No End of Oil

Don,

You are forgetting about all the previous examples of natural resources the world has already exhausted. For example, there was, uh, wait, it will come to me.


Surely we'll use all the oil just like we depleted all the, uh, darn it.

Fantastic! ;-)

In the mosquito example... while the amount of blood in the baloon is finite, the amount of oil on earth is changed by how much the planet creates (the production of oil is, after all, a naturally occuring process). Its certainly possible, if not probable that the earth continues to create oil. I have often wondered if we could help speed this process along?

The impact of earth production is as if someone is randomly adding one pistachio per week in a random place in the room.

This of course is merely details in a well sorted point.

Deniers! The world is doomed!

I get your point, but geez ... a mosquito and a balloon of blood? Couldn't you have found a less off-putting metaphor?

Such a great post. I've had this discussion so many times... it's nice to finally have a succinct article to point others to (though I must agree with the above commenter regarding the mosquito and the balloon).

What about using the example of a politician sucking on the taxpayer's teat? I think it's pretty clear that taxes are one "resource" that politicians never worry about us running out of too soon!

The otherwise increasingly shrill Reason's Hit and Run blog has a post today about the fall of whale oil and the rise of kerosene. Might we have faced "peak whale" in the 1800s had petroleum not come along?

"I have often wondered if we could help speed this process along?"

Maybe we could speed the process up by warming the earth.

**snicker** **giggle**

That the cost of extracting oil increases more of it is produced is shown by the average depth of wells drilled today with those in the past. Most big discoveries today are from very deep wells that are very expensive to drill.

The shallow formations that made the East Texas oil boom in the 1920's are not very productive today. Most of the low-hanging fruit (or shallow-formation oil) has been picked.

The advance of technology that has enabled deep drilling can't explain this change because no one would bother to drill a well 5 miles deep if the same oil could be recovered at a depth of 3,000 feet.

One thing that will keep oil drilling going for longer than it might otherwise is that so many other products are made from petroleum and its by-products, from life saving medicines to lipstick, bicycle tires, trash bags, putty, yarn, toilet seats, golf balls, toothpaste and about 6,000 other items.

...i've found russ' pistachio example more helpful than don's mosquito scenario. The fact that it's so uncertain simply makes everyone worry that the end is near and want to plan for worst-case-scenarios, even though that's a foolish thing to do, so the example is counterproductive in conversations (perhaps I simply haven't had the right opportunity to use it as a clarification).

It's easy to see with the pistachios, though, that eventually you'd be stupid to keep mucking around, looking for uneaten pistachios, and simply buying a bag is well worth the monetary outlay.

I can't help but feel that this answers the concerns about "peak oil" the wrong way. OK, we won't run out of oil, but the pistachio metaphor means to me that it could get so expensive we might as well have run out.

Isn't the economist's point that by the time oil worth extracting is no longer available, investment/discovery in other power sources will make that irrelevant?

sorry....don't get the article.

Are you saying that oil will never be depleted so continue gouging away?

.....or are you saying that even though oil will run out but not in our time as we will continue building better extraction tools? So keep gouging away.

Clarify please.

hanmeng,

Yes -- and because the difficulty of finding oil increases gradually, rather than all of a sudden or in gigantic leaps, the price of oil will also rise gradually -- inspiring searches both for alternative sources of energy and for new and better ways to extract oil (and for better ways to conserve oil in its uses).

Recognizing that if oil will truly become more scarce, it will become more scarce gradually rather than suddenly helps to calm fears that the market will wait until oil is no longer 'gettable' before it searches for alternatives.

What about the Dodo bird? We ran out of those.

It is a sound argument but it does not deal with the real issue.

The Peak Oil folks are not saying that we will run out of oil. They are saying that the production of oil will peak and a world that depends on the assumption that we can always grow supply to meet demand will have serious adjustments that it will need to make.

And the people who don't fret about peak oil (or peak whale) reply that were peak oil to approach or we were to pass it, the price mechanism will make other alternatives economical. Another way it could play out is that another form of energy just ends up weighing in under the cost of getting oil and we go through peak oil because the demand side plummets as it switches to cheaper energy. I'm not optimistic about that happening, as oil gives a lot of bang for the barrel, but it's not inconceivable. At any rate, peak oil is a self-fulfilling prophecy. It's a concept that relies on a static market to be so perilous, when in fact the market is pretty dynamic, so it probably won't be a disaster.

Many people seem to think about capitalism like train speeding dangerously along a track. The track cannot be moved, and between the train and its destination is environmental destruction, peak oil, crass consumerism, or whatever. The best we can hope for is that the train has enough speed to smash through these obstacles without incurring too many casualities, the train is speeding now of its own volition and only one direction to go. But does anyone want to be on that train? Or it can it be slowed so that it is possible to disembark?

Of course, the market is not a speeding train hurtling inevitably toward some destination, it is no propelled by any disposition or volition. The market is adaptable, an all-terrain vehicle perhaps, capable of solving problems as they arise, changing course and strategy at any time.

Those who imagine the market like the speeding train like to fight it with environmentalism, nonconsumerism, etc. but the market is not how they imagine, rather it even adapts to customers who think it the enemy, producing all manner of "green" and anticapitalist products.

The market is a problem solving system, and the problems it solves are those of the people it serves, whatever those problems may be.

"The market is a problem solving system,"




Posted by: Lee Kelly | Sep 2, 2008 6:08:23 PM"

How so, Lee? I am trying to understand but not getting anywhere.

studentT,

was there a world market for Dodo birds?

Vidyohs: I think that Lee is refering to the ideas of the Sante Fe Institution, essentially that a market, like evolution, is a problem solving algorithm that adjusts to the requirements put upon it.

In other words, people want X quanties of y number of items. As tastes and needs change, resources are spent on solving those needs in different amounts. People want iPods? No problem. People want cheaper energy? Research happens to try and make money from that. As such, the market directs problem solving resources.

Of course the market is a problem-solving system. Buyers of goods and services are trying to solve a problem - a need for nourishment or a need for transport or a desire for entertainment or whatever. Buyers seek sellers of goods and services who will solve their problem (meet their need). Sellers devise solutions to problems only because a market for those solutions exists. This is pretty basic high school economics, right?

Through the price mechanism, the market ensures that resources are directed at exactly those problems which have the highest negative value - or which will produce the highest positive value if solved. The free market basically solves the problem of optimization of resources.

John, sort of. The optimization of resources is not the only thing it does. It also finds solutions to other problems by virtue of piles of trial and error, without considering negative value as much as positive value of the results. It doesn't just come to one solution, it comes to many hundreds of solutions, which are then chosen between based on a fantastic amount of granular data.

On an extremely high level I would agree with what you said, but I think the lower level really defines it more.

Hammer: "It also finds solutions to other problems by virtue of piles of trial and error, without considering negative value as much as positive value of the results."

I don't understand what you mean by "not considering negative value". I also don't know why you feel that optimizing the utilization of resources does not solve many problems.

Hammer: "It doesn't just come to one solution"

I agree. And, of course, I said nothing about finding a single optimal solution. What is optimized is the utilization of resources to achieve the maximum value in solving the problems it does solve.

hammer: "which are then chosen between based on a fantastic amount of granular data."

What do you mean by "fantastic amount of granular data"?

Sorry, but your "correction" of my comment is just confusing to me.

That we'll never run out of oil is a truism. It's true but not very interesting. The question for the foreseeable future involves growth in the production/consumption of oil. Will we continue producing more oil each year or will production peak and then decline? A peak does not portend a sudden depletion of oil. It doesn't even imply that oil will ever be depleted. It only implies that we cease producing more each year.

Peak oil doesn't imply a continually rising price of oil either, only that the price of oil rises to the level of more costly alternatives as demand continues to rise.

Since there is no serious Peak Oil hypothesis suggesting that oil suddenly or ever "runs out" and since there is a very serious hypothesis suggesting that production of oil ceases to increase each year in the foreseeable future, we might consider the consequences of this peak rather than debunking assertions that no one seriously asserts.

we might consider the consequences of this peak rather than debunking assertions that no one seriously asserts.

Martin, the consequences of this peak are as uninteresting as as the truism that we'll never actually run out of oil. We will produce more oil every year that more oil is demanded. The only question is at what price will this oil come to market? As oil becomes more difficult to bring to market and price increases, so does the propensity to conserve and develop alternatives. As the professor points out, none of this will happen overnight (as some serious but alarmist physicists from Cal Tech have asserted). It also won't be a linear process. So, what consequences of peak oil are we meant to consider exactly?

Thanks Hammer, now I see what he meant, I think.

So when I walk into a Kroger's to buy a box of Wheaties I am solving a problem.

Truthfully, I can understand that point but I don't think I ever bothered to put that much thinking into it. I guess at my level I never thought of wanting a box of Wheaties and going to a store and buying one as a problem unless I thought I didn't have enough money.

Learn something every day, I do.

But why would anyone consider a need as a problem except the one with the need? And, how would I "solve" his need.

Wouldn't I see his need not as a problem but as an opportunity?

I guess I need to put more effort into learning this stuff.

It has been awhile since I dabbled in anthropology in the U. of Maryland but I don't remember anyone or any book teaching evolution as a problem solving algorithm that adjusts to requirements placed on it.

I am now struggling with that idea. See what you did! ;-)

Vidyohs,

The market solves problems by trial and error. The errors are how selection occurs; for biological evolution the error means fewer offspring or an early grave; for the market the error means financial losses or bankruptcy. In this way the market weeds out bad business practices, inefficiency and waste, leaving behind those who can adapt to changing circumstances and satisfy consumer demands.

The problem situation arises from the combination of consumer wants and scarce resources (the former is always greater than the latter). The market solves this problem by allowing for new ideas to be tested, entrepreneurs are to the market what genetic mutations are to biological evolution. The error elimination process, or selection algorithm, then retains those that work at the expense of those that don't.

The role of the government is, so often, to keep errors around by way of subsidies, quatas, tariffs, etc. Imagine a world in which mother nature subsidised genes which were unadaptive; those particular genes would be better off, but at the expense of life everywhere which would be less adapted to the problems of survival.

Just got back from the movies, and there was a trailer for a documentary based on the premise that we're running out of water (thanks to evil corporations, of course!), called Flow:

http://www.imdb.com/title/tt1149583/

I suspect it won't be long before we hear about "peak water" or some such.

However, there's a legitimate question in the catastrophism that I haven't wrapped my head around yet: When it comes to necessities of life (particularly food and water, without which we live only days or weeks), and those necessities have a cost associated, how do the poorest in the world get access to them?

I understand the need and unavoidability of prices, but the basic question remains.

Ronald Hayden: "When it comes to necessities of life ... and those necessities have a cost associated, how do the poorest in the world get access to them?"

The world has always had poor people, hasn't it? Over the past three centuries - and perhaps longer - what economic system provided the most food to the poor of the world? Here's a hint from a campaign speech by Phil Gramm (who may have borrowed the line from Dinesh D'Souza):

"Has anyone ever noticed that we live in the only country in the world where all the poor people are fat?"

Lee Kelly,

Being the least formally educated on economics of all the participants here it takes some adjusting of my thinking to kepp up with you guys sometimes.

My view of market/markets is known to be pretty basic, intimate, and personal, so I read your last, geared my thinking up to where I can see market/markets and evolution as a "system" and what your saying makes sense.

Thanks.

My only question is in this one sentence:

"The market solves this problem by allowing for new ideas to be tested, entrepreneurs are to the market what genetic mutations are to biological evolution."

Would not the word innovators be a better word than entrepreneurs in this explanation?

Again thanks for the boost.

kepp(ing) up is damn difficult too, if you've never tried it! LOL

Shudda been keep up, of course.

vidyohs,

I have had attended a total of 3 indroductory classes on economics, each within the last two weeks. Before that, nothing. I suspect that until recently I was not better formally trained than you, but then my interest in economics most likely arose from a different source. I am a philosopher first, with a particular concern for ethics, and an economist second (if at all). At 22, I am now attending college for the first time, and hope to go on to study economics more thoroughly.

And yes, 'innovator' is perhaps a better word.

To this excellent article, I would add that we are almost literally awash

in sources of hydrocarbons that can be converted, at a cost, into


hydrocarbon fuels. One source calculated that the amount of hydrocarbons in


sewage sludge, if converted, is enough to replace all oil imports. That


same technology is at work at this very moment converting scraps from


processing Butterball turkeys into a form of biodiesel. So, nobody should


worry about running out of hydrocarbon fuels. The only issue will be the


price of those fuels at the pump, that is if government will just allow the free market


to work. -- Ewin

Lee,

Best wishes on college.

BTW, I had a brief video interview with a PHD Economist today for an atty in Dallas.

After competing the interview he graciously chatted with me as I loaded my equipment back into my cart. I had an opportunity to run some of the things brought out by this Cafe by him, and got interesting and affirmative results for the viewpoints of the "good guys".

But, here is what may be interesting to you. He was bemoaning that there was a shortage of economists doing what he did. I am sure it is because what he does is not a widely known thing.

He teaches somewhere, but his sideline is doing "life assessments" on accident victims to determine their potential earnings had they not been injured or killed. Of course this is done in support of law suits. Lee, this is just a brief outline of his work. You might find it worth looking into if you do get a degree in economics. It is involved and not easy from the looks of things.

I commented to him that it must be lucrative, as most things connected with lawsuits can be. He told me that it was indeed.

For what it is worth.

Lee,

Just QC'd my DVD and the PHD said what qualified him to do the work I videotaped him doing was his gaining a Charter Financial Analyst degree/certificate (whichever). Kinda of like a CPA but qualified him to analyse the records, instead of create them.

John Dewey: what economic system provided the most food to the poor of the world?

I understand, but in the meantime, what is the best way to help the extreme poor in countries that not only are not going in the right direction when it comes to using the market, but are backsliding (Africa, basically)?

How do they get access to food and water, with basically no economic resources, and with political systems set up to siphon off anything that comes their way? (And, worse, governments talked into avoiding GM foods...argh.)

This is not a hidden appeal to communism or some such -- it's wondering how the extreme poor can get access to necessary resources when they can't afford the associated cost, and when they don't have the time to wait for political change.

This is both a question of how to help fellow humans, and how to avoid one of the more persuasive images of those opposed to markets: Showing pictures (as the Flow documentary does) of starving kids in failing states, and insisting that the evil corporations are killing them by charging for the food, water, and drugs they need to live.

There may not be a good answer. But I don't think it's a persuasive answer to say, "Someday maybe they'll have a developed market-oriented economy." It's much more likely, in that case, that the anti-market forces will continue to have their way, especially if they manage to blame the initial situation on evil corporations and human greed.

We will produce more oil every year that more oil is demanded. The only question is at what price will this oil come to market?

No. A higher price does not magically produce more oil. Rather, a shortage of oil produces a higher price.

As oil becomes more difficult to bring to market and price increases, so does the propensity to conserve and develop alternatives.

We'll use oil more efficiently and develop alternatives, but we won't produce more oil every year just because people want more oil.

As the professor points out, none of this will happen overnight (as some serious but alarmist physicists from Cal Tech have asserted).

Which physicists from Cal Tech?

It also won't be a linear process. So, what consequences of peak oil are we meant to consider exactly?

Precisely the consequences you've discussed. We'll find ways to use oil more efficiently, and we'll develop alternatives. We'll do these things precisely because we'll fail to produce more oil one year than we produced the previous year. The Volt is one possible consequence. It could enable us to power cars on coal, uranium, wind and other energy sources rather than oil. Peak Oil is not Peak Energy.

Peak Oil is not an apocalyptic end-of-the-world scenario. It's a well established theory of a peak in production following a peak in the discovery of new reserves. The theory successfully predicted the peak of production in the continental U.S. decades ago. The U.S. was once the world's leading producer of oil. Why is the rest of Earth's surface different?

Anyone suggesting that oil production will rise for decades to come needs to tell us where to find the oil. People eagerly search for oil, but known reserves are peaking anyway, and environmental regulation is not the primary cause.

The oil needed to keep known reserves rising won't come from ANWR or off the Florida coast. Those sources offer a small fraction of known reserves at best. They can't possibly fuel a sustained increase in production. Peak Oil does not imply catastrophic change, but it does imply change.

No. A higher price does not magically produce more oil. Rather, a shortage of oil produces a higher price.

You're right that it isn't magic. But oil that isn't worth extracting at $100 bbl might be worth extracting at $200 bbl, or $800 bbl. This rising price would provide the incentive to bring more oil to the market, effectively producing more oil.

Oil reserves are the oil capable of being extracted under current conditions. If more oil can be extracted, thanks to newer technologies brought about by rising prices, then what counts as oil reserves would increase. It only seems magical.

As long as there's a market for oil, there will be oil to market.

No. A higher price does not magically produce more oil. Rather, a shortage of oil produces a higher price.

Yes it does because the amount of oil in the ground is a function of price. If oil costs more than the market price to lift, then it is not counted in reserves because it might as well not exist - even though it technically does exist. Thus, you will see upstream operations mark up the amount of reserves they carry on their books (it's pretty much their only asset) when oil prices rise and take write offs when the price declines. As Ewin points out, we can squeeze hydrocarbons out of anything - including dirt in your back garden. The only question is - at what cost?

We'll use oil more efficiently and develop alternatives, but we won't produce more oil every year just because people want more oil.

Yes we will and for the reasons I stated above, but only at ever increasing prices (unless technological advances reduce the cost of oil production by more than the effect of the demand increase).

Which physicists from Cal Tech?

I'm terrible with names. They wrote a book about peak oil a few years ago and I thought it was B.S., so I promptly forgot their names. You wouldn't like it - it claimed an apocalyptic scenario when oil peaks because they're physicists, not economists. Their area of expertise isn't even anything to do with oil.

It's a well established theory of a peak in production following a peak in the discovery of new reserves.

It's a hypothesis and it has plenty of detractors and with good reason.

The theory successfully predicted the peak of production in the continental U.S. decades ago. The U.S. was once the world's leading producer of oil. Why is the rest of Earth's surface different?

Because the geological formations are different all over the world and a lot of oil is too expensive to even think about right now. For example, there are oil seepages in areas of the ocean where it's just too deep to economically drill a well. If oil price rises enough (or tech advancements lower costs enough), that oil will become economic and the total worldwide oil reserves will increase. Oil prices may never reach that point because alternatives will just be cheaper.

New reserves can easily be exhausted in one part of the world - especially when most of the world's easy to access oil isn't even in that part of the world. It's largely thanks to American spunk and wildcatters that American oil production ever reached the level it did. Other parts of the world were and are much more oil rich (by that I mean easily accessible oil) but much more hampered by both government idiocy and backwardness (read: Russia and Arabia). However, when the low hanging fruit is picked all over the world, we can turn to non-traditional production to extract hydrocarbon. It's much easier to predict a peak in a single location than it is to predict a worldwide peak. Who knows, if we turn to non-traditional production, the U.S. might see an increase in reserves again.

Anyone suggesting that oil production will rise for decades to come needs to tell us where to find the oil.

Deep sea, sewers, tar pits, your flower garden - for starters.

*sigh*

After reading Hans Luftner's response, I realize I could have just said "what he said"!

Martin, I'm pretty sure I still have the formula I used to use to calculate reserves on a floppy disk somewhere. I'll see if I can find and post it so that you can more easily see how reserves are a function of price.

Yes it does because the amount of oil in the ground is a function of price.

The amount of oil that people are willing to suck out of the ground is a function of price, but the amount of oil in the ground has nothing to do with price.

If oil costs more than the market price to lift, then it is not counted in reserves because it might as well not exist - even though it technically does exist.

This may be true, but accountants don't create oil. They only account for it. What you say here was true of U.S. production, and it peaked and declined as a matter of fact. At some point, global production also peaks. That oil remains in the ground at this point is irrelevant. Some oil will always remain in the ground, but we won't produce it, because alternatives will be cheaper. The economic reorganization at this point is dramatic. I'm not saying it's catastrophic. The last centry saw many similarly dramatic reorganizations.

As Ewin points out, we can squeeze hydrocarbons out of anything - including dirt in your back garden. The only question is - at what cost?

We can produce energy in many forms at a cost. We produce so much of it from oil out of ground at the moment, because pumping it out of the ground is cheaper, but this situation won't last.

Credible authorities claim that conventional production (excluding heavy oil reserves like Canadian tar sands) has already peaked. It peaked in 2005 or 2006. Price then rose, and consumption fell. Price is falling now, because consumption is falling and because threats of still tighter supply are subsiding, not because conventional production is rising.

Even if conventional production has not peaked, this prediction won't be far wrong. Wide eyed optimists say global oil production will peak before 2015. That's less than decade away, coinciding with the depletion of the payroll tax surplus, another looming event we're denying like an unsightly wart on our butt. I'm not predicting armegeddon, but it definitely portends dramatic change.

Yes we will and for the reasons I stated above, but only at ever increasing prices (unless technological advances reduce the cost of oil production by more than the effect of the demand increase).

Oil is not the limiting factor, so price will not rise indefinitely. We'll find alternatives, including increased efficiencies, less costly than the next barrel of oil we might squeeze out of the ground.

It's a hypothesis and it has plenty of detractors and with good reason.

Precisely when the peak occurs is always debatable, but Hubbert has few serious detractors since the peak of U.S. production in the seventies. That it occurs in the next decade is not controversial. The rising price and a rush to increase production may only further deplete reserves, making the decline steeper when it occurs.

Because the geological formations are different all over the world and a lot of oil is too expensive to even think about right now.

If the oil is more expensive than alternatives like nuclear, coal and wind, we'll never think about it. We don't pump oil at any price until we've pumped the last drop out of the ground. The peak isn't simply a function of supply. Rising price hastens the peak by encouraging alternatives like nuclear energy and the Volt, not to mention scooters and flourescent light bulbs. The alternatives are unimaginably vast and largely untapped while thousands of people earn their living trying to imagine more oil production at last year's price.

Who knows, if we turn to non-traditional production, the U.S. might see an increase in reserves again.

Pigs might fly, and I won't say that a peak decades in the future is impossible, but it's not what credible voices are predicting.

Deep sea, sewers, tar pits, your flower garden - for starters.

I was hoping for something more specific. Are you investing in tar pits yourself at the moment?

The amount of oil that people are willing to suck out of the ground is a function of price, but the amount of oil in the ground has nothing to do with price.

Since we can use human waste to produce hydrocarbons, it's hardly a relevant distinction. In theory, we could develop hydrocarbons as long as there is a planet earth. Once we use that up, demand disappears as well because there is no planet. I know it's a ridiculous example, but it's just testing at the limit for illustrative purposes.

This may be true, but accountants don't create oil. They only account for it. What you say here was true of U.S. production, and it peaked and declined as a matter of fact.

Martin, how do you think they came up with the reserve numbers for U.S. peak oil? The very same accounting techniques.

Credible authorities claim that conventional production (excluding heavy oil reserves like Canadian tar sands) has already peaked.

Even if very credible authorities are of the opinion that conventional oil has peaked, there are plenty of credible authorities who refute them with equally good arguments. It is incredibly hard to make predictions in this industry - and I think this is a very under appreciated fact. Opinions (even the opinions of experts) are like assholes - everyone has one and even experts can be wrong.

The rising price and a rush to increase production may only further deplete reserves, making the decline steeper when it occurs.

By definition, this is untrue. If a higher price is required for secondary and tertiary recovery of existing fields, then those would be new reserves, not the decline of old reserves.

Martin, the rest of your post wrt oil can basically be summed up this way: stuff changes over time. I don't disagree with that, I just don't understand why you think it's an interesting discussion. If substitutes become more economic, we'll use substitutes, if not, we'll find more oil. Ok. It's as interesting as saying we all age and eventually die. I don't understand your obsession with this topic.

I was hoping for something more specific. Are you investing in tar pits yourself at the moment?

A.) how much more specific an answer do you want to the question "where will we get more hydrocarbon?".

B.) What does my specific investment activity have to do with anything? As it happens, I'm investing in my own company and nothing else because the return I produce beats the return of anything else available to me. What are you invested in and why is that relevant?

Well then all is fine ;-)