167 comments on The Economics of Oil, Part II: Peak Oil and the Energy Supply Curve
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167 comments on The Economics of Oil, Part II: Peak Oil and the Energy Supply Curve
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Put me in both the disagree and agree columns.
In the disagree column, the problem with supply is threefold: exports; exports and exports. From the point of view importing countries, the aggregate world oil supply is largely irrelevant. Importers are primarily focused on two things: domestic production and net world export capacity.
Our mathematical model (Export Land Model, or ELM), real life case histories and our quantitative forecasts suggest that net export declines accelerate with time, e.g., the UK went from peak net exports in 1999 to net importer status in 2006, from an initial exponential decline rate of 38% per year to a final exponential decline rate of 178% per year. I have compared a net export crash to an airplane doing a terrifying near vertical dive into the ground.
Having said that, regarding the "agree" column, Alan Drake has documented how the US and Switzerland arranged for the transport of people and goods with minimal oil input--via electrification of transportation.
WT: Basically I agree with your ELM, but IMO the UK experience obviously cannot be extrapolated to exporters like KSA. KSA's reliance upon the export of crude oil is too great for a similar decline to occur. The UK, economically speaking,was never reliant upon the exportation of oil, unlike KSA.
The UK and Indonesia case histories are interesting. It would be hard to find two more different net exporters.
UK: high per capita income; high energy taxes; minimal rate of increase in consumption. Result: Peak exports to net importer status in seven years.
Indonesia: low per capita income; subsidized energy prices; rapid increase in consumption (4.4% per year from 1996 to 2005). Result: (1996) Peak exports to net importer status in eight years.
ELM: Peak exports to net importer status in nine years.
WT: You could be right, but for KSA to go this route would be economic suicide. I still think any countries that are, economically speaking, based around nothing but the export of oil or oil products should be slotted in a separate category. KSA is obviously the first one that comes to mind-possibly you could refine your model to attempt to account for this (just a suggestion).
The 2005 to 2006 numbers for KSA are as follows (exponential increase/decrease):
Production: -3.7%/year
Consumption: +5.7%/year
Net Exports: -5.5%/year
Extrapolating from year to date numbers, my guesstimate for 2007 is as follows (I am adding in some increased liquids consumption, because of their natural gas shortfall):
Production: -5.6%
Consumption: +10%
Net Exports: -9.5%
"WT: You could be right, but for KSA to go this route would be economic suicide."
Nope. As long as prices rise faster than exports fall, they will keep making money. And because of the low elasticity of oil, that is almost certain. Oil prices have doubled, but they are only down about 8-10% on supply. That does not look like suicide to me.
Plus the US chemical and fertilizer industry is closing and heading to the Middle East, so they will be able to diversify (didn't they just purchase Dow Chemical?).
Jon Freise
Analyze Not Fantasize -D. Meadows
G: I was referring to WT's example of two exporters actually going to net importer status. Hard to see how KSA would have a functioning economy as a net importer of oil and refined products.
I thought it was interesting that Indonesia's consumption kept increasing until they were a net importer.
What is your estimate for Mexico?
bill.james@jpods.com
It costs less to move less
Mexico is an odd case. Their consumption was increasing, up until 2006, when it actually dropped, probably because of the sharp drop in transfer payments home from workers in the US--presumably because of the decline in housing construction.
Their 2004 to 2005 net export decline rate was -9.7%. If their consumption from 2005 to 2006 had increased at the same rate as 2004 to 2005, their net export decline rate from 2005 to 2006 would have been -12.0%. However, because of the decline in consumption, their net export decline rate was only -1.7% from 2005 to 2006.
In any case, they were the only top 10 net exporter to show a decline in consumption from 2005 to 2006.
The question on the production side is how long they can partially offset the Cantarell decline/crash. I'm surprised that production is not falling faster.
Do you have numbers on what part of the governments ability to act depends on oil?
Political instability seems likely as revenues drop.
Except for the positive feedback loop--cash flow increases (for a while), even as exports decline, because of rising oil prices.
Pemex accounts for a huge percentage of government revenue. I don't have the exact number though.
I did not find specific numbers but it looks like political instability will be a significant risk post peak.
Thanks for your insights.
http://www.brookings.edu/views/op-ed/20070905martinezdiaz.htm
Finally—and this Mr. Calderon recognized less explicitly—the Mexican economy remains perilously dependent on the country's northern neighbor. Ninety percent of Mexico's exports and 70 percent of its imports go to and come from the United States, while some 65 percent of Mexico's foreign direct investment comes from US investors. Nearly a third of Mexico's commercial bank assets are owned by US financial institutions. And crucially, over $20 billion in remittances from Mexicans working the United States flow into the economy every year, providing the country with a major source of foreign exchange and improving the lives of thousands in some of the country's most depressed areas.
According to Wiki the Mexican fed takes 60% of Pemex's Gross, or about $US 46 billion / yr. this in turn is claimed to be 1/3 of the Mex. Fed. Budget
http://en.wikipedia.org/wiki/Pemex
"Taxes on the state oil monopoly Petroleos Mexicanos SA, which faces declining output, now account for about 40 of collections"
The KSA has very large investments in refining in the US economy. When Texaco lost the lawsuit to Pennzoil over the Getty takeover, they sold 1/2 of their refining in the US to the Kingdom of Saudi Arabia. If you'll recal at that time they were worried about maitaining market share. That's the real reason they flooded the world with crude in the middle 1980's, not some nonsense about ccoperating with Reagan to destroy the Soviet Union.
They've also bought other US assets for years, including treasury notes. The Saudi's have no desire to knock down the house of cards, but members of the extended family certainly do. And I'm sure the US refining industry isn't their only foreign invetsmenst, they apparently have large investments in the European Union too Bob Ebersole
Westexes, I thought you and Khebab where working on a story that gave a more detailed ELM prediction for the decade ahead. I havn't seen anything yet, is it still in development?
Regards, Nick.
We will do a preview in late September, with the final report delivered at ASPO-USA. It will not be a pretty picture.
As an finance type, I enjoy reading a post that doesn't completely discount the impact the invisible hand will have on peak oil. However the post ignores ELM as westexas points out. You also ignore the ecomomic and political fallout that demand destruction will have in less developed nations. Sure I can walk to the store and save the fuel but what of the african village that can't irrigate their crops for lack of any useable energy source?
Is there any precendent for ELM or for demand destruction in marginal economies that we could look at to see how it will impact the global economy. Is an orderdly energy descent possible globally or just in the developed nations?
Only with nations that have lots and lots and lots of social capital