Peak Oil is You
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Page added on November 13, 2010
The problem with “Peak Oil” from an economist’s point of view
The National Geographic Daily News blog cites a new International Energy Agency report that pins 2006 as the year in which oil production rates attained a pace that will not be again matched. Or, in other words, 2006 was the year of “Peak Oil.” That projection is just one scenario of several looked at by IEA, but in their view this scenario is the most likely outcome.
The Daily News blogger admits that the “peak” is not expected to be followed by significant declines – rather, IEA projects a leveling out of conventional oil production at levels just below 2006′s peak for at least the next 25 years and minor increases in unconventional oil production and minor increases in natural gas liquids production. In short, the IEA’s report more resembles CERA’s undulating plateau story than peak anything. Yet we are told the “age of cheap oil is over” and the consequences of relying on on natural gas liquids and unconventional fuels are “stark.”
A more reasonable characterization of IEA’s most likely scenario is that it estimates oil production will remain steady for the foreseeable future at around the level attained in 2006. Scary? Rioting in the Streets? Stark?
No? Well, are you at least mildly concerned?
A lot of peak oil analysis leaves economists cold. After all, production levels are in part a result of production choices, and in markets production is driven in part by costs and prices. The popular Hubbert’s Curve approach to modeling peak oil ignores all of this. Here is a quote from a recent analysis by James L. Smith:
[Hubbert’s model] is problematic for economists since the volume (and timing) of ultimate recovery presumably depends upon price — which in turn depends upon demand, interest rates, and the cost of production — none of which are incorporated here. There is no assurance in Hubbert’s model that the projected rates of future production will actually clear the market. Although the prediction is simple, it is not credible due to neglect of these fundamental economic factors.
Smith also notes that “Empirical tests of [Hubbert-style analysis] … failed badly in predicting the peak, which reinforces economists’ theoretical objections to the underlying method.”
[And to be clear, I’m not asserting the IEA modeling is “peak oil analysis.” So far as I can seek, the peak attribution was that of the Nat Geo writer, not directly drawn from IEA’s projections.]
4 Comments on "The problem with “Peak Oil” from an economist’s point of view"
Ian Cooper on Sat, 13th Nov 2010 10:15 pm
So if our cars ran on cream, and cream supply consisted of a gargantuan cup full of milk that had been produced by long-dead dinosaur cows, and we had just finished sucking out the cream from the top, leaving milk with whatever cream was left dissolved in the milk, I suppose economists would say that cream production could remain at current levels.
I realize demand for cream is expanding, and I get that supply responds to demand, but where is all this future cream coming from? Is there a ginormous magical cow swimming in the milk?
John Bilsky on Sat, 13th Nov 2010 11:33 pm
What economists refuse to admit is that money is nothing more than a complex accounting system for available energy. Ultimately, money has to come from somewhere. If it is “created” out of thin air, it will likely eventually lose all it’s faith based value and thus become worthless. Hubbert’s model certainly WILL be problematic for economists because their beliefs are totally divorced from reality.
KenZ300 on Sun, 14th Nov 2010 1:55 am
The end of cheap oil will have people looking for more supply but that supply will be at much higher prices. The world economy and it’s growth was built on cheap energy. In 2008 when oil hit $147 / barrel the economy took a big hit. Suddenly families had to budget for an extra $300 or more a month in transportation costs. That took money away from other things like mortgages and retail spending.
High oil prices will have significant economic implications. We need to speed the transition to clean, sustainable alternative energy and reduce the impact of high oil prices.
Our economic security and national security depend on it.
EVsRoll on Wed, 24th Nov 2010 2:10 am
The Hubbert Peak Oil theory models the production of crude oil over time.
Dr. Hubbert’s original production curve for example has years on the X axis, and
production on the Y axis. There are no dollars on the plot.
The fact that production capacity intersects with price is an economic construct independent of the oil left in the ground.
EVsRock!