[PostPetroleumMan]

PEAK-OIL: A Game for Two Main Players (And a Large
Number of Other Very Interested Parties).

Player 1. "US". The world's largest oil consumer.
The richest and most powerful nation on earth.

Player 2. "SA". The world's largest oil producer.
Holder of the world's largest reserves, and the only
nation left with an ability to significantly increase
its production.

The Situation
Hubbert's Peak approaches. The
world's oil supply will shortly go into irreversible decline.
The consequences for oil consumers and producers
alike are immense. Although no-one can prevent
the arrival of the peak, the SA player is in a strong
position to influence both its timing and the rapidity of
post-peak decline.

Objectives
The US seeks to manage the transition
to a post-oil economy and avoid serious
disruptions resulting from a prolonged oil-price
shock.
SA seeks to maximise the price it will receive
for its vast remaining oil reserves, both in the
short-term and in the post-peak future,
when it will still be pumping millions of barrels
per day.

Policy options for the US player:
Option 1. [FAST-TRANSITION] The US player may
opt to transition as quickly as possible to a post-oil
economy, by making very large investments in the
near-term to replace existing infrastructure.

Option 2. [SLOW-TRANSITION] The US player may
alternatively opt to transition its economy slowly over an
extended period, maintaining significant oil-dependency
both through the peak and into the era of
declining oil production.

Policy options for the SA player:
Option 1. [RAMP-PRODUCTION] In this option, SA
dramatically increases its oil production in the near
future, delaying the arrival of the world peak and
ensuring a slower rate of post-peak decline.

Option 2. [HOLD-PRODUCTION] Alternatively, SA
may choose to hold production at current levels,
or even reduce it somewhat. The world production
peak will arrive earlier and the post-peak decline will
be rapid.

The Possible Outcomes.

Outcome 1. The US player chooses FAST-TRANSITION,
the SA player chooses RAMP-PRODUCTION.
Consequences for the US player:
The US makes significant short-term investment which may
dampen its economic growth but is unlikely to cause recession.
In the long-term the US successfully transitions to a
post-oil economy and the risk of a major
oil shortage is removed.
Consequences for the SA player:
In the short-term prices remain lower than they could be
due to increased SA production. In the long-term, prices drop
significantly because the developed nations, led by
the US, have switched to other energy sources. SA gets
a poor price for its reserves, both in the short- and long-term.

Outcome 2. The US player chooses FAST-TRANSITION,
the SA player chooses HOLD-PRODUCTION.
Consequences for the US player:
The peak arrives early and the world's oil goes
into rapid decline, causing a dramatic increase in prices.
Unfortunately, the increase comes just as the US has
embarked on an aggressive investment programme.
Severe and prolonged economic recession results.
Eventually, the US investments pay off
and a painful transition to a new economic era -
independent of oil - is achieved.
Consequences for the SA player:
In the short-term very good oil prices are achieved.
In the longer term, a combination of severe
recession and enforced rapid transition in all of
the world's developed nations causes a decline in
oil prices. SA will achieve a poor price for most of its reserves,
but may do better than under outcome 1.

Outcome 3. The US player chooses SLOW-TRANSITION,
the SA player chooses HOLD-PRODUCTION.
Consequences for the US player:
Oil production peaks early and goes into rapid
decline. The US is not even close to being ready.
In this outcome, the US player will be forced to
switch its strategy to FAST-TRANSITION.
Consequences for the SA player:
In the near term prices rise to excellent levels,
but with severe depression in the US the SA has
lost its major export market. Very low volumes of
oil are sold. In the long term, the US player has been
forced to switch to FAST-TRANSITION and oil prices
decline. Another bad outcome for SA.

Outcome 4. The US player chooses SLOW-TRANSITION,
the SA player chooses RAMP-PRODUCTION.
Consequences for the US player:
The arrival of the peak is delayed and the post-peak
decline in supplies is softened. The US gains time
to successfully transition to a post-oil economy.
A near term recession of some magnitude remains
possible.
Consequences for the SA player:
Oil prices rise in the short term but then fall back
as the major economies make progress in switching
away from oil. Long-term prices remain good as the
US maintains large imports. A reasonable price is
achieved for the bulk of SA's reserves.

Observations:
Neither player can achieve a desirable outcome without
the cooperation of the other party. Outcome 4 is the
only one likely to be acceptable to both.
However, like all the other strategies available
in this game, it comes with very large risks
attached.

Risks for outcome 4:
The risks are both technical and political.

Technical risk 1.
SA may fail to soften the peak-oil event, due
to steeper than expected decline in other producers,
technical/financial difficulties in ramping production
quickly enough, or a worse-than-expected depletion status
of its own oil fields.

Technical risk 2.
The US may fail to manage its transition successfully,
even if the SA player has bought time by ramping production.
This could happen simply due to the sheer complexity of
the task.

Possible Mitigation.
There may be several possible strategies available to
mitigate these risks, should they materialize.
One example is for SA to provide US temporarily
with oil at a price below the market price.
It would be in SA's interest to do this (as long as
US sticks to SLOW-TRANSITION), because they
need a market for their future oil production.
However it would greatly antagonize other nations
whose supply situation would be aggravated.
Therefore the main players may not wish to resort to this
unless they have no choice.

Now let's discuss the political risks for outcome 4.
These risks exist because the US is a capitalist
democracy, in which the government does not
control all aspects of the economy and is always
in danger of losing the support of the electorate.

If the PEAK-OIL game were to become a major
political issue in the US, other players within the
US system could become very nervous about the
SLOW-TRANSITION strategy. Nervous business leaders
may opt to protect themselves by choosing a
FAST-TRANSITION strategy for their own business.
Or a nervous electorate could force the government
to switch the US strategy to FAST-TRANSITION.

Either of these outcomes could precipitate a move by
the SA player to HOLD-PRODUCTION.
To avoid this, the US player must strive to prevent PEAK-OIL
from becoming a political issue in the US mainstream.
This can be done by studiously ignoring
the issue in public, by publishing reports
stating that the world has ample oil supplies,
"3 trillion barrels of ultimately recoverable oil",
"no production peak until beyond 2037", etc,
and by pretending that the main game in town
is actually not PEAK-OIL, but WAR-ON-TERROR.
The SA player also needs to help reassure the US
business and market sectors that it can successfully
implement the RAMP-PRODUCTION option,
for example by issuing statements such as
"we now have 1.1 trillion barrels of reserves"
and "we can maintain 16 million barrels a day
for 50 years". Until it becomes clear that
both the US and SA players are irrevocably committed
to outcome 4, both of them will need to
continuously signal to each other that they
have confidence in both their own and each
other's ability to implement the strategy.

Not all of the political risk can be avoided.
Many oil production statistics can be found in the
public domain, and at least some of the US
electorate are bound to notice the imminent
arrival of peak production. These people will
likely become super-nervous because
thier government is appearing to ignore the
issue and has not announced any plan B.
Oh well... with any luck they will be
regarded as a paranoid minority.

The US and SA players are the main actors
in the drama of PEAK-OIL, but there are many
other interested parties. These
can be brought into the game as well if you feel
that it's not enough fun with just two.
As an example, let's consider the "EU player".

The EU is the second largest consumer of oil
in the world. As such, its objectives and available
options are much the same as those of the US.
In particular, the EU player also wants the SA player
to choose RAMP-PRODUCTION. While the
EU player lacks either the market or geopolitical clout
to decisively influence SA, this also
means that the EU potentially has more freedom
to act. The FAST-TRANSITION option will be very
tempting for the EU player - particularly as he
will be aware that the US and SA players
may negotiate a special deal if everything else goes wrong.
Choosing FAST-TRANSITION will irritate the SA
player, but SA can be expected to play ball
as long the US sticks to SLOW-TRANSITION.

Therefore statements such as "we will have an
oil-free economy by 2020" and "our target is
30% renewable energy by 2020" can be
expected to emanate from the various EU
mouthpieces.

However, like the US, the EU player cannot afford
to turn PEAK-OIL into a major political issue.
This would risk destabilising the US strategy,
removing the US player's freedom to act,
and precipitating the SA player to choose
HOLD-PRODUCTION. Like the US, the EU
is a capitalist democracy. How will the EU
player provide the leadership required to move
EU society towards a FAST-TRANSITION strategy,
without making a fuss about PEAK-OIL?
Fortunately, there is another game in town
in which FAST-TRANSITION is also a valid
strategy - it's called KYOTO-PROTOCOL.
A good option for the EU player is to make a
lot of noise about KYOTO-PROTOCOL,
and then use it to justify implementation of
FAST-TRANSITION.

Note that the US player cannot join the
KYOTO-PROTOCOL game, as this could
signal to SA that he has abandoned
the SLOW-TRANSITION strategy. The option
of playing KYOTO-PROTOCOL may become
available in the future once it's clear that the
US and SA players are fully committed to
outcome 4.

The PEAK-OIL game may not in the end be a lot of fun
to play, but it is a lot of fun to analyze from the
comfort of my armchair. It is of course a simplistic game of
pure fantasy. Even though the game as descibed is
simple, my analysis of it is likely completely
wrong.

[Nike62]

Policy options for the SA player:
Option 1. [RAMP-PRODUCTION] In this option, SA
dramatically increases its oil production in the near
future, delaying the arrival of the world peak and
ensuring a slower rate of post-peak decline.

Option 2. [HOLD-PRODUCTION] Alternatively, SA
may choose to hold production at current levels,
or even reduce it somewhat. The world production
peak will arrive earlier and the post-peak decline will
be rapid.

Very good job!

Anyway, I'm afraid there is a little mistake: ramping-up production delay the peak but lead to a rapid post-peak decline; holding production makes an earlier peak oil but ensure a slower post-peak decline... so I've read in many posts!

[PostPetroleumMan]

In the long-run you are right: boosting SA production now will
eventually cause it to decline faster. However, in the critical
years around the peak, SA production will still be rising or
stable, while the rest of the world will be falling fast.
Therefore the effects in this critical period will be softened.

[BigTex]

Considering the way SA has developed its production, according to Simmons anyway, when they do peak their decline is likely to be steep. It's kind of like in the kung fu movies when the fighters fight like madmen right up until the moment they collapse from countless wounds. They look fine right up to the moment they go down.

SA is like the proverbial duck, smooth on the top but paddling (pumping, exploring, investing) like mad underneath the surface.

[garyp]

It reads to me as if outcome 3 & 4 have the assessment of SA ramp the wrong way round, at least from what you say about peak date.

Anyway, if you're going to play game theory into this, I'd suggest that you've neglected that pre-peak and post-peak are separated by a phase transition. The rules that govern success or failure in the game change during this phase transition such that what makes sense on one side will make no sense on the other.

As a for instance, a possible approach to some of the risks you mention from the SA perspective is the sudden cessation of supply to US, protected by others (eg EU), so as to remove a substantial element of the demand side via crash and collapse - equivalent to the use of economic force to impose will and control on those left (build an empire). Since there is substantial risk to SA that US will attempt to use military force to secure all supplies for itself, forced sudden collapse has the benefit of forcing the transition under SAs control and in directions best for SA.

[PostPetroleumMan]

I think you are right: timing is critical. If SA ramps production
too early, then its own peak may occur before the worldwide
peak. In that case it looses its ability to influence the worldwide
peak (in fact makes it worse) and outcome 3 and 4 are reversed.

SA must take care not to ramp-up until the peak is imminent.