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173 comments on How to Address Contrarian Arguments - part I
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173 comments on How to Address Contrarian Arguments - part I
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Having been basically called names (for questioning whether Peak Oil would happen, and how it would happen) it is my first experience of the 'persecuted minority' thinking in some time.
I'm not adverse to the principle of Peak Oil (it's trivially true, in the sense that oil is an exhaustible resource-- one simply needs to remember that control of Rumanian (or Romanian ;-) oil in the first half of the 20th century was a major strategic issue-- to remember that oil is produced, and production declines).
Then I committed the heresy of suggesting that 'Peak Coal' wasn't something we should worry about too hard, because the CO2 emissions from our existing, proven coal reserves could kill us off first ;-).
I basically got told that I should google world coal reserves, and then I would agree with the poster's analysis that we only have 30 years of coal left (in the scenario of Peak Oil. So the logic chain isn't just 'we don't have much coal' but 'PO is now, therefore we don't have much coal').
If the first was questioning the divinity of Christ, the second was questioning the virginity of Mary ;-).
We need to unify against our true enemies here, gang, I mean the People's Liberation Front of Judea ;-).
So it fascinates me what reception a genuine PO sceptic would get from the 'informed' 'thinkers' here. Probably a public lynching ;-).
The only true signal one would get of Peak Oil is an explosion in the oil price*. Because
Demand = supply + changes in inventories
Only in an extreme case (where a much cheaper substitute had emerged) would the price of oil be falling at the same time as supply was peaking ie you would need wholesale 'demand destruction'.*
Since there is no sign of that at the moment, and indeed oil prices are falling, we are not (yet) at Peak Oil.
* that signal would not be unambiguous either, unfortunately. There are lots of reasons why the price of oil might go up, or production might decline, which are *not
the result of geologic oil exhaustion. Mostly they are geopolitical in nature.* there are some interesting results out of Systems Dynamics models. If you postulate very long supply and demand lags in response to changes in price (which is what oil is) then you could get a 'stuttering' market effect, where prices are very volatile.
Basically demand is lumpy (the decision to close an oil refinery, or to switch locations to economise on road transport, is a major capital decision), associated with the differences between fixed and variable costs. At the household level, the decision to add extra insulation or buy a more fuel efficient car won't happen just because oil prices have shot up-- it will have to look like those changes in oil price are *permanent
and worth the additional cost. And households are constrained in all kinds of ways (borrowing limits etc.).Supply is lumpy in part because there is oligopoly in the oil production market: for small oil producers especially, it may be sensible to ration supply in face of future prices (this is called 'OPEC' in the real world ;-). It's also lumpy because of the 'hit and miss' nature of oil development-- you pay lots of money for drilling rights, and then you hit dry holes.
Deffyes talks about this 'stuttering' in prices in his second book (inferior to the first, I thought) ie the idea of applying queuing theory.
I think that what you wrote about "stuttering prices" is right, but therefore negates what you wrote above that: "an explosion in the oil price... there is no sign of that at the moment". It's fallen somewhat in the last couple of months, but it's triple what it was a few years ago. If you look at the big picture and ignore the "stuttering" I think that the price signal is there. There are also indications of some "demand destruction", and no indication of "spare capacity".
I was struck, f'rinstance, by the rise in US SUV and light truck sales. Not a harbinger of falling gasoline consumption!
As to prices. In a world with very price inelastic supply and demand, you would get the same kind of price volatility. I think you could fairly argue that the previous price of oil was 'too low' rather than the current price is 'too high'. There is a minimum price (around $40-45/bl) which triggers new entrants such as Canadian oil sands production-- which is, indeed, happening.
The fact remains oil prices are below their recent peaks, below their all time peaks (1980) by a considerable margin, and consumption, AFAIK, is still rising.
We might be close to Peak Oil, but the market isn't telling you that yet.
It seems as if oil consumption is still rising, inventories are static, therefore supply is still rising. And, indeed, prices have fallen back.
You can tell a commodity is exhausting, if the price rises. For a long time, the real price of oil fell (1). It has now in some sense 'caught up' to where it might be (on a long term growth track).
(1) my own theory on that is that for a long time, OPEC was able to hold the price of oil higher than market forces would have let it. OPEC is a profit maximising oligopolist, and therefore reduces the quantity of its commodity supplied below the free market level (and secures a higher revenue for its efforts).
And there were genuine efforts to conserve energy (not so much in the USA post CAFE, but in Europe with high gasoline taxes, encouragement of diesel cars etc.-- and businesses worldwide sought to reduce their vulnerability to oil price swings). So you had less demand than market forces would have dictated, and at the same time 'held back' supply.
Eventually that played out as the oil price collapse of the late 90s. But in the 2000s the rise of China and India, plus continued growth in US oil consumption, has 'eaten up' the slack capacity in the system.
The oil traders, who have a big influence on the day-to-day price, seem to react to the "inventories". But I think those inventories are vastly over-rated. They are only a few days, perhaps 2 weeks, of supply. And they're not a lot higher than they were - the "increase" is what, less than one day's supply? Drawdown form tank farms in KSA and Europe can easily explain the commercial "inventories" in the USA. Meanwhile the SPR is lower than it was (pre-Katrina).
Also, like WT says, the bidding war for oil happens in spurts. So the "demand destruction" in poorer countries brings a temporary bit of "relief" to the richer countries, until the next round of bidding. It's a "musical chairs" game and the chairs are slowly disappearing even if some fat asses are still sitting.
Anyway, I am not saying that the price signal is perfect. Not at all -- that is why Peak Oil is so difficult to tackle. The Market is mostly blind, until near the end. The current visibility of some price signal is thus a sign, although uncertain, of imminent peak.
Finally, I don't think that "peak" is the important point in time. Supply can fall behind demand even before the peak. You would expect it to, since the supply curve flattens out as you near the peak, and the demand curve is still rising, even faster (e.g. China). With the globalized economy dependent on "growth" that's catastrophic. Moreover, worldwide per capita oil peaked in 1979, thus any "growth" since has been due to increasing inequity.
The supply of oil exactly equals the demand for oil, plus or minus any change in inventory.
And most oil changes hands at the market price.
When you say 'supply can fall behind demand even before the peak' that is actually logically impossible (except for changes in inventories).
I'm not aware of evidence that total world oil consumption has fallen, so if there is 'demand destruction' it's not evident in the aggregate. That (the quantity of oil demanded) would be a higher quality statistic than total oil produced.
The fall in oil per capita isn't particularly concerning. Merely a sign that the world has gotten better at generating GDP, per barrel of oil consumed. (It also uses less copper per unit of GDP than it did in 1979).
If we look at some other measures like life span and average life expectancy, or number of mobile phones in the world (1979: people connected to a phone system of any kind), proportion of people who are starving, etc. then the world is a richer place than 1979 (with the striking exception of sub-Saharan Africa, where AIDS has taken a horrific toll).
Where there is room for concern is in total pollution and in other measures of ecosystem degradation. The capacity of the Earth to handle our polluting output is finite (albeit elastic).