All 1 entries tagged Economics

Petrocollapse

Follow-up to Peaking of global oil production from Nicks blog

My previous article sparked a lot of angry protest about my arguments for petrocollapse which was probably mostly sparked by the way I ended the blog by creating a challenge that sounded like I knew everything and no one could prove me wrong. I have been accused of not understanding anything, being very onesided and using false information to justify my arguments. I would like to correct these to explain myself and my article more clearly. I will hopefully do this in an unbiased way (forgive me if I fail to do this). It is incredibly complicated to relay all these issues in a blog, so as you are reading I would ask that you keep in mind what was said before and not to focus on a single part without considering the rest. I do not claim this to be complete or perfectly accurate, none the less it is interesting to consider and I would appreciate a valuable debate which does not simply dismiss this.

When oil production peaks there will be a shortfall of supply and this will cause the price of oil to rise inorder to reduce demand and encourage more supply. Initially this demand destruction will occur by reducing unnecessary car trips and other conservation methods. This will reduce the strain for a while I suspect and give us chance to implement alternatives. A significant increase in production is unlikely in the long term and it would take several years for this new production to come online. When it does it will slightly reduce the decline. I would consider this to be the bumpy plateau which may last for several years, perhaps with gradually increasing prices. Oil will continue to decline and this plateau will eventually end at which point the price of oil is likely to get very high and there would be further oil shortages. As these prices get very high so do other products due to their dependence on oil, unless we have by this point managed to remove this dependence with alternatives.

Questions then arise, how high will prices go when production peaks and how long will this bumpy plateau last? Many of the worlds largest oil fields that have already gone into decline have a decline rate of over 10%, this is due to the drilling technology that was used, they run out very quickly (not the bell curve one might expect). Other issues need to be taken into account here, particularly political ones. When peak is realised there may be a significant amount of panic, violence (wars) and political manipulation (middle east etc) which would send prices even higher than they otherwise would be. If prices go up too fast and too high as a result then what will happen? It will become viable to seek alternatives to oil, however it will still take time for these alternatives to be put in place. Currently these alternatives (mostly) are still in very early stages and to suddenly have to take them to global levels that replace oil is going to be very difficult. It should also be noted that the cost of making these alternatives increases with oil (since they require energy and oil products to make them, at least until the alternatives are in place). As a result of these alternatives costing more than they do now and the fact that a massive infrastructure (for hydrogen) or construction (for power plants and such) would take time and cost yet more (this initial cost may be too high and cause the viability threshold to also be higher than it would seem at the moment), it would mean oil prices would rise much higher than perhaps expected. Coal is likely to become viable before these more expensive alternatives, and this would be a backward step since we moved from coal for a reason (cost, efficiency, …) and would add to climate problems (coal to oil technologies exist but they are costly and what I refer to here is the use of coal in the cheap old ways). These issues are difficult to predict because it is a hugely complex dynamic system with massive numbers of variables, as a result I have not gone into much detail but I have considered these in more detail and it seems oil will become very expensive before the pace and viability of changes becomes enough (debatable, I am not certain).

How long will the plateau last? Not very long I suspect (again cannot tell), due to political reasons. This is difficult to predict because I cannot determine demand destruction, political issues, new oil field developments and so forth. I would think that 10 years is an optimistic (I expect less than this) time for this plateau. Oil prices would probably be very high but supply would still meet demand as demand will still be reducing and supply increasing (due to increased investment). Alternatives may also be gradually comming online (at least the easy ones, which may reduce the strain on oil).

What would it mean to have very high prices ($200 per barrel ?, I have seen figures like this being discussed and much higher) and a 10 year plateau (again probably less, some suggest no plateau at all)? This is overly simplistic but the price of a barrel of oil does correspond to how much it costs to fill up a car, if anything it is more. As a result it would probably (uncertain) cost around $200 to fill up a car (if oil = $200). Many companies that depend on energy would struggle in this period (before alternatives have been implemented or become viable) and may go bankrupt (this has already happened to some and others are coming close with recent rising energy prices). As I am sure any economist would say at this point, there would as a result be demand destruction and prices would drop to the correct levels. This figure already allows for demand destruction (in this scenario), demand for oil can only be reduced so much without these alternatives yet in place. This kind of stress on companies and individuals may be too much. How can the average individual afford these massive price increases (in nearly every product) especially when they already have debt and may even be unemployed as a result of companies going bankrupt. It may be that even when these alternatives do become viable and have been implemented that the average person cannot afford them either? This may of course be wrong and that these alternatives can be done cheap enough to be afforded by the majority of people. I say majority, not all, because a large number of relatively poor people will not (this is already true now with fuel poverty) and that it is quite possible for this minority (or maybe majority with prices this high) to disrupt civil order to a huge extent with massive riots (like those in Paris, but this would be worse since they would be unable to live in warm homes and feed their families).

I could go on forever discussing these kind of issues. In my previous blog on this, several arguments were made against what I have just said, they are valid arguments. Change habbits: drive less, work from home, don't go on holiday, work locally. This would be the demand destruction I speak of. Alternatives: nuclear, solar, wind, hydro, biofuel, coal to oil, tidal. Along with hydrogen systems for transportation. These are valid alternatives I do not dispute this. The problem is how flexible is our economy really when it comes to making so many expensive and difficult changes in a short time? It seems most people think these kind of things would happen very rapidly if they needed two, but how fast and would it be fast enough? How long can the economy survive with high oil prices and these changes not in place? (Please note that the following estimated times may be wrong but you get the idea). Would it not take 5–10 years to build power plants, 10 years to rip out all existing oil based transport infrastructure and install hydrogen and replace all cars with hydrogen cars. Would it not take 10 years or so to convert enough land into biofuel land and build associated production and distribution plants. Would it not take 5 years to build enough hydro and wind systems. How is everyone going to afford to install solar panels, it may be cheaper than staying with oil but they may still not be able to afford it, and how long would it take to increase their production levels, several years? This is assuming we move as fast as possible with no interruption (ie. as it is today in our relatively calm economic state). What happens in the mean time while these things are being done? We may be starting some now but compared to what would be required to replace oil this would be nothing. Again I am sure someone would say that it does not have to replace oil completely but enough to reduce demand and lower prices. True, it will take several years for this to begin and by that time oil production will have dropped even further, so these initial alternatives will only offset that decline and hence prolong the plateau as I suggest (10 years?).

I leave it to you to expand on some of the above issues (a lot have been left out). When all this required change is considered with the massive civil unrest at the high prices and the possible collapse of many business and resulting unemployment, it seems difficult to see how the economy will survive. Perhaps I over exagerate some of the challenges and underestimate the power of the economy, but there has never been anything this challenging before and the least we can expect is a depression greater than that of the 30's. The government is likely to get involved and tax oil companies to subsidise alternative energy. The oil companies are likely to provide alternatives, but we still suffer from the pace of change problem and will governments actually survive such a crisis?

It seems this is still one-sided, I again leave it to you to see the other side (since that is how you see it anyway) and to challenge this, but please do not accuse me of knowing nothing. We are in for a turbulent time and I seem to have less confidence in our ability to get through this than most (I am a pessimistic person). Forgive my mistakes and point them out politely please. Thanks.

: 18 Apr 2006 20:14 |  Tags: Economics Oil Politics |  Comments (27) |  Close comments |  Report a problem