Here’s an article that strongly suggests Norway is restraining oil production – in part, perhaps, because they think that oil will be worth more in five years; but mainly because they want to keep the industry, and the Norwegian economy overall, stable. They could lock in production and wait for the price to rise; or pump faster to take advantage of the current high price. Of these three choices, can we say that any one is more economically rational than the others?
http://www.energybulletin.net/903.html
There still seems to be a large question mark over reserves and their upward revision in the 1980s hence all the talk right now about data transparency. If the real figures could be uncovered then you might seem some real action over stock prices in all sectors so all of the above talk about efficient markets lacks a solid underpinning of reliable information. This non-economist is suprised no-one has mentioned this yet.
The public awarenes of peak oil issues is growing so fast that I suspect that if we postpone this discussion until the spring, I would anticipate that the futures market will be telling another tale as more folks digest the info available.
Incidentally, my wife told me that if I bring up peak oil one more time, she will start teaching me about peak sex. Anyone else run into that too?
It is always bad to make a comment on half a cup of coffee, but here I go …
“If markets are not perfect, then we should put no faith in them.”
Are you sure this is about markets being perfect … or about using markets to validate an external belief (in this case about PO)?
I don’t know about you, but I’ve taken very much to heart the old line “the market rewards you for being right, but it doesn’t care why you were right.”
That is, many market winners win for the “wrong” reason … I can never be sure why I won …
The market is big, really big (apologies Hitchhiker’s Guide to the Galaxy) … and I don’t see a guarantee that PO will be the biggest factor in short term (five year?) price variations … until we get to the real light crude endgame.
FWIW, on half a cup of coffee
I’m a peak oiler, but I see enough uncertainty from factors other than the peak to justify current prices.
Ralph hit the nail on the head with his comment early in the first chapter of this discussion. There is enough uncertainty, especially when it comes to the actions of governments, that oil doesn’t warrant $180/barrel prices. Another threat to James’ profit plan is climate change and the actions that governments might take to deal with that problem as it becomes harder to ignore. If additional heavy carbon taxes are levied, and this is something that is being talked about regularly, profits from oil investment will be significantly dampened. To me, it seems that these factors are reflected in the current price of oil. If we lived in a world where government intervention in the markets were unthinkable, oil might well be at $180 as James’ suggested it should be.
Incidentally, an investment in wind and solar generation seems to avoid much of the above problems (infact, governments seem to be looking to increase incentives in the near future) but still offer the benefit of future profits. Unsurprisingly, these investments are priced accordingly.
Avo: When you say “What we are afraid of is that market incentives, on their own, will not be enough, because the problem is so huge and seemingly intractable.” I think we arrive at a philosophical impasse. That statement implies that you believe that the government is capable of acting faster and guessing more correctly than the market.
So far, the most vocal “peak oilers” on this series of threads are basically coming from a socialist perspective (no pejorative intended). Here’s my try at a market oriented “peak oiler” viewpoint.
I agree with Dan, that investors are still reading the writing on the wall. Futures prices will soon reflect an upcoming oil peak. If the economy really is incapable of transitioning away from petroleum quickly enough to prevent recession, distribution failure, and political upheaval, then these things will happen, regardless of what governments do.
However, can’t the economy of a state or region (provided it has a sufficiently diverse resource base) adjust to changes that an entire nation cannot adjust to? Furthermore, can’t an individual make investment decisions that can make them a winner even in a game where most players are losing?
The people calling for sweeping measures like a gas tax and more stringent fuel economy standards are acting like they think these measures will prevent an oil peak. At best these measures will buy a few extra years, and in no way exempt anybody from the need to prepare.
One way to prepare is to attempt to profit from your insight. If Dan is right, we all have a few months in which to act before the market catches up to us.
Another way to prepare is by investing in or starting businesses in your community that will become crucial once imports become more expensive. In addition to protecting you financially, it will help isolate your community from some of the disruptions to the economy as a whole.
Texas Al – I think we could all carve out an ideal response to PO based on our ideological preference, but I don’t think that matters.
I think the important thing, the thing we *might* be able to influence, is the current mix of individual, corporate, state, and federal plans.
I don’t know about you, but I think the current Energy Bill is pretty dysfunctional. So is the mindset that generated it. In fact, despite my status as a lifelong conservate and Republican – I think it is more about the “ENRONing of America” than anything else.
YMMV.
If we amend
“If markets are not perfect, then we should put no faith in them.”
to the more reasonable
“Because markets are not perfect, we should not put undue faith in them.”
most people would probably agree with it. And I think most people would agree with your argument, that market mechanisms will “produce some smoothing of the price and quantity available to the market over time”.
So far there is no debate. I think the real question on which there is a lot of disagreement is what energy policies the federal government should be pursuing.
We have our current policies: control world oil supplies (of which the invasion of Iraq was considered a key step by the current administration) and subsidize the oil, gas and coal industries primarily through massive tax breaks. This approach is costly and many would argue dangerous, and more costly and more dangerous as time goes on and supplies dwindle.
Then have the policies that market fundamentalists might advocate: the government should do nothing.
I am inclined to think this is preferable to the current policies.
But I think it’s clear that we do need active government policies, if for no other reason than the huge “externality” of global warming resulting from the build up of greenhouse gases from burning fossil fuels can not be dealt without government intervention – although the intervention could be in part market based – carbon trading permits for example. (The market left to itself is likely to turn to coal – of which there is a huge supply – and this would be an environmental nightmare: there is much more carbon locked up in easily accessible coal – than is currently in the atmosphere. See for example http://calspace.ucsd.edu/virtualmuseum/climatechange1/05_2.shtml )
The other reason why we might need policies which encourage massive investments in solar, wind, biomass and other renewable supplies – rather than just sitting back and and watching what the market does – is that individual companies, regardless of market incentives, do not have the resources to undertake investments in energy R&D of the magnitude that are likely to be necessary to smoothly transition from a cheap oil economy.
I’ll cheerfully agree to disagree on the merits of lobbying the government to “do something”.
My question to you, Avo, Odograph, and other, is:
What’s your local, pragmatic backup plan? You do have one, right? Does it require more money than you currently have? Have you put some thought into how you can raise the money you need quickly?
This is not polemics, I *have* had a plan for several months now, and eventually will bounce if off you folks and see what you think… but first I’m trying to hear your opinions unbiased by what I’m going to say.
I anticipate something approximating the 70’s fuel crisis and recessions … I’m in a situation to weather that, so I don’t worry too much about myself. I just yak about it because I’d rather see those recessions not happen, and because I wouldn’t want to see them slide into something worse (low probability).
I think the people most likely to suffer from these economic transitions (from oil to something else) are the ones least likely to be here, in this conversation. They’re out shopping.
I’m confused.
The standard (Solow) price model of an exhaustible resource shows a smoothly rising price curve (to the right, over time), until a backstop technology (new source of energy) arises at which point the price curve flattens.
But clearly that is not what has happened with oil: arguably because a cartel has achieved a long term price of oil higher than the free market price, thus encouraging high cost production (why drill in Grand Banks Newfoundland at $10/bl extractio cost or have oil sands in Alberta at $20, if Saudi costs are $0.50/bl? Answer: because the oligopolist (OPEC) curtails supply).
There has also been a revolution (several actually) in finding and extracting oil: as Deffyes points out, Oil Services is consistently the highest Return on Equity subsector of the S&P. So there has been lots of technological innovation (eg horizontal drilling, 3D real time imaging etc.). This has lowered the cost of extracting oil.
But we might be at the peak. It is after all, an *exhaustible* resource.
There are two ways to hedge:
– financial hedges – buy oil for future delivery
– physical hedges – what we might call the ‘Japan Strategy’. Invest heavily in non-oil energy sources and energy conservation. Stockpile oil like crazy.
Both of these have a cost: the financial cost of investment.
But financial markets are *uncertain*. There is (AFAIK) no evidence that a commodity futures market is a good long run predictor of the future price of a commodity. Because what drives current commodity prices is supply and demand, but also factors like interest rates, capital availability for speculation etc.
Unlike in the Arrow-Debreu assumptions, there is no full and complete market for all of the world’s future oil production in all times and states of the world. Commodity markets are just a pricing, at the margin, of current supply, demand, expectations and financial market conditions.
So if we are at peak oil, we might expect that markets might figure that out, eventually. Probably when oil production starts unambiguously falling. My bet is oil is such a lucrative commodity to produce that before that happens, we will simply spend increasing amounts of investment producing the oil we have faster (the life cycle of the UK’s North Sea was less than half the normal life cycle of an oil field– the oil was in the right place, and we needed it when we discovered it). So we will be shortening ‘the Age of Oil’ but production won’t slope off for some time to come.
My conclusion is that commodity markets won’t warn us of Peak Oil. Just as stock markets didn’t warn us of the personal computer destroying the mainframe, or the airline crippling the railway etc.
We’ll know we are hitting Peak Oil when the price of oil goes through the roof. Say $100/ bl or its previous peak (in real terms). Then we will worry about alternative energy. In the meantime, we as a society will soldier on complaining about how much it costs to fill up our SUVs (Range Rovers in these parts ;-).
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Felix– Certainly the Saudis have been pretty irrelevant in the price fluctuations of the past year, as their reported production has been virtually constant. I really doubt that they have the power to move the price back to $20, and I doubt they would have the power to prevent the sort of price movements I envision once the market is persuaded that the date of peak production is nearer. I don’t see why they’d want to try to prevent them, either, because the Saudis would want to see those prices just like anybody else.
I do agree that the Saudis made more of a difference in some other historical episodes, but I tend to interpret their actions as being motivated by their own economic interests. Depending on how long you think oil supplies will last, what you’re assuming for the price of backstop alternatives, speed of moving to them, and short-run and long-run demand elasticities, either too high or too low a price would reduce the Saudis long-run earnings.
Avo– if many others see this the way that you do, then the common ground may be larger than I was thinking. Certainly economists have no problem in recognizing some public good and externality issues associated with railroads and developing new technologies, and would see a potential important role for government measures in helping to encourage those. Though, as Hal notes, with railroads the question is whether the market incentives are there to make it all work if the government does lend some more support.
i live in county tipperary in ireland. i first went to a meeting at which ‘peak oil’ was discussed 30 years ago. it was held in dublin in 1975 by the solar energy society.
it was not called ‘peak oil’ at the time, but the language used came from the study ‘the limits to growth’ and referred to ‘non-renewable resources.’
it seems to me that there will be no detectable peak in the production of oil. there may already be an uneven plateau, but even that will not be readily apparent. the customer at the petrol pump does not experience total oil production – but the local price. the inability of ‘swing’ producers to ratchet up production to meet demand, is not a peak that we have to climb, it is an anvil upon which producers, refiners, distributors, and retailers can hammer us, not to mention manipulators, governments (taxes), hoarders and speculators.
so the plateau in oil production will not be experienced directly, but as a peak in the oil price. the real price of oil in the last 30 years is not a steady climb, even though discoveries have been in consistent decline.
the last oil crises in the early and late seventies occurred in conjunction with severe inflation. if the economy keeps roaring ahead the oil price works through as inflation in all oil derived products. with transport that means nearly everything. under different cyclical, financial, and psychological circumstances the effect could easily be towards conservation and deflation. the oil might be comparatively cheap, but the newly unemployed motorist unable to afford it.
if this were the case, – and eventually contracting energy supplies have to work through into a contracting global economy – the ‘oil peak’ would manifest not as rapidly rising oil prices but as a peak in the oil price, perhaps the all time peak.
as with stock markets an oil price peak will be indistinguishable from a ‘correction’ until things unfold further. you will see it in retrospect.
thus an individual’s plan for the peak oil period might need to take a view on inflation / deflation and the whole complex financial superstructure built upon the assumption of ongoing global growth.
At $60 per barrel, the price of oil today is still below the price of oil in 1981 (inflation adjusted). So on a historical basis, the price of oil today is not really that high.
In 1970, a barrel of oil sold for $1.25. Ten years later, the same barrel of oil sold for over $18 – an increase by a factor of 15. The astonishing fact is that during those tubulent times, the world oil demand did not fall, in fact oil consumption increased by almost 50%. In the US, there was a significant reduction of oil demand in the early 1980’s as a result of downshifting the manufacturing sector of the economy and building up the service economy (mainly financial services). But that effect lasted only a few years. Since then US oil demand is growing steadily year by year.
To predict that oil prices will not repeat the dramatic rise of the 1970’s in the future years is simply wishful thinking. A prediction of oil prices rising to $200 per barrel must be viewed as a conservative prediction. A future Dollar price of oil must take into account the depreciation of the US Dollar in its purchasing power. A more meaninful oil price quotation would be in gold. I predict that the quotient
(price of 1 ounce of gold)/(price of 1 barrel oil)
presently at 7, will decline in the future years to a range between 2 and 3 due to oil depletion. I am not making any prediction of the price of gold in US Dollars.
It is often stated that increasing fossil fuel prices will help renewables, because then renewables will become more price competitive. But this ignores the fact that renewable energy devices are currently made almost exclusively using oil, gas, and coal energy as inputs. It is possible that as fossil fuel prices increase, the price of renewables may increase in parallel with them. One primary reason why renewable energy devices are currently expensive is that it takes a lot of energy to manufacture renewable energy-generating devices. This is because they include things like steel, copper, high quality silicon crystals (essentially, failed chips), rare metals (silver), glass, precise machining, and transporting heavy things over long distances.
Currently, a 20 kWh/day photoelectric system with battery storage costs around $50,000 and covers 500 sq ft. For comparison, a gallon of gasoline contains 36 kWh of chemical energy and a car turns about 1/4 of that into useful work, which is about the equivalent of 100 human slaves doing hard physical work for an hour (knowledge work is more efficient; the human brain uses only 1/100 of a kilowatt).
Saudi oil is currently an energy source. It takes much less energy to extract it than you get back out of it. Whether photoelectric generation is fundamentally an energy source also depends on whether you get back more energy out of the photocells over a reasonable approximation of their lifetime than it takes to manufacture them, which includes all the energy needed for steel and silicon furnaces, machine tools, silver mining, and so on. I hope the answer to this question is “yes”. If not, then no amount of money/price or greed or self-interest or altruism or fear will make such energy a plant a renewable energy *source* — it will instead be just be another way of spending non-renewable oil, gas, and coal energy, and as such, a waste of energy compared to just using the fossil fuel energy directly. At least until last year, the market decided to disinvest in renewables in the US. As JDH says, maybe it knows something we don’t…
You said, “Certainly the Saudis have been pretty irrelevant in the price fluctuations of the past year, as their reported production has been virtually constant. I really doubt that they have the power to move the price back to $20″…
If the Saudis are unable to increase production even in the face of a tripling of prices, aren’t we very likely at peak oil? What reasonable scenario do you see in the medium term future where global oil consumption can continue to increase as it has over the last few decades with Saudi production remaining constant?
And I disagree with the argument that the Saudis are only pursuing financial goals, not political ones. Oil profits will do no good if they can not defend themselves from internal and external enemies, and the support of the US is crucial to those goals.
JDH asks why, if oil prices are likely to move much higher two years from now, people and organizations have not tried to make a profit on that increase. Some of the answers have already been noted by previous writers, but here is my version.
Many oil producing nations need to maintain or even maximize current production, because of the financial needs of their society. Many oil consuming nations are indeed storing up oil, which is the correct strategy if one expected a higher price, and a shortage, in the future.
Many major oil companies have for several years been reducing their investments in drilling, and instead they are buying back their stock or increasing dividends. These companies say that they have reduced investment because they are worried that oil prices might decline below their drilling costs. But one could ignore their justification and note that this would also be the correct strategy if they expected oil prices to rise significantly. They are indeed leaving the oil in the ground.
Most speculators and hedgers are evaluated by their employers on a three month or six month time frame. Thus they can not invest for the few-year time scale. Instead they have to try to guess how the other market participants will behave in the nearer term, not whether the basic commodity of oil will rise in price in the longer term.
It is dangerous for individuals to buy few-year futures because, as was pointed out, a large profit requires buying options on margin, and if the price of oil goes the wrong way in the nearer term, one can get wiped out from broker calls. So even if one had perfect knowledge of the oil price two years from now, it would be inappropriate to leverage ones investment unless one could also predict the shorter term pricing. One could buy futures without leverage, or oil company stocks with cash, but then the profit potential is limited.
Because of the above imperfections in the market, it seems possible that the market one or two years from now could indeed surge from $60 to $200, if the mob of investors and speculators started moving in that direction. And individuals who are rather sure that the peak is near still could not make a large profit on their investment.
If there is a safe way to become rich by correctly predicting prices two years out, without knowing the shorter term price fluctuations, please tell me how.
“Many major oil companies have for several years been reducing their investments in drilling, and instead they are buying back their stock or increasing dividends. These companies say that they have reduced investment because they are worried that oil prices might decline below their drilling costs. But one could ignore their justification and note that this would also be the correct strategy if they expected oil prices to rise significantly. They are indeed leaving the oil in the ground.”
Either that or they believe that most of the sites that have any hope of being cost-effective to drill have already been discovered.
“If there is a safe way to become rich by correctly predicting prices two years out, without knowing the shorter term price fluctuations, please tell me how.”
What is the furthest expiration date normally available for options? Anybody know?
Steve, you can buy a December 2008 $70 call option for $5.50. Lots and lots of profit for you and all your nephews, if you believe what you say. Al, you might want the December 2010 $70 call option for $5.80. Check them out at NYMEX.
“One primary reason why renewable energy devices are currently expensive is that it takes a lot of energy to manufacture renewable energy-generating devices.”
Marty, this is not quite true. The primary reason why solar panels are expensive is because they are not produced on a large scale. A quality midsize car costs today around $25,000. The amount of energy and special materials going into the production of that car is much larger than into the production of the solar installation you mentioned for $50,000. In fact, that solar system is a very simple and primitive piece of technology in comparison to the complexity of a modern car. A modern car, if produced only by the thousands per year (like solar panels) would most likely cost at least $250,000 if not more. If we would set up a large scale operation producing these solar panels in hundreds of millions per year, the cost of a system would go down at least by a factor of 10 if not more. The energy invested into production of these panels would very likely be returned in less than 5 years.
People who write about these things are unnecesserily pessimistic. However, I do agree with the other points of your fine post.
Thank you for the info, Dr. Hamilton!
Should I activate these options, I will be sending you either a consulting fee or shares in the windmill business I expect to have up and running by then. I’ll leave the choice up to you. 😉
Robert: No doubt, there are massive economies of scale remaining to be realized with solar, wind, and hydro. Now, how do we go about estimating the time and investment that would be needed to ramp up production to these levels? Comparing this estimate to one’s favorite random guess as to when the oil peak will happen seems to me a good way to gage how optimistic or pessimistic one should be.
JDH seems to be surprised that Peak Oilers that believe oil will be at $100 in five years aren’t snapping up $70 options for 2010 and pushing up the futures price. One answer might be that one can make a bigger profit with less risk by simply buying the S&P 500 index.
If oil prices were to go up by 8% per year, current oil future contracts would still be a less attractive investment than stocks.
“Comparing this estimate to one’s favorite random guess as to when the oil peak will happen seems to me a good way to gage how optimistic or pessimistic one should be.”
Al: The descending side of peak oil will be painful – there is no way to avoid that. As many people studying this issue pointed out, it is too late to create an alternative energy infrastructure. We should have started doing this in the 1970’s – those oil shocks were a warning of things to come. It takes a very long time to create the alternatives on the scale required (mostly because we have to study first how to design that technology – there is very little R&D in this area). It also takes lots of energy to create these alternatives – energy which will be soon in short supply.
Texas Al, I do NOT “believe that the government is capable of acting faster and guessing more correctly than the market”. But I think it’s clear that the market exists in a tax and regulatory environment created by the government.
For example, consider road maintenance. Do you think it be done by the government? If so, should it be funded exclusively by taxes on fuel and vehicles?
JDH, I also think there is more common ground than I initially assumed.
You might enjoy perusing some of the forums (especially Economics) at
http://peakoil.com/gate.html?name=Forums
I am certain that any contributions you might choose to make there would be more than welcome.
I’d like to thank Dr. Hamilton for linking earlier to my comments on peak oil.
I came upon this discussion a few days ago but didn’t say what immediately came to my mind. Since the discussion continues, I think it’s worth going back to the original post. I found Dr. Hamilton’s description of the market effects of peak oil very similar to what I had concluded was likely to happen. No dropping off the edge, but a more gradual change with increasing development and use of alternative energy. I envisioned a fairly bumpy transition, however, because of the market and information imperfections that have been mentioned in many posts in these threads.
I’m not an economist, but rather a chemist who has worked close to engineers and geologists; in fact, I feel that I don’t understand economics very well. Dr. Hamilton asks how the conversation might better be carried on. To that end, I’d like to say that I found his original argument isomorphic to a description of feedback.
In control systems, like the one at the volcanic geothermal plant I visited a couple of weeks ago, information (like temperatures and pressures) is used to control the plant via a computer program. The information there is much better than the information available to potential investors in oil futures, but even so, it is possible for strange things to happen in feedback systems. Engineers have put a lot of work into removing those strange things (like wild oscillations) from the software that controls power plants.
I suspect that the market resembles the less sophisticated engineering control systems. Price and other information are factored into a system that is partly rational and partly emotional. There are an enormous number of variables and ways of weighting them, none of which has been validated, unless the economists are further along in using feedback as a concept than I’m aware of, and I’m aware of very little in that area.
Coming at it from a feedback perspective, I’d start writing down the information inputs and classifying them as to whether they themselves are subject to feedback and to what degree. (Futures price is, reserves are to a lesser degree, and refinery capacity is still less.) Then I’d try to fit it into a fairly sophisticated control model. Lots of work.
But it might be useful. And the correlation (it’s more than a metaphor) may be useful in the conversation.
Four fine posts from economics blogs
Tino at Truck and Barter declares that policy on Global Warming should use two types of science: climatology and economics. Professor James Hamilton patiently and clearly explains that causal relationships in cross-sectional data can be different from …
If the authors of the study knew that they can predict future stock returns based on demographic changes then why didn’t they invested in those stocks?
Joe,
I don’t think you’re understanding how options work. Suppose you buy a $70 call option for five years in the future, paying $5 today. If the price of oil is $90 five years from now, you’ve made $20 for each $5 you invested, beating the S&P 500 by a lot. If the price goes to $100, you make $30 for each $5 invested.
BTW, if the price of oil rises at 8% a year, it will be about $90 5 years from now. So if you’re pretty confident about this prediction, you can make a lot more than 8% a year by purchasing call options.
to recap: markets exist. peak oil may or may not exist. even if peak oil exists, it may or may not be apparent in today’s market.
how do we leap from there, to preparedness?
the old split is that engineers worry, and that economists trust. is that fair?
there seem to be a few leaps of faith that if peak oil comes, it will become apparent in the market, and that will drive preparedness … with time to spare?
btw, my observation would be that american society “mostly” trusts the market on peak oil, because while government “alternative” programs exist, they are not “large” in the grand scale of things.
I think discussion will be easier if we define more clearly (a) who is participating in the discussion and (b) what we are discussing and/or what we are trying to solve. Non-economists is a broad audience. My study of economics to date tells me that even economists often have difficulty coming to much agreement. So to state the problem as one of discussion between economists and non-economists is a show-stopper (eveyone talking to everyone).
I believe that defining who is participating as well as what we are trying to solve should be performed simultaneously. What I mean by this: there are members of the peak oil community who believe we need to power down ASAP. And that human society is in extreme overshoot. Now I think there may be merits to the idea that humans are in overshoot, but are we really doing to try to solve that problem here? As someone mentioned: take a look at peakoil.com. I participated for a while, but it is frequently visited by survivalists, racists, and nuts. It is a nice consolidation of articles, and there are some thoughtful contributors, but you have to sort through a lot of garbage (as with any largely open forum on the internet).
Narrowing the audience and questions to solve will result in progress.
I believe a couple basic questions must be considered: (1) From a largely physical perspective, what is our best guess at energy production volumes over the next twenty years (through 2025). This can be considered from an EROEI perspective and a monetary perspective. (2) What is the impact of #1 on the economy, or way of life, etc.
If #1 says we have more energy than we need, and it is clean energy, then the primary concern may be monopolization of this energy. But if #1 says that the volumes of energy will be decreasing, then what is the implication for #2.
So here’s where I get frustrated. To the economist who tells me that markets adapt, technology will find a way, it has in the past, the profit motive is strong, etc.; my response is big loud drawn-out DUH. 🙂
Here are questions that run through my head. (1) Can economists and/or markets tell me much about prices and/or markets five years out? E.g. how predictive of a science is economics and/or the futures market? I think anyone can rummage through the many contradictory statements made by economists of every stripe and find an accurate prediction. The question still remains: is economics a predictive science? I don’t know the answer to this, but if there is little proof that it is, then we should use caution when using economic arguments to predict the respond of industrial society to what could be severe energy constraints. (2) Is there a role for the Govt in energy? Govt research funding has, through plan or serendipity, facilitated digital communications, air travel, nuclear power, medical technology, etc. Is there a role for govt? I say yes. (3) Are individuals and/or countries driven by long-term planning that would allow futures markets to indicate the future price of energy, or are individuals and/or countries often driven by short-term needs. Personally, I don’t put much credence in the argument that the futures market tells me much about the price of oil in 2010. A few years ago the futures market told me nothing by misinformation about current oil prices. Why believe it even further out? Give me historical evidence why I should believe it. In addition, demand destruction (through recession, for example) will lead to a glut of oil, making the argument that the futures market price of oil is telling me something about peak oil largely bunk. I can as easily argue that the futures market is telling me that peak oil is happening and demand destruction will cap the price of oil for the next five years.
As I’ve said in a previous post, I think peak oil is a serious problem. I don’t believe that because markets are not perfect, we should lose all faith in markets. But truly free markets including demand destruction, and the most severe type of demand destruction is reduction in population. That is not a prediction. Econmomics tells me this. Seriously. It is an economic possibility.
So we have to ask ourselves as a society the questions (1) what are the risks and (2) what policies might be necessary to deal with these risks. It’s not clear to me that anyone is actually doing this yet, or enough. Instead we are having silly debated about Economics 1A, the invisible hand, and similar ideas.
Ragout: To believe that an oil peak won’t happen is equivalent to believing that petroleum is a renewable resource on a human timescale.
To me it seems the disagreement boils down to the relative values of two variables:
Variable A: How long before oil peaks (this variable is a function of how much oil remains in the ground and how much the demand for it will grow in the coming years).
Variable B: How long it would take to transition from oil and gas consumption to coal, nuclear, solar, wind, and biomass (this variable is a function of how quickly markets are capable of reacting, and how much it would cost to retrofit the infrastructure keeping in mind that rising fuel costs will drive the costs of retrofitting upwards).
If B < A …then sit back, relax, and laugh at all those chicken littles. There is absolutely nothing you need to do differently.
If B > A …then *plan* on there being chaos; start thinking about ways to help your community be as self-sufficient and safe as possible. The more time you waste agitating for a sweeping policy solution, the less time you will have to make a difference where it counts for you and your family.
If B ~= A …then policy solutions might tip the balance. But no conservation measure can replace the need to transition from oil eventually; it just buys us time and if we don’t make good use of this time, the effort will be wasted.
Now, most likely I’m overlooking something in the above model and if so, I hope someone will point out my mistakes. But if nobody can see any flaws in the basic idea, the next logical step is to come up with more accurate estimates for the A and B variables.
Just a little thought about markets and futures and human nature…
I’m a doctor, and last year’s shortage of flu vaccines brought out the worst in many people. While most years, people decline the shot because “it gives me the flu, Doc”, most became highly irate when they were told that they couldn’t get one this year. I had numerous healthy middle age men want me to come up with some letter to the effect that they were in poor health and therefore really needed the exemption to let them get the vaccine. I shrudder to think about human behavior during the upcoming decline.
In an example more closely linked to human reaction to oil prices, please look at the following post…
http://www.wnem.com/Global/story.asp?S=3613528&nav=7k75cJft
I strongly suspect that as people start to come to an understanding of the situation, mob panic will transform the current futures market almost overnight into one of a picture more consistent with escalating prices in subsequent years. I expect if to occur quickly once peak oil hits critical mass in public awareness.
On an additional note, there was a story in the Milwaukee paper that a local company called Oil Gear had its share price double in one day despite no announcement from the company, or any change in its operations. Apparently, this happened about a week after Matt Simmon’s book was released, and the idea to buy oil companies that invested in ifrastructure (as suggested by Matt) had led to frenzied buying without any idea of what, exactly, they were actually buying.
The company is actually a clothing line (or some equally non-oil related business). The article didn’t make the connection, but after reading Matt’s book, I saw the immediate relation.
Al, isn’t the issue here that both A and B are a function of C, the price of oil? A bigger value for C will make A bigger and B smaller. And the point of my original post is that there’s a tremendous incentive for markets to find a value for C today that makes A ~= B.
I think it is somewhat tempting to look backwards at technological history, see all the neat things that have come to pass, and think it’s easy. I think we sort of discount many things that were wished-for (“incentivized”) but found to be dead ends. Just to throw one out there, the price differential between lead and gold incentivized a philosopher’s stone. That doesn’t mean we got it.
Or here’s another favorite (MOORE 1998):
“If the automobile industry advanced as rapidly as the semiconductor industry, a Rolls Royce would get half a million miles per gallon, and it would be cheaper to throw it away than to park it.”
Why *didn’t* we get that million mpg Rolls? Was it just a lack of incentives, or were there some physical limits involved?
… in a tussle between physical limits and incentives, who wins?
Dr. Hamilton:
Wouldn’t all three be functions of each other as well as a number of external variables? All of which are worth pinning down as much as possible.
But to answer the practical question of “What should I do?” wouldn’t one try to express everything in terms of most likely onset of the event versus the most likely speed of response to the event?
Obviously we can’t hope for an exact numerical answer, but we can at least assign likelihoods to the possible outcomes based on how one chooses to weigh the components that determine time-till-peak and transition-time.
At that point, the discussion become much more interesting. Instead of being a (cordial) yes-it-will/oh-no-it-won’t exchange, we will be forced to examine each component individually and eventually be able to say precisely in which initial assumptions any given difference of opinions on this topic originates.
But odograph, the potential of incentives to reduce oil demand is a question not of physical limits but rather of economic responses. And if your argument is, the price increases needed to stretch out A to meet B by way of curtailing demand are too huge and enormous, my response is, huge and enormous price increases over a short period of time are exactly what the incentives are for the market to avoid. So, if that is the concern, it’s predicated on the assumption that investors will fail to rake in the big profits that your story implies would be available for anyone to snatch.
JDH, it seems to me the problem at hand in having a discussion on peak oil is that first a definition of “perfect/imperfect markets” needs to be established. The terms are decieving. It’s like weather forcasters using the term “normal” when they’re talking about the mean temperature. People then talk about the weather not being normal when in fact on any given day it’s not “normal”. Likewise, it seems to me that at any given moment in time the market is “imperfect” and that throws people off.
Odograph:
The way I’d put it is, whether or not something gets done depends on how great the market incentive is versus the actual cost of doing it. The incentive to invent lead to gold transmutation and million-MPG cars is high, but the cost needed to do so is even higher… so it will take an immense span of time to attain that level of technology*.
For technological goals that are in frank violation of physical laws (like perpetual motion machines or a car that can attain a speed of 187,000 miles per second) this cost is infinitely high and therefore these goals will never be acchieved no matter what the incentive.
* I’m not a physicist but IIRC it is technically possible to transmute lead to gold. The cost of attaining the temperature and pressure needed to do so guarantees that it will never come anywhere close to being competitive for any plausible price of gold. I’m too lazy to calculate the minimal kJ it takes to move a human-sized payload a million miles, but guessing the car would probably be in the infinite-cost category.
what would you think of a “rust belt” size dislocation? is that (market) success or failure?
fwiw, i am a big believer in markets. i just think it is fair to give people a little warning, and the chance for preparation, if there is trouble ahead.
Al, yes indeed, A, B, and C are all related. But C is the one that doesn’t just come out of nowhere. If you change whatever the scenario is about how hard it is to get oil out of the ground (A) or develop another technology (B), then the price of oil (C) *has* to adjust in response to that, and, in so doing, force some changes relative to the earlier assumptions about A and B.
” And the point of my original post is that there’s a tremendous incentive for markets to find a value for C today that makes A ~= B.”
The existance of an incentive does not guarantee the existance of a timely solution.
There is an tremendous financial incentive to find a cure for cancer or AIDS, but despite a lot of effort, we don’t have cures.
Again Jeffrey, higher oil prices don’t have to successfully find a cure for cancer or AIDS, all they have to be able to do is reduce demand.
do workers in energy-intensive industries know we are talking about them? i mean, without the right innovations and adaptations, the market solution (demand reduction) means they … adjust the hard way.
if anybody is way back on the question “will the market find a solution?” … i don’t think that was ever in doubt. the only question in my mind was how nice that solution will be, from a humane perspective.
Higher oil prices will certainly reduce demand and spur innovation and conservation. I don’t think anyone doubts that.
What’s not clear (at least to me and evidently to some of the other posters) is whether this whole process will be painful and involve a lot of economic dislocation and suffering (say like 1973 only much worse), or relatively painless and smooth – if for example we make some big breakthroughs in energy efficiency or in solar technology.
There seem to be lots of smart people ranged on both sides of the issue and I don’t see any clear
way to tell who’s right.
Ah, I see one point of miscommunication.
We are making unspoken assumptions about what constitutes a successful adjustment. I’ll revise what I said earlier to incorporate this, and to have a more firmly defined endpoint for variable A.
A: The time remaining until petroleum extraction hits its hard limit– i.e. any feasible extraction technology requires more energy input than is contained in the petroleum it extracts.
B: The time needed to completely replace oil with backstop energy sources without a large increase in poverty, war, crime, starvation, disease, and political instability.
If B < A, no problem.
If B > A, one or more of poverty, war, crime, starvation, disease, and political instability will occur.
So, as I said before, the only thing the market can’t adjust to is complete extinction of the human race, so it’s tautological to say that the market will *somehow* adjust to oil depletion. With this refinement, we’re now distinguishing between the desirability of possible outcomes.
I still don’t know how to work C, prices, into this. It seems to me that oil price is a crucial variable but an internal one that affects both sides of the final expression. Perhaps something like…
B + f(C) < ? > A + f'(C)
Where f(C) is some to-be-defined function that increases the time required to transition from oil by making the transition more expensive ceteris paribus, and f'(C) is some to-be-defined function that increases the time until the hard limit is hit on oil by destroying demand and creating an incentive for more efficient extraction technology (though there is surely a diminishing return on this technology).
I’m sorry, I’m probably completely misusing notation here. I hope I’m at least explaining this well enough that someone who does know the right notation/terminology can get it.
i think it is a horse-race between the oil depletion rate and the alternative energy improvement rate. technologies on the shelf now are not good enough for a “painless and smooth” transition.
now, it may be that technology will win the race.
that’s not what bothers me. what bothers me is that most people are not aware of the gamble.
indeed, some real gambles in the technology race (like hydrogen fuel cell cars) are presented as pretty sure things. stuff like that does not contribute to an informed public (or rational market players).
Ding! Odograph and I have reached a common ground.
i thought maybe A, B, C, and f(C)/f'(C) were saying the same thing … but I wasn’t sure 😉
Well, Al, I’m not agreeing, even with this definition, that the right formulation is A + f(C). You defined A as a length of time. That depends in part on the physical quantity of conceivably recoverable oil that you’re free to specify for purposes of discussion, but it also depends on how much oil gets used each year. If we only use 1 barrel each year, that physically limited amount of oil would last a long, long time. And how much oil we’re going to use each year absolutely does depend on C.
The way I’m thinking of it is, C should be the value such that A(C) = B(C). As long as A is a monotonically increasing function of C (which it is), and B is a monotonically decreasing function of C (which it is), and for that matter, even under weaker conditions than that, there is a value of C for which the equation would hold.
And as for Jeffrey’s and Odograph’s points, about how massive the dislocations would be that result from that C, I’m claiming that, if the changes in C were that huge and abrupt, somebody missed a great profit opportunity along the way. If you have faith in people looking for and finding those profit opportunities, you should have doubts about this whole famine-war-pestilence story that many in the peak-oil community often worry about.
Now, Odograph is also mentioning much milder scenarios, like the Rustbelt and 1973-74, which certainly could be much more like what we’re talking about, or maybe much tougher than that. But then the question is whether there is any plan, government-based or market-based or whatever, that would be able to avoid that.
Well, there are components of A and B that are only partially determined by oil price or completely independent of it. Here are some I can think of, I’m sure there are more, and I hope people will point them out.
A: how much oil is actually in the ground; the rate at which returns on investment in improved extraction/refinement techs decline; population growth; the rate of economic growth; the maximum amount of net demand destruction attainable strictly through conservation measures without impacting the “painless and smooth” criteria; the technical capability of oil producers to adjust their output; geopolitical factors.
B: how quickly declining production will translate into signals the market can respond to; how long the market takes to respond to these signals; how far down the cost of backstop technologies can be driven through economies of scale; the theoretical minimum time it would take to build enough of the backstop energy infrastructure that the “painless and smooth” criteria are met (even with infinite funding, construction would not proceed at infinite speed); the number of false leads (e.g. ethanol and hydrogen fuel cells IMHO) that will need to be pursued and the expense of pursuing each one; psychological inhibitions of consumers and investors; domestic policy.
i was just reading this:
http://www.resourceinvestor.com/pebble.asp?relid=11438
found at the always excellent Energy Bulletin Fossil Fuel Headlines:
http://www.energybulletin.net/7401.html
that first article, about current technologies, is the kind of thing i can relate to. if you take it at face value, we could transition to a mostly-electric car future.
but yeah, the big question is what combination of education, programs, and market would achieve it with minimum displacement.
btw, there was this charge leveled at the majors:
“The oil majors are profiting from scarcity, Campbell told Resource Investor. They are raking in the profits because oil is at $60 a barrel and, materially, their costs have remained the same.
…Its a windfall for the oil majors, said Campbell. An irony about the current situation is that in any normal market a price rise gets people producing more. In this case there is every incentive to do the opposite, so that the majors can make their reserves last longer. In the oil market we have now, high prices actually seem to dampen output.
http://www.resourceinvestor.com/pebble.asp?relid=11575
i think that’s where we started.
First of all, sorry I’m practially slashdotting your blog, but this is great stuff! I’m learning way more about this lately than I’ve been about what I’m actually in grad school to learn.
With regard to this…
“But then the question is whether there is any plan, government-based or market-based or whatever, that would be able to avoid that.”
…I think I might have a solution, but it involves thinking small. High fuel costs lead to high shipping costs which lead to less reliance on long-distance trade. So one might attempt to anticipate this by being ready to go into business providing goods and services one considers crucial, which currently cannot compete with imports, but which will be able to once long-distance trade becomes expensive.
In other words, perhaps the focus should be on making sure the economy is capable of degrading gracefully rather than fighting a Quixotic battle against it degrading at all.
I’m *not* assuming that I’ll be able to influence any policy makers or well-capitalized investors. I’m limiting my scope to the economy of the immediate area in which I live. If other people find that my ideas have merit, that’s great, but if they don’t, it won’t hurt my efforts.
Note that there are benefits to a gracefully-collapsing economy even if resource depletion doesn’t happen for a century. Natural and manmade disasters share many features with collapse caused by resource depletion, particularly the disruption of long distance trade.
Al, you go ahead and pick numbers for every single one of those factors, including all the ones that are completely independent of the price of oil. If I raise the price of oil, and if that increase in the price of oil causes people to use less each year, then I’ve made the value of A go up.
Sorry Al, I’m always a step behind you. My last comment was a response to your previous post.
(I promise this will be my last post for the night)
The reason I’m so interested in this issue is that I’m about to take on an entire additional skill-set and career path completely orthogonal to my current one. No, not to the point of running off to some bunker in the woods! A far more nuanced plan that will more or less coexist with my current life, I’m hoping.
So if peak oil is a non-issue because A(C) < B(C), I’d love to know that before I sink a large chunk of my life into the project I have in mind.
If there is reason to believe that A(C) just might be > B(C), but my idea of self-sufficiency one community at a time is hopelessly naive and I might as well just resign myself to a certain risk of living the latter portion of my life in a third-world economy, I’d like to know that too.
But I can’t dismiss peak oil just because it would be convenient for me to do so in the short-run. Whenever I’ve practiced wishful thinking, it has come back to bite me. I’m hoping to get from this discussion a thorough, rational foundation for whatever opinion I end up forming. So far it’s been very informative, and I’m grateful to everyone here especially Dr. Hamilton.
It occurs to me that for the last hundred years, the price of oil has been reasonably constant (with a lot of fluctuations). It certainly hasn’t been rising at the rate of interest. So up til now, the increntives have said: pump as fast as you can.
If we’re now “running out of oil” (in some sense) the ground rules of the game are going to change. We can expect a sustained price rise in the future, and the oil well owners will start holding back on production in order to cash in on the higher future prices.
So, I agree that will be pretty powerful incentives for oil companies to start behaving differently. But maybe it’s not so surprising that the Peak Oil crowd thinks that oil companies are going to continue their all out production, just like they have for the last 100 years.
i would like to comment on the topics on trading futures on the NYMEX. specifically, i recall reading about a 2010 $70 call selling for $5.50.
I have recently started trading crude light on the NYMEX. In May’05, i offered to buy a 2009 $65 call at a premium of $10.00. that equates to $10K on one options contract. And guess what! no takers! no one who was holding a 2009 Crude contract was willing to write out a $65 call for $10K!!!
one of the reasons is that traders are afraid, what if i’m right and they’re wrong! no one wants to take the chance because no one can forsee what happens that far out. Hence, Liquidity always decreases the farther out you trade.
Although buying a 2010 $70 call for $5.50 seems like a sure thing to profiteer, it is very difficult to execute. I would suggest trading margins, at closer dates, but not too close. For instance, i ended up buying 2 Dec’05 margins back in May (7-mo away) or buy a margins contract at 2009 – 2011. the farther away you trade, the less volatile the price fluctuates. Thus you are able to absorb short-term oscillations and still be on a long-term bull run.
Billy: Extremely interesting. The market is telling us exactly what I would expect: “I don’t know.” The lack of liquidity is synonymous to “I don’t know”.
Someone above said something that I’ll reiterate. There are solid physically based arguments that (a) oil production will have trouble meeting demand (b) oil production will easily meet demand or (c) oil production plus alternatives will easily meet demand.
Nobody knows. I don’t believe the futures market can tell us much. I don’t think economic arguments tells us more than we already know, or should I say tell us more than generalities (which are still useful by the way).
I’m not personally interested in the futures market nor that interested in trading individual stocks and have therefore put money into the Vanguard Energy Fund, thinking that the combination of increased income, and the investment of some of that income in energy infrastructure and R&D companies (as well as alternatives) is a good investment bet.
Of course, money has been running into these funds (as one would expect) to the point that they’ve closed. Perhaps an indication of smart money? Or overexuberance? Who knows.
also, does anyone want to shed light on how to invest in railroads? there are obvious choices such as buying rail company stocks. but how about more direct mehtods such as going after right-of-ways? any experts out there?
“Of course, money has been running into these funds (as one would expect) to the point that they’ve closed. Perhaps an indication of smart money? Or overexuberance? Who knows.”
Elliott: It’s very easy. The world suffers from excess of money and a scarcity of energy.
“I’m too lazy to calculate the minimal kJ it takes to move a human-sized payload a million miles, but guessing the car would probably be in the infinite-cost category.”
Unfortunately, even an infinite amount of money will not suffice to make such a car. The most efficient transportation device ever invented is the bicycle. A human on a quality bicycle travelling on a very smooth road will beat any bird or other animal regarding the efficiency of moving a certain amount of body mass a given distance. Such a human/bicycle combination can be viewed as 60 Watt machine. Now 1 gallon of oil contains 140,000 BTU’s of energy which is the same as 41032 Watthours. In other words, A 60 Watt machine can work 41032/60 = 684 hours on 1 gallon of oil. Travelling on the bicycle at the average speed of 15mph, the energy contained in 1 gallon of oil would therefore suffice to travel 10,258 miles. In order to travel 500,000 miles, the efficiency of the humam/bicycle combination would have to increase further by a factor of 50 which is impossible. It is therefore safe to conclude that even an infinite amount of money will not succeed in producing a car with a mileage approaching 500,000 mpg. The laws of nature can not be changed. Even with an infinite amount of money. That is precisely the problem with peak oil.
“also, does anyone want to shed light on how to invest in railroads? there are obvious choices such as buying rail company stocks. but how about more direct mehtods such as going after right-of-ways? any experts out there?”
Billy: why would you like to invest into railroads? Historically, nobody got rich by investing into railroads. Most rail road companies do not make any profits – that’s the reason why they all go bankrupt eventually. If they do not make any profits today, they will not make any profits in the future. All the big money in the past was made with oil (Rockefeller, Getty etc). If you want to make money, invest into oil and natural gas. Everything else is gambling. Take a look at the 40 year long chart of Exxon. You will see that during that time, the stock of Exxon increased by a factor of 100. No railroad has ever made such money.
Regarding the equation A
what do we know about Peak (Natural) Gas? have tried to do some research, but the info isn’t as forthcoming. i know it’ll happen after P.O but how will P.O impact NG consumption?
any websites you’d refer?
Robert: regarding the hyper-efficient car. If you review my post, you’ll see that I was only using it to illustrate precisely the point you’re making– that economic incentives to solve a technological problem are only half the story… the other half being how hard the problem actually is to solve. A physically impossible goal is an infinitely hard problem, and therefore no market incentive will be sufficient.
Regarding the theoretical maximum energy available per-capita, I’m afraid your estimates are way off.
The dry surface area is 57.5 million square miles which is 36.8 billion acres, or 6.1 acres per person. Let’s lower this to 4 acres per person to allow for agricultural land use. According to the NREL (http://www.nrel.gov/ncpv/land_faq.html) the theoretical energy yield of these four acres will range, depending on what form you harness the energy in, from 32 MW (biomass) to 809 MW (PV with concentrators). Megawatts. Per person.
This utterly dwarfs the power draw of even the most voracious consumer, including of all the energy needed to produce goods they consume!
Sure, you could argue that not all land is suitable to all uses, the energy yield is not uniform over the Earth’s surface, it’s environmentally imprudent to utilize every square meter of land, etc… and to that I’d say, fine, all this was just to prove a point. A mere 10% of the dry surface will still give us a comfortable 3.2 to 80.9 MW per person. And we haven’t even included the ocean surface into our estimates.
There is plenty of energy for everyone to live like Westerners do. Like *wealthy* Westerners. And to live at that level until the affluence-associated baby-bust levels off the world’s population at a comfortable 10 billion.
The only uncertainty is the path from here to there.
I’d like that path to get traversed peacefully and while all of us here are still alive, rather than by our descendents after generations of needless scarcity and suffering.
I think that just like some people on the political right conflate the market’s ability to respond to any imaginable event with that response automatically being a desirable one from a human perspective, people on the political left have the bias that sustainability necesserily involves a lower standard of living.
I’m not talking about the people in this conversation. On the contrary, I’m glad that we here are so willing to relinquish our respective blinders. This is what makes possible a thought provoking conversation that has the potential of yielding useful conclusions.
Robert, I don’t know about Billy, but the reason railroads sound good to me is that if steam or electric trains replace all trucking, there is a a historically unprecedented growth potential. I can’t think of anything besides rail that could backstop trucking.
i’m going to lay a long quote on you. i’m sorry for that, but i think it illustrates the way these ideas of engineering limits, and incentives, meet in the real world. this is from:
http://www.voanews.com/english/2005-07-25-voa8.cfm
here is the bit. after learning that hydrogen fuel cell cars are “at least 40, 50 years away” we read:
START QUOTE
A 40-to-50 year wait does not appeal to U.S. lawmakers who are searching for a solution to America’s energy challenges today. Representative Bob Inglis suggested President Bush issue a challenge on the development of hydrogen technology similar to President Kennedy’s 1961 call to send a man to the moon by the end of the decade. Researcher George Crabtree of Argonne National Laboratory responded with caution.
“I think there is one difference from the Apollo program. There, President Kennedy could say, ‘Let’s do it’ and he had NASA do it. It was very well coordinated,” he said. “In the case of energy, cars and hydrogen, it has to be the economy [that motivates]. It is a complex system. It is a lot of people interacting and making independent decisions, so you do not get that direction from the top. So, what I think government can do is ‘incentivize’ [provide incentives for] that activity.”
END QUOTE.
Pfft. As an engineer, I’d say the moon race was a target of opportunity. We HAD the technology, we just hadn’t done production on that scale.
And we did NOT produce a Saturn V for every garage.
I second Texas Al’s comment that members of the right (or those of the libertarian mind set) assume market outcomes are desirable–or moral, to use a different perspective. True, collective tinkering with the economy is not desirable unless there is a good reason to do so. Energy is one area in which collective tinkering–R&D, modelling, and leadership–may be necessary.
Regarding his comment that sustainability requires a lower standard of living, Richard Smalley has been considering this issue and his current opinion is that we have a major problem. He believes we required many miraculous technological breakthroughts if humans are going to tap into the solar energy that Texas Al says is so readily available.
As far as trains as an investment, I have considered this but see no way in the immediate term–say five to twenty years–to make any money in this area. The govt could very well get involved and destroy the best of investement plans, particularly in the area of transportation. Consider that even with oil and gas, if shortages were extreme, I can imagine the govt trying to control prices or even nationalizing these resources. I’m not proposing it, but it’s always a risk.
on standards of living and sustainability … i disagree with those who assume a lower-energy lifestyle would be less happy. lower energy cultures already rate as happier than us … we could probably learn something.
regarding your Railroad reply.
i had dreamt of a possibility to buy up some right of ways, hang on until Peak Oil forces companies to use rail as replacement for trucking, then sell the right of ways when there’s motiviation to re-build railroads.
correction for above comment. it’s from me, intended for Robert. not from Robert.
If your state and local government collude to use eminent domain on your rights-of-way, they’ll just take them for some paltry amount instead of paying your fair market value for them.
See Melo vs. New London.
Railroads: There is no question that transportation in the future will be done by rail. To lay down a rail track is much cheaper than construct a highway. The friction caused by steel wheels running on steel tracks is at least one order of magnitude less than the friction between tires and asphalt. So the future of rail traffic is excellent. That does not mean that people investing into this area will make any money. More than 100 years ago, the stock market was populated by all kinds of railroad companies which also issued lots of bonds. All these companies went out of business and investors lost lots of money. Same thing today with car companies. There is essentially only one car company which makes any money and that is Toyota. The rest is either bankrupt or close to bankruptcy. The real value is in fossil fuels which provide the energy to run the trains and the cars. Mother nature made a perfect product – oil. In many ways it can not be improved. Cars and trains are subject to obsolete human designs and more often than not simply do not work as intended. It takes a lot of capital to develop a quality car. In order to recover that capital, you will need to sell a large number of cars into a market which is already saturated.
I still feel that investing into oil and gas is much easier and much more rewarding. Oil is called a commodity – a word which intentionally suppresses the truth, namely that oil is one of the most valuable substandes around.
As an engineer, I love to paraphrase the infamous Woody Allen quip about casual sex, Sure, economics is a social science, but as social sciences go, it’s one of the best.
The problem about our transition at peak oil has bewildered me for some time and so I’ve been giving it a lot of thought. I’ve already put a bit of thought into energy and made a career decision in 1971 to become a nuclear engineer, which, after a recent MBA, I still practice. I’m currently designing and building a new nuclear plant in Taiwan and am preparing for the coming boom in new plant construction.
Frankly, Stuart Staniford’s contributions have it nailed. The alternatives all have less EROEI. When scarcity of oil hits, we’ll have to make investments in those lower EROEI facilities which will lower our global standard of living and reduce economic growth worldwide. We’re wealthier today, after a 100 years of oil, then we were after a hundred years of coal, at least partially due to a better EROEI for oil.
Even nuclear power plants have a lower EROEI than Saudi oil so a post-peak oil, nuclear age will be less wealthy and will grow slower (or shrink more) than during the Age of Oil.
Some corollaries include that China and India will soon hit a wall in their economic development. Without oil, the productivity gains to their economies from automobiles and trucks will smother their growth. World food production will decline (or prices increase) with less hydrocarbon energy subsidies.
As an engineer, I can assess the second string energy options. First, natural gas. Thanks to liquefied natural gas technology, we’ll see a global market in LNG and when oil production peaks, all countries will be rushing to exploit it. However, resource estimates would give it a short (10 to maybe 20 years) hay day following the oil peak. The North American resource has probably already peaked. A play here might be Cheniere with LNG terminals on the Gulf Coast.
Non-conventional oil will also see a growth spurt with tar sands and heavy oil becoming more economic. Already, Venezuelan heavy oil needs 120 bbls to make 100 bbls of commercial syncrude and that’s probably the best EROEI we’ll see, assuming no natural gas assistance. Canada’s tar sands are only in production today because of local stranded natural gas. Expect to see a better use for that gas in heating Toronto. I don’t have a good estimate of the world resource base for these but I expect it to be large but slow and expensive to develop with a low net energy. However, they do place a cap on transportation fuels.
Coal prices have already shot up as well as producer stocks like Peabody. Dirty, dirty, dirty. (I’ve hated coal since I was a small child; sorry for an emotional input.) Again, a large capital investment in infrastructure will be required for increased net energy. Already, while railroads are close to max’ed on transport for electric production, there is room for growth. For transportation fuels, to make a substitute for oil will be daunting and expensive and dirty. Of course, the global climate change impacts make a coal ramp up a risky move.
The “renewables” are, frankly, a bad joke, sold to the public as a fantasy escape from real, hard choices. Debase yourself, fellow citizens, please. Most are negative EROEI or too piddling to make a difference.
That leaves nuclear, or more precisely, uranium. A nuclear power plant has a two year energy payback; not as good as a horizontal well in Ghawar but not too shabby either. Resources are very good. Just surplus Russian warheads today supply 10% of the US electricity and we haven’t even started to burn weapon-grade plutonium stocks (100 tonnes makes $55 billion in wholesale electricity). Australia can rightly be considered the Saudi Arabia of Uranium – they refuse to even prospect for ore in fear of dropping the price.
Uranium, by the way, is doing fine. Yellowcake prices purportedly went from $7 a kilogram to $21 over the last year. Of course, a big new mine or two could shave that price a lot yet China and India (and soon the US) are all expecting new construction. If you want a long play, look at Broken Hill Proprietary or Rio Tinto. For owners/operators, Exelon is the biggest and one of the best.
We will also see nuclear power gain market share outside of traditional electricity production. I foresee future tar sands and heavy oil developments to have on-site nuclear plants supplying process heat for extraction, refining, and upgrading of hydrocarbons. Hydrogen production from nuclear plants is 20+ years away. Consumer hydrogen fuel might not be in the cards but process plants can turn carbon from coal into synthetic diesel fuels using the nuke’s output. It won’t displace transportation greenhouse gas contributions but those are maybe 25% of the total GHG releases anyway and nuclear hydrocarbons are much better than coal-based hydrocarbons. Even using pure hydrogen, costs optimistically could equal today’s fuel prices if one stopped taxing motor fuels.
A get-rich-quick guy here in Silicon Valley ran for state assembly in my district using his new money. He sent out a glossy brochure on his positions with a whole chapter on energy. In it, he promised to push for “energy breakthroughs.” I called and asked him just which ones he had in mind – I’m in the business and there is no physics out there pointing to an imminent new energy source – the best shot I can see is cold fusion and that’s by no means in the bag.
As to one commenter’s quoting 1981 to 1984 decline in oil with a rising GDP, those years saw not only closing of half our aluminum and other electrochemical industries but a pulse of new nuclear power plants coming on line and displacing oil fueled electric power plants.
The other prediction – INFLATION, big time. As the remaining oil producers reap increasing profits (sorry, “rents”), our government will screw them back by giving them ever more worthless dollars. It happened in the ’70’s and it will happen again. It will also be the preferred way that the pain gets distributed across the economy.
In summary, I went long 34 years ago on nuclear power. Sure, oil’s going to hell in a handbag but I recently bought a 5.7 liter gas hog of a muscle car because, like the pop song said, “I studied nuclear science: my future’s so bright, I gotta wear shades.”
Gloating? Who me?
“The dry surface area is 57.5 million square miles which is 36.8 billion acres, or 6.1 acres per person.”
Texas Al: The dry surface area might be 57.5 million square miles, however, not all of that area is useable for humans. Nature needs space for living too. Forrests, lakes, rivers, mountains can not be covered with PV panels. Deserts are also highly unuseable for PV panels simply because the frequent dust storms would bury the panels quickly in sand. (I have PV panels on my roof. The heavy local pollution makes it necessary to clean the panels once a month from excessive amounts of soot accumulating on the roof). There are other issues. We may not have enough metals in order to cover such a huge area with PV panels. The recent awakening Chinese demand for metals has caused shortages worldwide, especially in steel and copper. And the Chinese did not try to cover China with PV panels, they only wish to make a few cars and a few refridgerators for their people.
Next, the problem with electricity is that presently, we do not have any means to store the excess electricity efficiently. For that reason our transportation sector is running on liquid fuels. There is no easy way to convert electricity into liquid fuels.
I consider myself an optimist and I am very much in favor of generating all the electricity via PV elements. However, I find your estimate of generating 800 MWH (please notice Magawatts are not a measure of energy – you need magawatthours (MWH)) per human on earth via PV elements many orders of magnitude too optimistic. Even if that would be possible, I think it would be undesirable for reasons of enviroremental degradation. Excessive energy consumption always produces ecessive pollution. That pollution could be fought with still more energy consumption. But this race can not be won. That is one of the lessons taught by thermodynamics.
Robert – my original plan was to make as much money as possible on oil. then once oil hits $200, roll all that money into right of ways. i’m glad i found out the easy way to not do it.
Joseph – about uranium. is there a public trading platform that trades uranium commodities? i haven’t found any.
Joseph Somsel: I liked your posting, very clear statement. Please do us all a favor and explain how the problem with radioactive waste is going to be handled in the nuclear future you advocate and predict.
“The “renewables” are, frankly, a bad joke, sold to the public as a fantasy escape from real, hard choices. Debase yourself, fellow citizens, please. Most are negative EROEI or too piddling to make a difference.”
This is a statement from somebody working in the nuclear industry. Talk to the people building solar panels and you will hear the opposite statement. “Most are negative EROEI” is simply not true. Wind has an energy payback time of 4 years, solar panels less than 10 years. These figures have to be adjusted for the fact that wind and solar create no pollution, while the proponents of nuclear energy always fail to explain what to do with the radioactive ash produced by nuclear power reactors. The cost of taking care of that “dirty, dirty, dirty” stuff could be very very substantial one day. Promoting nuclear power without addressing the long term cost of this problem is in my opinion irresponsible.
For the record: I am not in the renewable energy business. I am only a student of the energy crisis.
I’ll have a forthcoming article in EnergyPulse.net entitled “How Harry Reid can Save Us $80 Billion” that will lay out how reprocessing of spent nuclear fuel will recover huge amounts of uranium and plutonium to power our nuclear power plants.
It works like this: rather than bury the spent fuel whole, we cut it up and dissolve it in nitric acid. The uranium and plutonium is extracted and returned to the fuel cycle as mixed oxide fuel (MOX) or as enrichment feedstock.
The wastes are separated into two streams. One is the fission fragments, the lighter atoms that are the result of splitting the fissile uranium. These have a relatively short half life and are easy to store while they decay to stable atoms.
The other stream contains the real bad actors – the transuranics – curium, americium, etc, formed when a neutron hits a uranium atom but doesn’t split. These get feed into special “actinide burners” – one or two specially designed reactors optimized for fissioning the transuranics into the first waste stream – while making net electricity. The transuranics are what drive the Yucca Mountain design. Without them, the design requirements for duration of isolation decrease by an order of magnitude or more. The decay heat rates for aged waste also decrease greatly.
The recycled uranium and plutonium have immense energy value – 10 times the Strategic Petroleum Reserve equivalent in net electrical output. With the big increase in yellowcake prices, the MOX is that much more valuable (Thanks, China!)
The title refers to how, by supporting reprocessing, the senior senator from Nevada can claim to have beat Yucca Mountain and save the US taxpayer a bunch of money to boot.
I’ve done a particular analysis of a local solar installation here in the SF Bay Area that shows that the real cost of a mature solar plant is 10X that of nuclear. See my articles here:
http://www.energypulse.net/centers/author.cfm?at_id=183
It is worthy of note that “renewables” are intermittent sources of energy – discount the utility of intermittent energy and almost all are of negative value or of piddling output. Do you claim ethanol will really save us imported petroleum? Do you work for ADM?
As to uranium markets, there was an organization that tried to create a spot and future market in yellowcake but it was raided by the Feds for dealing in Russian uranium and closed down about 15 (?) years ago – some former colleagues of mine worked there. Uranium prices today are set on a bilateral contractual basis. Check out these guys for some useful market studies and projections:
http://www.converdyn.com/press_room/presentations.html
I will also note that my decision to become a nuclear engineer was catalyzed by cleaning up an oil spill on my hometown beaches in Florida when I was 20. I’ve taken a lot of grief for that choice over the years while working in a career that has produced more clean energy per man-year than any I can think of. I guess no good deed goes unpunished. If I could have found an alternate career that has done as much good for society and the environment while still feeding and clothing my family, I would have jumped a long time ago. Call me an idealist with mouths to feed.
May I suggest that we humor Dr. Hamilton and discuss the inflation angle more. I know its coming but would love to hear more about how it will work on us.
has anyone heard of the energy investor Phil Flynn of Alaron which is based in Chicago?
apparently, he predicted oil prices to hit $30/barrel in the year 2000, rise of retail gas prices in 2001 and then most recently, that global crude oil prices would reach close to $40/barrel in 2004.
Regarding Joseph Somsel’s comments…
Joe, you mentioned cold fusion. I know that the Pons-Fleischmann cell was debunked soon after they described it in 1988, but I also know that last year, the US Dept of Energy has authorized a complete review of the extimated 3000 papers further exploring the concept of cold fusion that the PF cell suggested. I, too, have thought that such a device will be our only hope to avoid a continued energy decline in the future.
Do you (as a nuclear insider) think it has any chance?
The original “debunking” was nothing of the kind. I’d call it a deliberate official wet blanket. The physicists on the panel concluded that since 1) there was no evidence of the negative side effects predicted by current theory and 2) the effects were not reliablity repeatable, even by the original team, therefore it ain’t fusion. In the words of the immortal Homer Simpson “Duh?”
That’s a fair conclusion. Since current theory has no place for it, more experiment is called for yet, it is too unreplicable. It fits in neither science, nor art. If one could make it work reliably, even it one didn’t understand it, one could proceed empirically. In other words, the engineers could fiddle with it and maybe get something out of it. Until the lab boys can give us a set of parameters for operation, it’s useless. The physics guys were a bit embarressed, I bet. The Boss asks, “WTF?” and how do you answer?
Another worry is, maybe you do have something here, something REALLY BIG. If the first cell could get lucky and melt through the container and the table and the floor, what if somebody got SUPER lucky with cell #999? Small chance but….
The answer is go slow, keep it small, think it over, talk it down, don’t get excited. The Universe is a very strange place – just look at the physics of vacuum.
On a practical basis for action in the real world, it should influence no decision at this time other than more funding for basic research.
Robert: as you’ll see from the remainder of my post, I’m just using the 57.5 million square mile figure as a theoretical hard limit on renewable energy. I go on to say that even 10% of that is probably sufficient.
“Next, the problem with electricity is that presently, we do not have any means to store the excess electricity efficiently. For that reason our transportation sector is running on liquid fuels. There is no easy way to convert electricity into liquid fuels.”
I agree completely. Electricity could be stored by hydrolyzing water and storing the hydrogen, or solar energy can be captured as plants with a high oil content and processed to biodiesel. But neither is going to be anything as cheap as current gas prices.
“please notice Magawatts are not a measure of energy – you need magawatthours (MWH)”
Megawatts are indeed a measure of energy. A watt is 1 Joule/second. 1 megawatt is about the continuous power draw of 750 American households. 24MwH is the amount of energy used by these 750 households per day. So the final range of 3.2 – 80.9 Mw per capita I give would translate into 76.8 to 1941.6 MwH/day.
The reason I’m giving it as a range is because I’m recognizing that not every place is equally suited to every form of renewable generation, and I’m including wind among these.
Again, I’m not claiming that it’s either feasible or desirable to build this much energy generating capacity. The point I’m making, though, is that we are in bottleneck to growth scenario rather than a limits to growth one.
Re:
“then private investors already have incentive to invest in railroads”
No, they don’t. Investing in railroads is a foolish gamble right now, because getting any railroad built or expanded relies on government help, and our government obviously doesn’t believe in the rails.
By the time the Tom DeLays of the world get the rail religion (assuming you believe that’s our hope), it will already be too late – building railroads will be too expensive when oil is that expensive, in other words. This is not a problem the market can solve.
While NEW rail routes are unlikely, there is room for increased capital investment in existing routes to increase capacity and lower energy consumption.
Double tracking is still an option for reducing bottlenecks thereby increasing capacity and electricification can lower petroleum consumption and greenhouse gas and other pollutant emissions.
One would expect both to happen under current owenership structures.
Here in California, the high speed rail link between San Francisco and Los Angeles (and San Diego?) is being blocked by environmentalists! The route that “connects the dots”, ie serves San Jose and Silicon Valley, would run through a rather dippy state park. To prevent that, they insist that another, northern route be used which would bypass the population centers in the South Bay. That’s right, build it so that most people won’t use it!
While I like the park, a railroad through it would not greatly diminish my enjoyment of it. BTW, the new rails would be owned by the state as we’ve already passed bond authorization for it.
The environmentalists blocked a similar proposal in the North Bay to link the ferry system in Marin County with points north (Santa Rosa, in Sonoma County) using a mass transit rail system.
“Think globally, act locally” – my puttie!
I’m not sure if anyone else has made this point, but the failure of any oil company but CNOOC to outbid Chevron for Unocal is another statement about oil company views of the value of reserves, and some of the press coverage has focussed on oil company reluctance to buy reserves at valuations even close to today’s price.
Remember that corporate acquisitions are generally very popular with CEOs and that oil CEOs generally have lots of cash and solid share prices with which to pay. Buying Unocal would not force the buyer to make a specific near-term dated bet on prices, and so avoids some of the criticisms made in this discussion.
“While NEW rail routes are unlikely, there is room for increased capital investment in existing routes to increase capacity and lower energy consumption.”
Not if the Federal Government (and state governments) continue to subsidize their competition (freight trucking).
In fact, in my darker days, I think the most likely scenario at $3/gallon is the elimination of the federal gas tax – resulting, of course, in an even greater subsidy to freight trucking and especially to the suburban motorist.
First of all i’m new to the debate and i’d like to say it is a good idea to open it. It is a great topic that deserves, i think, more than blog.
The amount of informations looks now too big and perhaps need to be sum up.
I can’t remember exactly what the exact problem was so i’ll give my opinion on self-made questions (tell me if i put inexact or wrong questions)
0. Is PO a serious problem ?
I think that question wasn’t asked. May be everyone assume it is a serious problem. I’d like to add that it is so serious that i believe that a wrong understanding and answer to PO may lead to an unprecedented economic collapse (just to mention economics). Correct me if i’m wrong.
PO is an *unavoidable* physical phenomenon that will occur *only once* if we agree that oil is a fossil fuel.
1. Can the market in time predict if PO is close by showing a sharp enough increase in oil prices ?
Unfortunatly oil is a strategic ressource and data “correctness” can’t be proven by people who need them to predict PO. Data correctness can only be proven by auditing companies and countries that extract oil. For instance Matthew Simmons’ theory that Saudi Arabia fields may have passed their sustainable peak can’t be proven false because it can’t be checked with reality. Therefore there is more doubt about PO timing now than if we had accurate data. This implies that authorities (Saudis, OPEC, CERA, USGS) that claim that PO is a far remote issue can’t also be proven false.
According to Simmons very short time is needed to make an audit and i believe that modeling oil depletion is now a well known and easy task for experts with correct data.
As the result, the market can’t now decide wether PO is remote or close because it is a bet against the authorities. Market can predict PO timing in a symmetrical information system. It isn’t the case for strategic ressource linked sectors where “authorities” are key players. Thus the market will only wake up when it starts to disbelieve the authority (i don’t know how) or when smoking gun events or data get to it.
I do believe that market can predict a lot of things though nobody knows the rating of its good predictions. Concerning PO timing, *there won’t be a second chance*.
Also note that with strategic ressources (that may actually soon decline) making money might not be a priority for key players. After all we are living in a world of fiat currencies and paper money.
2. Is a strong raise ($180) in oil prices enough to deal with PO ?
I don’t know. This is an unprecedented event if we assume there is no immediate (2-3 years) substitute for oil. Higher prices will surely kill much demand but also trigger dire immediate side effects. For example, cheap oil/gas mean dozens of cheap slaves~machines, higher prices should result in fewer slaves.
To me it’s a problem that economists should study in details.
In fact, i should ask the question in this way :
3. How many years do we have to find a substitute for oil with high prices ($180) before world economy to collapse ?
4. Last question : how much a barrel to know we are in danger zone ?
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Re:
“‘then private investors already have incentive to invest in railroads’
“No, they don’t. Investing in railroads is a foolish gamble right now, because getting any railroad built or expanded relies on government help, and our government obviously doesn’t believe in the rails.”
http://finance.google.com/finance?q=burlington+northern+santa+fe
BNSF up 50% since this comment was made.