Don Boudreaux and Mark Perry are among those who regard John Tierney’s claims of energy cornucopia to be persuasive.
Here are Tierney’s strongest arguments:
Giant new oil fields have been discovered off the coasts of Africa and Brazil. The new oil sands projects in Canada now supply more oil to the United States than Saudi Arabia does. Oil production in the United States increased last year, and the Department of Energy projects further increases over the next two decades.
Let me discuss each of these observations in turn.
Africa and Brazil. It is true that these areas are increasing production. Comparing the 12 months ended August 2010 with the 12 months ended August 2006, oil production from Africa was up a half-million barrels a day, and Brazil was up almost 600,000 barrels a day. On the other hand, over the same period, production from Norway fell by 642,000 b/d and Mexico was down 782,000 b/d, as those countries moved farther along the declining production rates that eventually characterize every mature field. Worldwide from all fields, production was up 1.2 mb/d over these 4 years. However, consumption from China alone increased 1.5 mb/d between 2005 and 2009, meaning that despite the increased production from Brazil, Africa, and anywhere else in the world, everyone outside of China had to make do with less.
Canadian oil sands. Of course the U.S. preferentially imports oil from those countries that are closest to us geographically. For example, U.S. oil imports from Mexico and Venezuela exceed those from all countries in the Persian Gulf (including Saudi Arabia) combined. The appropriate measure is not exports to the U.S. but rather exports to the world as a whole. On a global basis Canada exported 1.5 million barrels of oil per day in 2009, less than 1/4 the 6.4 mb/d from Saudi Arabia. The Canadian Association of Petroleum Producers expects that with aggressive growth their oil sands production could increase an additional 1.6 mb/d by 2025. And a proposed pipeline
to deliver that oil to U.S. markets may not get approved.
U.S. oil production. Here’s a graph of U.S. oil production since 1920, in which the recent increase that Tierney mentions is clearly evident, as a modest blip back up in what has been a profound decline going back to 1971.
|
The following graph takes a closer look at the last decade for those statistics, breaking it down by offshore versus onshore production. There were sharp drops in production from Hurricane Katrina in 2005 (which caused quite long-lasting damage) and Hurricane Ike in 2008. Those two events left average offshore production over 2005-2008 substantially lower than it had been earlier in the decade, and this accounts for the acceleration of the downward trend in overall U.S. production that we saw over these years. The gains in 2009 and 2010 mostly come from a return of offshore production to its earlier levels. Once again, the political and regularity reaction to the BP oil spill will be important in determining what happens from here. As for the EIA’s projection of further increases in U.S. production after 2010, the magnitude of these is modest, supposedly getting us back to 1998 levels by 2035, which would still be 33% below the peak U.S. production levels seen in 1972, very little of which came from the challenging offshore and arctic environments we are increasingly going to be counting on. And need I mention that those EIA projections are controversial?
|
Tierney goes on to claim that “the really good news is the discovery of vast quantities of natural gas,” and here I agree. The discovery of abundant new sources of natural gas is a huge story. Figuring out how to use this resource to replace our reliance on oil ought to be one of our highest priorities.
But the inference that we have nothing to worry about in terms of global oil supplies is not the conclusion that I would draw from the facts that Tierney discusses.
Professor,
I actually believe that you miss the essence of the article. It is not that crude oil will be with us forever but that energy sources will always give us more and better sources of energy.
If you trace energy production back through the ages you will never find a period that produced as much energy as we do now. Have the natural resources change over the centuries? Wasn’t it true that not that long ago oil was considered a nuisance and whale oil was a primary energy source. When whale oil got too expensive crude oil was refined and kerosene became the primary energy source with the remainder from refineries considered waste that was discarded. But such men as John Rockefeller began to use the waste and soon the synergy of gasoline and automobiles changed the whole chacter of energy production.
The point of that little history lesson is to point out that energy sources are always improving and changing. Locking in too tightly to oil is a mistake because we do not know what the next innovation will be. And government and environmental efforts to conserve the oil industry are misguided and causing misery for other for little reason.
Not long ago businessmen would have laughed at the idea of Africa and Brazil as major oil producers, offshore drilling was prohibitively dangerous, and the Canadian sand oil was consider to be unprofitable to exploit.
The “energy cornucopia” is not perpetual oil reserves and production. It is the belief in the power of human imagination and industry to continue the revolution in energy that has existed since time began.
You mention that oil production peaked in 1972. It should be obvious that we power more things by electricity today than ever in the history of the world and yet oil production is down. It should not take a leap of faith to understand that from energy saving devices to more efficient storage capacity our world is improving in enegry production every year with hardly a consideration of oil. It is simply the cheapest and most efficient source of energy to give us what we need.
From an energy perspective (not just oil), the limiting factor is technology. The amount of energy available to man is essentially infinite.
In the long term, there is nothing to worry about. In the short to medium term, there is some impact to the global economy. These will be net positive (higher energy efficiency and lower environmental impact).
We should spend more time rethinking how the world should work if energy is essentially infinite and free.
Natural gas use could be significantly increased with nothing beyond existing technology.
Fleet vehicles are a no-brainer: buses, postal vans, etc. But there are tractor trailers and locomotives using LNG.
Here in the Northeast, you still have a lot of people who live on the natural gas grid using far more costly oil to heat.
Say oil production has peaked, obviously we aren’t going to continue using it in the same way until it’s all used up in 20 (or whatever) years. With each fall in reserves, the price of oil will probably rise some, more substitution will occur, etc.
But it could also be that substitution renders oil less valuable. What’s a gallon of whale oil sell for now?
Seems like Tierney missed an opportunity. He should have asked why optimism isn’t worth the coverage. The problem as shown here is that it doesn’t inform. Will oil be a problem in the distant future? No, because it won’t be around as we know it now. A dull answer to a duller question. Will there be other problems deemed as great or greater in the distant future? Undoubtedly. Anticipating those would be noteworthy. All the interesting questions are how we get from here to there. How fast will we move away from oil? Will it make sense to manufacture it as a form of energy storage? What will be the sources of the future? How expensive with they be in real terms? What sort of lifestyle changes might they require? Pollyannish optimism may prove true and doomsday pessimism false, but fundamentally serves no purpose when the questions are what comes next and what do we do next.
Wow–some of you commenters are a hopeful bunch. The oil decline that has already begun (oil exports peaked in 2005) and has already helped damage our economy (see Professor Hamilton’s work) is potentially a major, major problem. Substitution may not work as easily: every other shift (coal/horses to oil, for instance, or whale oil to petroleum) was a shift to a much cheaper and more efficient energy source. Now there is no such source in the on-deck circle. Tierney is a willful idiot, and Professor Hamilton has done been, if anything, too gentle in taking down Tierney’s arguments. When the pollyannas are reduced to gloating about increased US production, you know they are just about out of gas…
There is an entity called Syntroleum listed on the NASDAQ (Symbol:SYNM) That has figured out a way to convert natural gas into the liquid fuels we know and love. There jet fuel meets miltary spec.
Last I heard, this technology put on the back burner for a biofuels plant.
Tierney has been trying to convince people that his judgment was better than Simmons’ simply because Simmons could not see or understand that the price increases in the mid 2000s would trigger an economic contraction that would cause demand to collapse. For anyone paying attention it was clear that Simmons’ logic has been validated. While prices fell, the decline had nothing to do with the supply response that Tierney was predicting. In fact, the scenario is playing out as Simmons was suggesting that it would. We now rely on some very old oil fields that are in permanent decline. While it is possible to use various methods to get some of the fields to produce at a higher rate any such efforts would cause a major reduction in the ultimate recovery from those fields.
What Tierney and other optimists are missing is the incentive structure at the back end of Hubbert’s curve. Once producers know that global production has peaked it makes sense for them to cut back on production from fields that have been pushed too hard. By deferring capital spending on enhanced recovery efforts to a later time producers will see their profits rise even as production falls and will see a greater increase in their market cap as their reserves are assigned a higher value by the market.
From what I can see, the Peak Oil story is still intact. Once it becomes evident to most people we will have to make a transition that makes more use of nuclear power and leads to more projects that convert natural gas and coal to liquid fuel. While the market will ensure that the transition is made it will be a long and painful one, particularly when foolish politicians and rent seekers begin to meddle and get in the way.
Further natural gas discoveries are certainly good news. While oil is rarely used to generate electricity, its refined products are still the transportation fuel of choice, and for good reason. There is currently no substitute or imminent substitute for its range/energy density, ease of storage, stability, and versatility.
Natural gas will undoubtedly ease the transition away from oil, and liquefied natural gas (LNG) is a potential future option for some transportation sectors given its approaching energy density to refined oil products such as diesel. Compressed natural gas (CNG) is only half as energy dense as LNG. Large and frequent use vehicles such as trains and buses can carry larger tanks to compensate for the lost range and the boiling off of LNG when they become cost competitive with rising gasoline and diesel prices. However, at this time, LNG is primarily used for transporting natural gas to markets themselves where it is re-gasified, not used directly as a fuel.
Fortunately, in the United States, much of a future natural gas infrastructure is already in place as natural gas is nearly as readily available as electricity. CNG and LNG stations will have to become as readily available as gasoline or diesel fueling stations and the vehicles themselves will have to be mass produced to a level to bring down costs further. LNG and CNG fueling stations will be able to liquefy or compress natural gas at the source, so refueling trucks may become an infrequent site. Natural Gas compression units already exist for home application.
The transition will not be a step towards a cheaper or more versatile energy source as this has historically been the case in transportation fuels. Natural gas will also be far from ideal for airplane travel. And with only a small portion of natural gas currently used for the transportation sector, it is unclear how large natural gas reserves will prove at a feasible price and for how many years this will be the case. But life should go on, albeit at least a bit more expensively.
Sadly the fact of “peak oil” and the ramifications are being totally misrepresented. What we will have is a crisis of unprecedented proportions over an issue that mankind, as a whole, has never faced … the absolute limit and steep decline of production of a resource that has no ready substitute and that is the linchpin of the operation of civilization itself.
Before, trying to make an educated bet on the infinite source of energy supply,it may be worth reading the Annual energy resources forecast.
Noticeable, shale gaz carries high expectations when other sources of energy are assumed to remain around the same level.
http://www.eia.gov/forecasts/aeo/pdf/0383er(2011).pdf (comparison of projections 2008 2035)
Any correlation between GDP and the oil price?
http://www.highbeam.com/doc/1G1-193035973.html
“The mis-representation of the linear specification has led to different attempts to re-define the measure of the oil-price changes. These measures are based on non-linear transformations of the oil prices. They try to re-establish the significance of the correlation between real GDP growth and these new measures. In fact, they are, actually, attempts to restore the Granger-causality between oil prices and GDP growth, which disappears when data from 1985 onwards (periods of oil-price declines) are included”
Any correlation between money stock M2 and the oil price?
Note that in 1985 oil prices decline:
Gross Domestic Product, 1 Decimal (GDP)
http://research.stlouisfed.org/fred2/series/GDP
Spot Oil Price: West Texas Intermediate (OILPRICE)
http://research.stlouisfed.org/fred2/series/OILPRICE
M2 Money Stock (M2)
http://research.stlouisfed.org/fred2/series/M2
Not so simple:
” Likewise, Hooker (1999) argues that Lee-Ni-Ratti’s (1995) and Hamilton’s (1996) transformations do not, in fact, Granger-cause GDP growth in post1980 data, but that their apparent success is due to an improved fit in the 1950s data. (4) Finally, Hamilton (2003) reports evidence of a non-linear representation and states that the functional form that relates GDP growth to oil price changes looks very much like what has been suggested in earlier parametric studies. He specifically analyzes the three non-linear transformations of oil prices proposed in the literature (Mork, 1989, Lee et al., 1995, and Hamilton, 1996), and he points out that, on the basis of the non-linearity test (Hamilton, 2001), the Lee-Ni-Ratti’s formulation does the best job of summarizing the non-linearity.”
Missing in the prices of energy output is the cost of domestic customers subsidies, by ways of carrying increased domestic tariffs in order to support the international forays of their domestic production companies.The reward may go to the shareholders at the expenses of the consumers.
I’ve been reading so many stories talking about oil’s resurgence that I’m glad you posted this article as a reality check. Oil is not an infinite resource. Sure, production is up, but does that this will be an ongoing trend? Even if it is a trend, do you think it will outpace demand? Those are the real questions I want answers to.
Hamilton,
You don’t seem to understand the basis of the “inevitable” decline of mature fields. Its not about running out of oil. Its about cost. At any real-dollar price for oil, every field follows the pattern you show, but if the real-price of oil increases those graphs widen, and the decline is delayed. The reason is that the decline is due to the there being alternatives to any particular well.
Why is this? A mature field is usually produced by means of water injection. The oil that emerges is a water/oil mix. In the Ghawar field, the oil fraction is now only a few percent. Very expensive skimming machines recover the oil, and then the water fraction is injected back into the well. The Saudi oil ministry has one of the largest desalination complexes in the world to supply the fresh water used to produce oil in Ghawar.
Oil reserves are estimated on the basis of technology and cost. The amount of recoverable oil depends on the market price, and the ‘oil in place’–the term for the actual amount of oil in the formation is usually much bigger about 2x to 10x the amount of what is referred to as reserves.
You can produce a mature field longer and longer but at greater and greater cost–larger and larger water volumes to pump and skim. As the price of oil goes up, we can go after these deposits too by reactivating oil fields.
You point out that discoveries are only balancing decline plus a little. Again, you fail to consider the time value of capital. Oil companies make demand forecasts, and they invest to bring on new production at the profit maximizing rate consistent with those forecasts.
During the last round of price increases, the underlying dynamic of the market were a handful of large unexpected supply disruptions: for instance in Saudi Arabia production dropped 1mbpp. This wasn’t the only incident. When a sudden production shortfall cuts out 2-3mbpp of production world-wide, the industry cannot replace that production immediately at the old, low cost. The price of oil started to soar in 2006-2007 because those shortfalls were met by inducing moth-balled fields to return to production by meeting their reservation price.
Get the facts. Don’t spread rumors and incite panic.
The argument that a switch to a less oil-intensive economy must be a very painful one because it amounts to an unprecedented shift to a less efficient set of technologies seems to me to depend on an arbitrary restriction of what exactly is being considered. As a general proposition, electrification has already produced many efficiencies, and similarly so has densification of human development patterns, and similarly so has improved telecommunications, and on and on. If anything, oil becoming more expensive and scarce will simply accelerate these other advances. Accordingly, even if in the middle-term future people are paying a bit more to move passengers and goods per mile due to the relative expense and scarcity of oil (and note that per mile is not per trip, or, more generally, is not per unit of transportation value), if that world is also even more electrified, more dense, more networked, and so on, then it could easily be a much more efficient world overall than the world we know today.
Now maybe it is true that the middle-term future world would be even MORE efficient if oil remained as relatively cheap and plentiful. But there is a big difference between claiming that our future world will be less efficient than hypothetical future world, and claiming that our future world will be less efficient than our present world. The former claim isn’t something to be overly concerned about per se–it is undoubtedly true in virtually infinite variations. The latter would potentially be a big problem, but the case for the latter claim is, I would suggest, quite weak.
What everyone seems to miss or overlook about the new oil finds off the coasts of Africa and Brazil is the ‘Iran Effect’. In 1979 Iran produced more oil and consumed less than it does today. Today, Iran produces less and consumes more, so the growth of domestic consumption has turned Iran into a net. importer of petroleum products.
The domestic consumption of oil in those countries with new oil finds will rise as the wealth generated by increased exports and employment takes hold to build larger middle classes, just as the industrialization of China has created mushrooming demand there.
I am entirely in agreement with you, Jim.
There’s an interesting economic point at issue here. The Cornucopians argue that there is a much bigger resource available at just a slightly higher price. Thus, a slightly higher price encourages technological innovation and increased capital intensity, and this–combined with substitution and efficiency gains–will resolve the imbalance.
The Peak Oilers take a different view, that the model is fishing in a pond with a finite number of fish. Thus, marginal costs decrease at first, but as half the fish are fished out, capital must be applied at an ever faster rate to maintain production (the fish catch), which at a certain point can no longer be maintained, and production declines. Technology and geology are in a race which technology is doomed to lose, eventually. Thus, marginal costs are the mirror image of the normal curve of production (forming an hour glass shape together), call it Hubbert’s Cost Curve.
And, of course, all of this is over-shadowed by China. Many of these debates about peak oil are really about enormous Chinese demand and the ability of the oil system to respond. If we had no China, John Tierney’s case would be much stronger, and indeed, we wouldn’t much care about peak oil today: efficiency and substitution would be adequate to offset production declines, at least for some time.
In any event, I personally find the analytics of peak oil quite interesting, and I’d love to see some more serious thought applied to the topic. But does anyone in economics do this sort of thing? There’s Dargay, Gately, and Hamilton. Is there a fourth researcher in the field?
Here’s some light reading for aficionados and the uninformed alike.
Peak Oil — Where Do We Stand?
http://imperialeconomics.blogspot.com/2010/10/chinas-gdp-per-capita-global-gdp-and.html
http://imperialeconomics.blogspot.com/2010/10/us-oil-consumption-per-capita-prelude.html
http://imperialeconomics.blogspot.com/2010/12/us-real-private-gdp-real-private-final_12.html
Steven, e-CON-omists still see the ecological system as a sub-set of “the economy” rather than the obvious converse. Thus, how could one expect the overwhelming majority of them to examine and understand the thermodynamics of the natural system upon which “the economy” depends?
The US economy has been deindustrialized/decapitalized, financialized, and feminized since US domestic oil production peaked in 1970 and the secondary peak in 1985. US oil production per capita has decline at ~3.2%/yr. since 1985, falling ~55% compounded. At the post-1985 trend rate of decline, US per capita oil production will have fallen 66% and 75% by 2020 and 2030.
On the basis of logarithmic collapse profile trajectories, the US is no fewer than 10-11 years from the point-of-no-return threshold of collapse of oil-based society; but China growing oil consumption and imports at 8% at global peak oil production (zero-sum oil supply situation for the West), thanks to US and Japanese firms’ massive FDI, risks pulling forward the tipping-point date for US and “global” collapse of the Anglo-American imperial trade regime and the oil-based economic system.
Note from one of the links above that US-China oil consumption and imports are on a disastrous collision course in the next 5-6 to 10-11 years, a period during which China’s oil consumption will converge with US oil imports by mid-decade, and then China will reach oil consumption and import parity with the US by the early 2020s, at which point the US and China will together consume two-thirds or more of global oil production a the implied global production peak today, leaving the rest of the world to cut their consumption in half or more from today’s level.
The Pentagon and Energy Dept. have concluded in successive studies commissioned since the early to mid-1970s, late 1980s, mid-1990s, and early 2000s that to shift to an alternative energy infrastructure, it would require 50% and then 70-75% of existing US liquid fossil consumption and 20-30 years to complete the transition, and we would still somehow need to sustain the existing fossil fuel-based infrastructure in the meantime; that is, it would require 150-170% of the existing US fossil fuel consumption and a generation to shift to an “alternatives-based” energy system.
The most important aspects of Peak Oil are net energy and net energy units of oil per capita per time, i.e., the net costs of producing and consuming oil and the net cost of oil to sustain current per capita consumption at the given scale. We can no longer afford to produce oil at a price that permits the existing level of per capita real private economic activity, let alone grow the activity or delude ourselves into thinking that nearly 2 1/2 billion people in China and India can continue growing at 8% per year. This is sheer madness.
And the techno-utopians, cornucopians, and trans-humanists dimiss net energy and scaling costs to a degree that is shockingly shallow and infantile, no doubt a result of our conditioning during the Oil Age of abundant supplies of cheap oil and having become increasingly separated as individuals and communities from the extraction and production of energy resources, foodstuffs, and material goods.
Thus, it is a thermodynamic and mathematical certainty that global economic growth will cease, if it has not actually already done so as of ’05-’08 for the world as a whole in private GDP per capita terms.
There is not enough time nor net energy at sufficient supplies to build to scale an “alternative energy” infrastructure before the structural effects of Peak Oil and population overshoot renders our techno-economic system unworkable; therefore, the overwhelming majority of us must prepare without delay to consume 25-30% to 45-50% less than we do today per capita of oil and in terms of our overall material standard of consumption.
Nature and “the market” will force rationing on us, including food, energy, transportation, travel, materials, medical services, gov’t transfers, private investment, employment, and incomes. Despite the fact that all living systems, human animals included, “grow” for just a short period of total lifespan or duration of a viable niche, few, if any, e-CON-omists, business or political leaders, nor most of the rest of us have a template for adapting to, or managing, decline or no growth; that is, natural systems grow and then reach a steady state or stasis, replacing and recycling within the thermodynamic bound of the resources of the system.
Yet, we human apes imagine that we can continue growing consumption per capita perpetually, in spite of our finite planetary resource bound.
The central banksters cannot print cheap, plentiful oil, and neither can the gov’t borrow and spend it into existence. We MUST adapt as soon as possible to a much lower level of per capita material consumption at a socially acceptable material standard of well-being; but apart from ecological or biophysical economists, you won’t find anyone in policy-making authority who will accept an alternative to perpetual growth of resource extraction and consumption at the steepest discount rate possible; it’s virtually hardwired into our genes and brain constructs.
Thus, one can only conclude that we will extract and consume ourselves via last-man-standing contests at increasing scale for the last of the remaining resources, destroying ecosystems and non-renewable resources to the point of oblivion for the vast majority of us human apes.
With nearly 7 billion of us being conditioned by US supranational firms’ foreign investment and production, mass-media advertising and marketing, and Hollywood icons to desire to consume at an oil-equivalent amount of 100% or more of the oil we can produce domestically, we are effectively dooming ourselves on an unprecedented scale to progressive extinction by resource wars, ethnic-racial violence, genocide, famine, pandemics, and the lot.
Then again, if Peak Oil and population overshoot ensure the outcome above, then we should not be surprised when the powers that be see fit to hurry along the process in the coming decade or two. It was a great run for the West and parts of Asia of the peak Oil Age era since the 1950s, so we cannot complain if it all comes crashing down on our furry ape heads and only a small fraction of us are around in 20-50 years to remember how lucky we have been.
My goodness, Nemesis, that’s quite a bit there.
Peak oil, as an accounting matter, is not a problem today. Petroleum liquids production is near all times highs, and we have spare capacity in the system. Further, it appears we have plenty of natural gas around for the time being.
We do need to make room for a very large China that is looking to achieve the same standard of living that we–or at least countries like Japan and Korea–take for granted. These pressures are strange only in that China was prevented from developing normally by its own internal problems until 1949, and thereafter by Mao’s communism. So China is catching up, and when a country so big does it, everything else is affected. But it is not abnormal that China should be prosperous. It is abnormal that it should catch up so quickly, and that is a function of a late start, on the one hand, and an impressive technocratic, commercial and educational capability, on the other. Were it not for communism, China would be middle class already.
So ‘peak oil’ today is a function of prosperity, not poverty (although, were the oil supply to decline at a rapid pace, it would be a problem of poverty, potentially). The stress on the oil supply is occuring because the Chinese are becoming more properous, not poor.
We may allow that oil is ‘special’ in the sense of being an enabling commodity: it provides mobility for goods and people upon which other economic activities are built. Thus, the downside of a prosperous China is that it may force us write-off fixed investments in assets (like SUV’s) and social organization (jobs) when it compels us to consume less oil.
Such an assertion is decidedly anti-Ricardian. Thus, in such an interpretation, the rise of one power must necessarily cause disporportionate harm to another. Could that be true? Maybe, but I haven’t done the proof, and the notion of Ricardian comparative advantage has held up for centuries.
If Ricardo was right, then the benefits of the rise of China will more than offset the loss of incremental oil. So, for example, China’s automobile demand has historically grown by 25% per year, more in 2010. If it grew that amount in 2011, then China’s auto production, without imports, would have to increase by, say, 4 million vehicles in 2011, or approximately 1/3 of total US vehicle output. That’s a big number. Can China’s manufacturing base really grow that fast? Forget the capital, do they have the managers and organization? Could the US replicate 1/3 of its auto industry year after year?
So what’s the alternative? China could import cars. A lot of cars, and that means…manufacturing jobs. Strange, but not out of the question. Look at what the refining sector is doing: exporting.
So, a non-Ricardian analysis based on the impact on fixed costs (assets, jobs) would be quite interesting, and necessary if you’re arguing that China’s rise will hurt the US economically, barring an actual downturn in oil production.
When I come to Econbrowser, I’m trolling for topics like these. Has someone done an anti-Ricardian proof? Does it hold up? If no one has, it seems like an interesting problem–maybe worth a thesis.
As long as the US can borrow hundreds of millions from the sovereign wealth funds every day to import oil, the US doesn’t need to worry about running out of oil or changing anything about US energy policy.
Steven Kopits, Ricardian considerations are not very relevant when considering whether economic development in Chna and other emerging countries makes us better off. Modern trade theory shows that most trade occurs among similar countries, in industries with increasing returns to scale, imperfect competition, product differentiation etc. Ricardo did not deal with such issues in his account of international trade.
The relevant benefit in this scenario is increased demand for such products, plus additional production capacity coming from the emerging countries. For instance, the woes of U.S. auto industry notwithstanding, the rise of such countries as Japan and South Korea has resulted in the availability of new export markets for leading U.S. industries such as e.g. aircraft and industrial machinery, as well as supplying a variety of products to domestic consumers.
To these benefits, one could add the provision of non-market goods such as scientific research, culture etc. as well as fuzzier geopolitical effects such as reduced economic disparity and increased political stability.
OTOH, Nemesis is partly right, in that if limits in the supply of natural resources cause a price spike, then this is obviously a problem. But industry and consumers can respond to such price swings by adding new supply capacity, substituting away from natural resources and increasing efficiency. It is not a cornucopia by any means–the supply constraints are still binding–but their impact can be mitigated.
The next big oil discovery is not an oil discovery at all. It is the self discovery that a 70 mpg VW Polo gets you there just as fast as a 15 mpg Suburban. That’s a 6 million barrel per day find by itself – it adds almost 7% to the world’s daily production.
Bravo DJT! And 70mpg for a rather comfortable Polo is by no means the limit. It has been achieved without sacrifice to comfort or performance. The saddest part of the defacto lack of US energy policy has been the paucity of petrol taxes, and obvious rent-seeking by the auto-industry preventing (or delaying adoption) of more of precisely these “discoveries”.
The last two comments above are, IMHO, the most relevant. There is HUGE waste that will be eliminated by rising prices. Just look at everybody during your next commute — each driving their own 25 mph vehicle. When that cost becomes too great, it will change and Google will create a flash ride-sharing app that will allow you to find a ride for a small fee from a pre-approved network of fellow citizens. Just look at the modest Volt — 100 mpg is easily reached if daily trips are merely the average, i.e., less than 40 miles.
IMO missing from this debate is EROEI – energy returned for energy invested in getting an energy source to its point of use. Most of these new sources have considerably lower EROEI than those of previous decades.
As EROEI declines, resources are shifted from producing goods and services to energy production. The big problem is that subsidies of all sorts distort the price signals that people need for evaluating decisions on long term investments, whether in energy production, transportation infrastructure, food production, or housing.
I can’t believe anyone still doubts that oil supplies are running out. Yes, as price rises we can access harder to access deposits, but that still means that energy becomes more expensive. Alternative energy sources all have disadvantages, not the least of which is that they are more expensive – or they would already have replaced oil and gas.
Cheap energy defines how we live our lives. As prices rise, we will have to match that by becoming more energy-efficient, or change the way we live. That is of course possible: Europeans already use much less energy per unit of GDP generated than the US, and that was just due to higher prices (because of taxes). Of course Europeans live closer together, drive smaller cars over smaller distances, walk, bike and take public transportation more often. Far fewer live in extreme climes, too. Are we going to abandon living in the deserts? Are the suburbs going to be emptied, with people moving to the city center in droves? Are we going to build up public transportation at the expense of cars? All of these are obviously possible, and obviously very powerful energy-saving measures. Sure we will do it when energy becomes that expensive – we’re not going to go back to a pre-industrial society. But all of them take a long, long time to be implemented.
With more attention paid to the matter, there is no doubt that we can further improve energy efficiency throughout the western world. But can we do it fast enough to offset the rise in price? Can we live with the volatility that this precarious race will create? It’s no trivial matter, and the optimists on this issue seem awfully glib about it.
Global Crude Oil Production Versus US Oil Annual Spot Crude Prices
(EIA, crude + condensate)
2002: 67.16 mbpd & $26
2003: 69.43 mbpd & $31
2004: 72.48 mbpd & $42
2005: 73.72 mbpd & $57
2006: 73.46 mbpd & $66
2007: 73.00 mbpd & $72
2008: 73.71 mbpd & $100
2009: 72.31 mbpd & $62
2010: 73.44* mbpd & $79
*Through 9/10 and subject to revision
There was a clear price signal from 2002 to 2005, as oil prices rose from $26 to $57. In response, global crude oil production increased by 6.56 mbpd.
Annual oil prices from 2006 to 2010 inclusive have all exceeded the $57 level, and four of the five years have shown year over year increases in annual oil prices. In response, global annual crude oil production has so far not exceeded the 2005 level, and in fact we have seen a cumulative shortfall–on the order of a billion barrels of oil–between what we would have produced at the 2005 rate and what was actually produced.
But of course the real battle is in the global net export market, and a plausible scenario is that the global supply of Available Net Exports, i.e., the volume of global net exports not consumed by Chindia, is in the process of falling from 41 mbpd 2005 to about 27 mbpd in 2015.
In effect, our works suggests that the US is well on its way to becoming “free” of our dependence on foreign sources of oil.
I agree that we have many sources of abundant energy. The US discovered large supplies of economically recoverable natural gas in the recent shale boom. We can also harness wind, solar, hydro and other renewable resources or build nuclear power plants which are reliable and provide cheap energy.
Our predominant issue lies in the transportation sector where it will take costly infrastructure developments to shift from our reliance on oil products. Even if there are abundant supplies, oil is still a volatile commodity and this sector will be at the mercy of price spikes. Beyond the cost to consumers, we are sending enormous amounts of money to other countries via oil imports. Switching from oil to a domestic energy supply would create jobs, boost our economy and lessen our deficit.
Steve Kopits and JDH,
please see David I. Stern’s review “the role of Energy in Economic Growth”
at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1715855
whats missing is some sense of optimism – that with the same energy that gave us the moon landing, we can get relatively clean energy from wind, solar, conservation.
why is it that in this area it is the ultra liberal lefty environmentalists who dare to be positive and dream big of a better future, while the conservatives are the gloom and doom stick in the muds ?
PS: there is to my mind no clearer sign of the coming dominance of china then there leadership in solar panels; the country that dominates solar wind and storage technology is the OPEC+brit empire of the next century.