Because most philosophies that frown on reproduction don't survive.

Wednesday, July 30, 2008

Peak Oil -- When Do Equations Break

A couple times over the last several months readers have emailed me to ask if I have any thoughts on Peak Oil. For those not familiar with the idea, Peak Oil is the idea that at some point the world oil production will (as production at any individual oil field eventually does) reach its peak and begin to fall off. This in itself is not a controversial idea. So far as we are aware, oil is a finite resource, and we certainly are having to drill deeper, travel farther, and work harder to continue to produce more oil every year. Eventually (whether in a year or a hundred years) it makes sense that he'd hit a practical maximum point and the annual production would fall off from there one.

But if the idea that global crude oil production will eventually peak and go down is uncontroversail, the term "Peak Oil" is generally used to refer to something a bit more specific and a bit more controversial which we might refer to more specifically as the Catastrophic Peak Oil theory.

The question here is: how quickly would oil production fall off after the peak, and how much would the increase slow before reaching peak. And also: how well can the world economy cope with stalling and then falling oil production.

Those who take the Catastrophic Peak Oil theory seriously believe that it will stall fairly suddenly, and then begin to drop fairly steaply (or that the world economy is ridigly incapable of adjusting to a more gradually stall and fall.) By this theory, the entire world economy might collapse, with trade breaking down, cities being abandoned, a billion people or more around the world starving, and technology falling back 150 years or more.

Clearly, this preys on some of our most basic fears as members of an affluent society. In an agricultural, subsitence society, fears were basic and can be well summarized by a reading of ancient mythology. Would the weather be good -- or would there be drought or flood? Would the plants grow? Would pestilence wipe out half the village? Would war break out?

Today we live in a society with a highly specialized economy, and so much of what we deal with looks a little like magic. Food shows up in the supermarket. Gas is available at the pump. Money spits out of the ATM. A credit card can buy you almost anything. And yet, because the systems which deliver all these things are too complex to understand in all their details, we can't help but harbor (even if far below the surface) a certain fear: What if it all stops working? What if we go to the pump and there's no gas? What if we go to the store and there's no food? What if the whole magical system suddenly just stops?

The Catastrophic Peak Oil theory appeals to these fears. But is it likely?

My tendency is to think that the economic laws that drive our economy are more flexible than we sometimes imagine. And we are simply so far above the subsistence level in our society that we could go through a fairly catastrophic economic reorganization without starving. (Cuba's sudden oil dearth when the Soviet Union collapsed perhaps provides a micro example of how we might cope with such a peak oil situation.) So I'm fairly optimistic about our prospects, even if the global oil peak turned out to be fairly soon.

The point where equations potentially fail to capture a situation, however, is when change is very sudden. If oil levels off and begins to decrease over the course of a decade or more, we might go through some pretty hard times, but we'd find other energy source and/or tighten our belts and we'd be fine. The point where it's very hard to predict how we'd do is if oil peaked in a truly sudden fashion. Imagine that one day all the Saudi oil fields just stopped, like a spigot turned off. That's the sort of event that we really can't project the outcome of based on a supply/demand economic model. Fortunately, it's probably the sort of situation that's pretty unlikely to happen.


Anonymous said...

The Blackadder Says:

I am myself inclined towards the view of natural resources propounded by the late, great Julian Simon: "Greater consumption
due to increase in population and growth of income heightens
scarcity and induces price run-ups. A higher price represents an
opportunity that leads inventors and businesspeople to seek new
ways to satisfy the shortages. Some fail, at cost to themselves.
A few succeed, and the final result is that we end up better off
than if the original shortage problems had never arisen."

Simon's application of the argument to oil can be found here (bad formatting, unfortunately).

Anonymous said...

The Blackadder Says:

Talk about bad formatting. Ugg. Here is the key paragraph again, hopefully in a more readable form: "Greater consumption due to increase in population and growth of income heightens scarcity and induces price run-ups. A higher price represents an opportunity that leads inventors and businesspeople to seek new ways to satisfy the shortages. Some fail, at cost to themselves. A few succeed, and the final result is that we end up better off than if the original shortage problems had never arisen."

Darwin said...

Yeah, I would tend to agree.

The example I hear all the time in regards to this was the great whale oil crunch of the mid 1800s: Whale oil was used for a wide variety of applications and was getting dangerously short -- but as supplies went down and prices went up, someone came up with kerosene.

That's pretty much what I meant by supply and demand successfully taking care of the peak oil scenario -- that as the cost of oil went up there would be a spur for innovation which would end up replacing oil before we actually ran out or hit a crises as a result of running low.

However, if oil unexpectedly peaked very, very fast, there might theoretically not be time for that to happen.

Anonymous said...

Apart from those survivalist weirdos, and Rod Dreher, I don't know anyone who believes the Catastrophic Peak Oil Theory. The standard Peak Oil Theory does not say that we're running out of oil; if oil production peaks, it means that roughly half the world's oil is still in the ground. The Peak Oil Theory says that we're running out of *cheap* oil - which, given the events of the past four years, is pretty obviously true.

Darwin said...

Again, agreed.

But at least in my limited experience, the term "peak oil" is often used to discuss the catastrophic scenario. Which is why I tried to draw the distinction there.

Also, since the demand for oil would (unchecked by supply) keep ramping pretty steeply for quite a while, the effect of heading into the downhill slope could theoretically be pretty severe.

Anonymous said...

The Blackadder Says:

Given that what's driving the increased demand for oil is prosperity, particularly in places like India and China, I'd say there's a pretty clear limit to the negative effects higher oil prices can have. Higher fuel prices might lead to slower economic growth, but that's hardly the same thing as economic collapse.

Darwin said...

I think the theory is that based on a ready oil supply we've built essential infrastructure around the assumption that transportation costs won't go up. (Anything from importing fruit from thousands of miles away to sourcing electronic parts in Asia.)

However, I would tend to think that there's a huge amount of room for reduction in these. If oil suddenly becomes much more expensive, maybe we stop eating fresh fruit that's out of season, or can afford fewer electronic gadgets.

Bernard Brandt said...

I believe that the conversation in this particular entry has been particularly astute. Nonetheless, I believe that there are three points which should be added to the discussion:

1. Those conversing appear to be making the assumption that "peak oil" is an event yet to occur. I would beg to differ if so. T. Boone Pickens, in his Plan (sorry, no links, but it is easily googleable) states that world peak oil occurred back in 2005, and oil production has been decreasing ever since. Considering Pickens' position in the oil world, I suspect that he is correct in his assessment. It is certainly an admission against interest.

Regardless, it is estimated that at present rate of consumption, that all available oil will have been consumed by 2035, and it would be reasonable to assume that all of the economic ramifications of increasing demand and diminishing supply will continue to drive the price of oil and its products up.

2. I am afraid that it is not as simple as to assume that all will happen will be that we'll just have to get used to less off-season fruit and buy fewer electronic gadgets. Oil is not simply the basis of most of the energy used by our technological civilization, but is also the basis for most of the fertilizers and pesticides used by modern agribusiness, but also the source of most plastics, pharmaceuticals, and many other products used by our modern civilization. The disruption which will result from the end of cheap oil will be far more profound than most people, including those here commenting or writing, currently anticipate.

3. The assumption that new products and processes will ultimately replace oil and its products, while ultimately correct, does not take into account the present fact that most scientific and technical research is conducted by large corporations, which corporations has been notably absent of clue of the need for alternatives to oil. I cite as one example out of many the fact that Ford Motor Company has lost $4 billion in the last quarter year, largely because it has continued to make and (attempt) to sell its standard product of gas-guzzlers.

While I believe that ultimately we will see the equivalent of garage businesses which will come up with the new products, the immediate future looks to be strewn with the corpses of economic dinosaurs which have not made the transition from the old economic realities to the new ones. It ain't going to be pretty, folks.

Myron said...

I read about a technology a few years ago (around 2004, I think) which could turn basically anything hyrdocarbon-based (including food, waste plant matter, plastics, tires, etc) into oil, and separate out the minerals and other components for re-use. It turns out this company, Changing World Technologies, is running a test plant now.

Darwin said...


While I certainly agree that oil is used for much more than transportation, I think the more general point might continue to apply: One could have a quite stable modern economy, in all probability, with 50% or even 25% of US per capital petroleum consumption. It might be a much less rich country than that which we currently enjoy, but I think it would be fairly stable and even comfortable. The trick is that it would take time to adjust non-catastrophically from our current economic structure to one using much less oil -- and thus the big question would be: if such a thing happened, how fast would it happen.


Agreed -- some of the oil generating microbes/technologies they're working on these days are really, really interesting. I would imagine we're still a ways off from really significant production (compared to the billions of barrels in oil pumped out of the ground each year right now) but it's probably a realistic source in the future, and I gather it's pretty much carbon neutral since it's using recent biological waste rather than stuff that's hundreds of millions of years out of circulation.