Peak Oil! Peak Oil! The Sky is Falling! The Sky is Falling!

The current issue of Rolling Stone has an article by James Howard Kuntsler worrying about peak oil.

Most immediately we face the end of the cheap-fossil-fuel era. It is no exaggeration to state that reliable supplies of cheap oil and natural gas underlie everything we identify as the necessities of modern life — not to mention all of its comforts and luxuries: central heating, air conditioning, cars, airplanes, electric lights, inexpensive clothing, recorded music, movies, hip-replacement surgery, national defense — you name it.
The few Americans who are even aware that there is a gathering global-energy predicament usually misunderstand the core of the argument. That argument states that we don’t have to run out of oil to start having severe problems with industrial civilization and its dependent systems. We only have to slip over the all-time production peak and begin a slide down the arc of steady depletion.

The term “global oil-production peak” means that a turning point will come when the world produces the most oil it will ever produce in a given year and, after that, yearly production will inexorably decline. It is usually represented graphically in a bell curve. The peak is the top of the curve, the halfway point of the world’s all-time total endowment, meaning half the world’s oil will be left. That seems like a lot of oil, and it is, but there’s a big catch: It’s the half that is much more difficult to extract, far more costly to get, of much poorer quality and located mostly in places where the people hate us. A substantial amount of it will never be extracted.

Kuntsler appears to have a very strange view of economics. For example, we know that oil producers will extract cheap oil before they extract more expensive oil. In other words, whatever oil we have not extracted is always more difficult to extract than the oil we have already extracted. Assuming technology doesn’t change, the price of extracting the next gallon of oil from the ground should always be higher than the last and extraction stops when the marginal cost of extracting the next gallon is higher than the value to be derived from it.

So the concept of peak oil as an event just makes very little sense. Technological changes affect both the cost and the value enough to make any claim that we have reached a peak extremely dubious. To say that we have reached “peak oil” is to be like that apocryphal patent clerk from 1899 who urged that we should close the patent office because everything that can be invented already has.

Incentives matter. Prices affect technology. Supply and demand curves are really fundamental. If oil prices are low, people will find new uses for it. If prices are high, people will find substitutes. Peak oil advocates claim that there are no substitutes that are not absurdly more expensive. But anyone who bothers to research the state of modern nuclear technology knows this is false (and see patent office comment above).

But even aside from alternative fuel technologies, peak oil advocates seem to forget that people can store oil. If people really believed that oil was going to run out, they would buy oil and keep it in storage tanks (or in the ground) for the future. Effectively the expectation of future high oil prices would drive up current prices sufficiently that we should expect no major price change associated with any form of peak extraction.

In other words, the recent changes in oil prices may be driven much more by middle eastern instability and china’s decision to overinflate its economy than any major change in oil fundamentals. At very least, we can say that the concept of peak oil sounds much more like a scare tactic than an actual explanation for anything that is actually happening.

2 Responses to Peak Oil! Peak Oil! The Sky is Falling! The Sky is Falling!

  1. ooghe says:

    I’m still in the process of forming my opinion on energy policy- so if you’ll excuse my economic ignorance- I’m not sure what you mean by saying the cost of oil extraction is de facto more expensive over time- surely the economies of scale allow the relative cost of various means of oil extraction to come down over time? It seems that we extract initially expensive oil on the expectation we will extract cheap oil- which we do if successful, until such point that we hit the peak potential of that resource and then the cost of that oil begins to rise (and our value begins to fall), but hopefully we’ve already started looking for more oil. In that context, the notion of a cyclical peak does seem relevant to the economics of the oil business, doesn’t it?

    But more important, it seems that the concept of ‘peak oil’ would at least describe the phenomenon where the world economy- in it’s current practice- is no longer able to meet peak energy demand through supply, and so therefore demand would be reduced to meet supply- possibly in the form of an economic contraction and competition for resources just as easily as demand might be reduced through some technological change? After all, it is possible that there could be some huge jolting start-up cost associated with further oil production (to bend the rules of the scenario a little- say the second half of the oil peak were on Mars)

    If the article is saying that peak oil means that the only possible result from here on out is doom (as you suggest) then, indeed, that seems a bit unsophisticated. But from the excerpt you give, it sounds as if he’s simply saying that the current energy economy is no longer going to function through further increase in oil production- a fair enough prediction, I think.

    I agree with you that we’re probably in an oil bubble today, or rather, China is in a real estate bubble- but I also tend to believe the end is conceivably in sight for oil-based civilization in the next fifty years, and more immediately- how various economic blocks trend in adjusting their energy demands will be a huge influence in the international order.

  2. Larry Wei says:

    Alex, you must also believe that there is no such thing as a shortage, just an unwillingness to pay for it … also, would “mushroom cloud” qualify as scare tactic?

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