November 28, 2012
I offer some observations on exhaustible resources and economic growth in the latest issue of the UCSD Economics Newsletter.
Posted by James Hamilton at November 28, 2012 05:46 AMdigg this | reddit
Love this sentence:
"But we should not dismiss the possibility that there may also have been a nontrivial contribution of simply having been quite lucky to have found an incredibly valuable raw material that was relatively easy to obtain for about a century and a half."
Posted by: jonathan at November 28, 2012 08:11 AM
That's a rather gloomy assessment considering the number of peak oil dates that have been met and passed.
Certainly, there is the unassailable position that oil is a limited resource. The question is whether that limitation is a practical one or a policy one or a technological one.
On the practical side, cost of extraction cannot exceed the revenue from its sale or extraction must necessarily stop. Two things affect that: policies related to the EPA and developing technologies... both of which have no foreseeable limitations and are usually conflicting.
There is also the issue of substitution. Natural gas and electricity from non-petroleum sources can be significant in that role. Germany demonstrated the feasibility of fuel from coal... but that is an EPA-restricted source.
Frozen hydrates may eventually become a larger source of fuel than natural gas extracted from the ground and deposits are worldwide.
Conservation is perhaps the most cost-effective method of eliminating unnecessary oil consumption and the least emphasized.
A free marketplace would react to a decline in oil availability with numerous substitutions. Unfortunately, a government-dominated marketplace is unlikely to react well or in a timely fashion. Hence, your assessment that "the end is near" is probably more correct than it has to be.
Posted by: Anonymous at November 28, 2012 09:49 AM
Anonymous: As I point out in the linked article, peak oil in Pennsylvania came in 1891-- that date's stuck for 120 years. It came in Ohio in 1896, in West Virginia in 1900, and so on for every U.S. state except North Dakota and Montana.
Posted by: JDH at November 28, 2012 10:57 AM
Peak oil is knowledge, how much oil do we have and where should the oil be allocated over the next fifty years. Once the questions have answers, then peak oil is upon us.
Posted by: Matt Young at November 28, 2012 11:38 AM
I had the chance to see Jim's presentation at Princeton a couple of weeks ago--and, boy, it was a peak oil presentation if ever I've seen one. Now, Jim is a very cautious guy, and the caveats were all correctly in place. But the message was as stark as the title of this post. As one looks around the globe for incremental oil, Canadian oil sands, US shale oil and Iraqi conventional oil tend to recur as the drivers of production. US oil rig counts have stalled; Canada continues to progress, but expansion there is constrained by the vast capital investment required. Iraq is generally accepted as good for an additional 0.5 mbpd / year. But this is not the rah-rah story needed to support China's economic development. Indeed, when you need unconventionals to support oil production growth, you are near peak oil.
Posted by: Steven Kopits at November 28, 2012 01:10 PM
Gasoline is used in transporting goods, over the oceans and through the highways. Gasoline is even used to bring water to dense populations in India. This quick efficiency is needed to support highly dense populated areas.
Do you foresee the dismantling of big urban areas as the oil supplies diminish?
Posted by: Edward Lambert at November 28, 2012 01:10 PM
"...and so on for every U.S. state except North Dakota and Montana."
And that's the point: peak oil is dependent on a variety of factors, not just what is perceived to be readily available by drilling a shaft and watch the black bubbly flow.
Posted by: Anonymous at November 28, 2012 01:11 PM
In other news, Maria van der Hoeven, Executive Director of the IEA, gave a pretty weak presentation at Columbia University here in NY today. I put it to her directly: "Do you believe US and OECD oil consumption is in secular decline?" Well, yes, sort of, no. "And if so, and we want to maintain 3.0% GDP growth with 1.5% annual oil consumption declines, doesn't that then imply that 4.5% annual efficiency gain is necessary?" Umm, well. "And if so, do you think that the OECD economies can maintain a 4.5% annual efficiency gain pace for oil consumption?" No.
"Do you then believe that oil consumption is constraining OECD GDP growth?" No. "Then do you believe that OECD oil consumption will recover--this is a mathematical relationship." ...
The IEA apparently does not understand that OECD oil consumption is in secular decline. The way they avoid this problem is by assuming that China and the other emerging countries won't develop, at least not normally. Their default model anticipates China and India as economic failures, or at least stunted in certain key aspects. It is a profoundly condescending and neo-colonial attitude--not necessarily by design, but by effect.
By contrast, if you assume that China will develop like Japan, Korea, or Taiwan, then there's just not enough oil to go around and the OECD countries will have to adjust to a smaller oil consumption bundle. Why should we consider this as a surprise or somehow strange and unusual?
In any event, if you believe in China, then maintaining traditional GDP growth rates for the OECD require by definition that oil consumption efficiency rise by the desired GDP growth rate plus the decline in oil consumption, and by extension, that the growth of actual and potential GDP is by definition constrained by the pace of oil efficiency gain.
So GDP growth is all about how fast oil efficiency can grow. On this topic, the IEA is clearly unprepared.
Posted by: Steven Kopits at November 28, 2012 01:30 PM
Here's Paul Sankey's take on the IEA report. Sankey's the Research Analyst for oil markets at Deutsche Bank. His former colleague, Adam Sieminski, is now the Administrator of the EIA.
In any event, Sankey argues that the IEA's implied US supply growth of 0.6 mbpd / year will "overwhelm demand...and price. ...The growth cannot be sustained."
Now, if you're running a constrained supply model, and you are assuming that a lack of oil is limiting GDP, then increased supply does not lead to lower price--it leads to higher economic activity. Thus, price remains limited by the carrying capacities of the OCED (around $95) and the non-OECD (around $115; Sankey thinks it's $130). Therefore, if the price drops much below $100, demand will increase, and the price will tend to return to this range. Put another way, if inherent demand is greater than actual supply, then price will be de-limited by the carrying capacities of the various market participants, and consumption will be re-allocated from the OECD to the non-OECD.
Posted by: Steven Kopits at November 28, 2012 02:52 PM
Anon, the market is already(along with the government) trying to find subs.
They can't. Nothing wrong with saying that either and accepting that, instead of going into some capitalists fantasy re-education camp like you want to.
The Tech just isn't there and not without effort.
Posted by: The Rage at November 28, 2012 04:01 PM
One more important fact to remember is that the countries that are still exporting oil are steadily exporting less and less oil to the world market due to increasing domestic consumption and increasing energy needed to extract and refine lower EROEI oil sources.
Posted by: RJ at November 29, 2012 03:24 AM
Peak oil can only be a reality by limiting definition of oil, region of oil, and most importantly to any economist, ignoring price.
I simply do not understand analysis that ignores these factors.
To me, oil simply should be defined by the range of its chemistry not by the physical state it is found in nature. Here on the the Western Slope, uncountable barrels of are available currently in the physical state as oil shale. And this amount must be dwarfed by coal which can be transformed into oil and oil products. Cost is the determinate. And who knows what other processes are on the horizon which could produce oil, if oil is what you want.
The only peak to oil is the price of a competing energy source which can replace the favorable characteristics of oil, mainly its highly transportable, highly concentrated, reasonable safe form of energy.
I would allow economics and the preference of the billions of people to dictate the change. Not subsidy, not force of legislation, not scare that we are running out.
Posted by: Ed Hanson at November 29, 2012 04:56 AM
Ed, take a look at US real private GDP per capita. We can't have "oil" at $85-$110 so that Bakken and tar sands are profitable to extract AND grow real GDP per capita. The lack of economic growth, falling global oil exports, and the coming China crash implies Bakken and tar sands production will not occur as expected.
IOW, it's not just the availability of reserves of "oil" and the price but at what price of extraction of deeper, tighter, and costlier reserves is the price too high to permit overall real GDP growth and thus continuing growth of "oil" extraction.
Steven, again, China has reached its debt Jubilee (along with most of the rest of the world's economies to date) coincident with the "middle-income trap". The Pentagon, State Dept., oil company execs, CIA, NSA, and IEA all know this, but apparently a lot of US high-tech and other firms don't yet know it, or only recently realized it.
China's growth boom is over. China will grow old before growing rich. Japan, Korea, and the "Asian Tigers" had the luxury of constant-dollar oil at $15-$20; however, China does not. China is 40-80 years too late to the western auto- and oil-based growth model.
Finally, China's growth boom was a function of literally net trillions of dollars of investment by US supranational firms from the '80s-'90s. China's dependence upon net capital investment of 3-4% of GDP for 20 years with a large multiplier to fixed investment (45% of GDP), production, and exports (mostly US firms' subsidiaries and contract producers' production) makes China vulnerable to net capital outflows.
Now a large share of those dollars are deposited in Chinese banks and not convertible from Yuan except via central bank custodial book entry transfers in the form of US Treasuries at the Chinese central bank.
Now that China's growth boom is history, a growing share of those dollars will be flowing out of China by way of Hong Kong, Singapore, Caribbean banking centers, and the PBoC. Net capital outflows from China as little as 1-1.5% of GDP risk a Great Depression-like contraction in loans, money supply, asset prices, production, and GDP.
Needless to say, this will have a negative effect on trade and demand and prices for commodities hereafter. Falling demand and prices for commodities and dollars flowing from China will strengthen the US$ and squeeze US supranational firms' revenues and profits, putting downward pressure on the P/E and price of equities.
Posted by: Bruce Carman at November 29, 2012 07:40 AM
Standard procedure in the energy industry, its for-hire institute mudslingers, and Fox News is to assert that anthropogenic global warming is a hoax perpetrated by dishonest scientists and governments, and to obfuscate the overwhelming contrary data with lies and cherry-picking distortions. The annual minimum volume of Arctic sea ice has decreased 80% in 30 years, and great changes occurring world-wide correlate directly with increasing releases of greenhouse gases. Most anthropogenic heating goes into the oceans, where its increasing effects are ignored by the science-denial industry. Hurricane Sandy gained strength over a warmed western Atlantic and landed with the 2nd-largest kinetic energy (integrated wind velocity and, in this case, huge area) ever recorded for a US hurricane at any latitude, and it was forced ashore by a unique autumn long-stalled atmospheric high to the northeast that probably was a product of jet-stream changes due to the decreasing temperature gradient from Arctic to middle latitudes. 2012 may be the warmest ever for the Lower 48. Some unpleasant new norms are on the near-term horizon (as, part of the other CO2 crisis, a biologically sterile zone 15 miles wide along the western US, due to CO2 acidification of upwelling coastal water), and the longer term is scary.
The peak-oil numbers are with Professor Hamilton. Further, unconventional oil requires far more energy input for its extraction, hence much greater CO2 release as well as decreasing net useful fuel, than does conventional oil. WSJ reports this morning that Exxon is hoping to develop enough new unconventional oil to offset its declining conventional production. Getting oil from Western “oil” shale requires not only huge inputs of energy and non-available water, but the “oil” beds contain also abundant sodium bicarbonate, which breaks down to release voluminous CO2 when heated. New BLM “oil”-shale leases were announced last month. Methane is increasing anthropogenically much faster than CO2, it has 20x the greenhouse effect by weight, and we will greatly increase its release if we start recovering it from Arctic-permafrost and submarine methane hydrate. Combustion of coal releases much more CO2 per energy unit than does that of hydrocarbons, and projections for the time of coal exhaustion (not peak; as, 200 years for US reserves, largest in the world) are based on nonsense assumptions of infinite hydrocarbons and no coal exports in the meantime.
We are becoming more efficient in our energy use, but our economy and urban sprawl nevertheless are based on cheap energy in whatever quantity we want it. We are surrounded by rocks and hard places.
Posted by: Warren at November 29, 2012 09:24 AM
JDH As an economist, what do you think we should make of the market's ability (or perhaps inability) to discover a reliable price for oil given the wide divergence in views about the reality of peak oil? For a long time the day of reckoning was far enough into the future that owners of oil in the ground could effectively treat it as an inexhaustible resource. I'm guessing that this probably explains why oil prices did not historically follow a Hotelling price model. But now we seem to be in a kind of no man's land in which markets aren't quite sure whether peak oil is just around the corner or if peak oil can still be dismissed while we go about business as usual.
So given your views about the reality of peak oil, I'd be interested in your thoughts about whether oil markets are correctly pricing oil. In particular, is it even possible for the market to discover the right price? And by "right price" I mean the price that results in an optimal extraction rate according to principles of optimal control theory.
Posted by: 2slugbaits at November 29, 2012 02:54 PM
... with a real price of oil that is five times as high as it was in 1891, we’re producing less than one eighth as much from these regions...
I don't know about that price statement. That's by CPI.
But figuring "real price" over long periods is challenging, CPI does a very poor job when the "baskets of goods" become ever more incomparable, and is really pretty meaningless at 100+ years (if not a lot sooner than that).
In recognition of which EH.net and its affiliate Measuring Worth give several different ways to compare the value of the dollar over time.
EIA.gov has oil at $0.77 in 1890. (That was down to a low after being $2.56 in 1876 and $8.06 in 1864, further complicating the historical comparison).
Today's price of West Texas was $87. MW says that the $0.77 of 1890 by CPI is equal to $19.60 today -- so, yes, by that measure today's "real" price is more than 4x as much.
But MW also says that the $0.77 of 1890 has a value today of...
$95.00 relative to the average unskilled worker's wage.
$156.00 relative to average production worker compensation.
$156.00 relative to nominal GDP per capita.
$771.00 relative to share of GDP.
Those are all more than $87, and IMHO they are all a lot more meaningful than CPI for this purpose over this time scale.
And in spite of these price increases, we are today producing vastly more than in the past, in places across the world with production costs below those here in the US.
I'm not being argumentative, basically I agree with you.
But things aren't so starkly simple as implied.
Posted by: Jim Glass at November 29, 2012 05:07 PM
Ed Hanson: Yes, a higher price of oil will allow more oil to be produced than would be the case with a lower price of oil. The price of oil today, in real terms, is 5 times as high as it was in 1891, and the technology for extraction is vastly improved. Yet Pennsylvania produced 8 times as much oil in 1891 as it does today. So, let me grant your point, that if the price of oil were today were no greater than it had been in 1891, the ratio of 1891 production to 2011 production would be larger than 8 to 1. How does that fact change in any way the substance of the points I have been making?
Permit me to again emphasize that posing the question as whether we are "running out of oil" is a pure straw man. I insist that this expression is only used by those who take your view of the world (that is, it is only used in the context of "some crackpots claim the world is running out of oil, which makes no sense because..."). If you find it impossible to understand my analysis, I think it may be because you associate my position with a straw man, rather than with my actual claim.
And the core claim I am making is a statement of fact-- the price of oil has quintupled, while the supply produced from Pennsylvania has fallen by a factor of 8.
Posted by: JDH at November 29, 2012 05:12 PM
2slugbaits: That is a great question. The "correct price" of oil refers to the best possible assessment based on currently available information. But the best possible assessment may be that nobody really knows. The market could get it right in the sense of having as reasonable a guess as anybody, but that does not mean that the market assessment will ultimately prove to be right.
I think markets (and anybody else) will have a tough time with this one. How much farther will current prices push efficiency in consumption? What will be the longer run depletion story with tight oil, and how widely geographically can it be replicated? Will Iraq come through, or not? I don't know the answer to these.
But what I do know is that too many economists have adopted a knee-jerk rejection of the hypothesis that the last 150 years have been special. So I see my role to be to call attention to some of the facts that should be incorporated into the broader discussion, to help academics, policy makers, and markets try to sort out together where we are likely to be headed over the next 10 to 20 years.
Posted by: JDH at November 29, 2012 05:26 PM
"...for every U.S. state except North Dakota and Montana."
Montana has peaked also.
Posted by: Robert Hurst at November 30, 2012 08:16 PM
Duly noted and chastised, I am chasing the straw man of the world running out of oil.
So I will chase the question you thought as great from the slug. I find it interesting that you assert " The "correct price" of oil refers to the best possible assessment based on currently available information." I prefer the view that the correct price of oil is the results of millions of individual transactions, each of which derived from limited information, but in total achieve a better result than any single source attempting to believe it could a achieve a 'best assessment'.
If allowed, the many in market will achieve a better result, in assessment, supply, cost, and price than any attempt by a few.
Posted by: Ed Hanson at December 1, 2012 06:53 AM
Posted by: Bruce Hall at December 3, 2012 06:34 AM
My fear is that new supply comes on too quickly and cheap-energy addict Ms. USA, continues her self-loathing and self-destructive ways.
Posted by: westslope at December 3, 2012 02:56 PM