106 comments on Wikipedia Megaproject Update (August 2008)
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106 comments on Wikipedia Megaproject Update (August 2008)
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Hypothetical question:
If the production cost hurdle rate was $100
how much oil could be produced, and by when?
If the production cost hurdle rate was $200, how much could be produced, and by when?
what I'm trying to get at is how much oil is "out there" in any reasonably high case future?
Trying to paint some different scenarios
Simmons is saying $500 oil. maybe he is right. in which case $200 production costs would be very reasonable
If it takes 10 years to get that oil to market, we should start now
This is why I think worldwide decline rates presented by Khebab and others are close to best case (though they are not including EOR). Its easy to ignore the law of receding horizons, which reflects the basic fact that many costs accelerate along with revenues - so an oil project that looks like it has juicy profits with projected costs of $70 all in, will either be scrapped, delayed, or scaled down as costs go up almost as much as the commodity. As we deplete the fixed oil in the ground and replace with higher costs marginal new oil, the rate of change of the price floor will rise faster than the rate of change of the crude price.
This is because the market is not correctly pricing in future production potential.
I think free markets have a fundamental flaw if they are misinformed. In general they only work if they have reasonably correct data and external forces such as subsidies don't distort the market to much with to much being intentionally vague.
The oil market is only fungible over a fairly short term time period for immediate production and is in general misinformed.
Next even if it was a more perfect market you have a real problem in the case of resource depletion since current production costs have been marked down for the marginal barrel of oil sold the market underprices future production costs and certainly flows.
Free markets are horrible at resource management and most of the distortions we apply to free markets tend to further push short term gains over long term viability.
I'd invite anyone to show me a free market that actually resulted in correctly managing a resource.
This is why open markets suffer wild fluctuation's in prices when the underlying resource starts to decline. They are always behind the curve and as they explore the maximum price boundaries the market participants who are human don't like the fact that the market signal is that the only bound is the price that ensures enough demand destruction to balance supply.
Thus the core issue is that any open market is poor when the problem to be solved is reducing demand to match supply much less prorating rising production costs.
This is even worse for critical resources.
A really good example of market failure is famines.
Also in the cases of many famines if you look you will generally find that external interference of some sort caused the market to be distorted leading to failure shortly after supply problems start happening. Its hard to find evidence of famines without heavy distortion but the isolated Indian communities of the southwest United States are probably a good example of decline because of resource loss and indeed it seems they took a long time to finally fail.
In my opinion the best corollary for peak oil is famines under various conditions.
The historical record contains information about various famines with modifications to the standard free market that closely parallel all the responses we have to peak oil including even the export land effect. In basically all cases the outcome was the same.
Said differently, the market does a pretty good job of pricing above ground resources (e.g. how much is in tankers, in barrels, in storage vs. how much demand there is), and a terrible job of pricing long term underground resources that are yet to be procured. It is my opinion this is linked to our domain specific neural wiring that focuses (as it historically always did) on the present.
I agree we intrinsically distort the yet to be procured problem. This paper is actually a perfect example it presents a generally rosy picture by ignoring almost all complications except what is probably a low estimate of the decline rate in production.
On theoildrum of course these issues will be highlighted so the overall presentation is balanced but I'd suggest that this is rare most of the time this distortion makes its way into our assumptions about the world without critical review. As I side note it shows one thing I've noticed is that few people understand the importance of true peer review. Despite the problems with peer review its the basic principle of science in my opinion.
But this goes back to the misinformed market problem underlying that is the simple fact that we intrinsically desire to be misinformed. Its part of our neural makeup.
Although it might seem off base the classic example is that people continuously fall for the exact same scams year after year and thus on of the biggest truths about people is that a sucker is indeed born every minute.
The problem is of course to counteract this intrinsic problem you generally have to present the absolutely worst case scenario to get a problem to be recognized but then in general your labeled a doomer and banned from society. So not only are we suckers for the best news we are very effective at killing the messenger of bad tidings.
And last but not least in the ultimate hypocrisy of our self denial we don't even admit that we think this way.
I think the only reasons humans have been successful is that in the past we have always had groups of breeding populations able to reinfect the host (Earth) when our civilizations collapse. Our success is thus based on our ability to survive in harsh environments and continuously repopulate
from a base hunter/gatherer level if needed.
In general the difference between oil and food is that food (locally) depends on the weather and the weather changes on a year to year basis. The population is sometimes over the carrying capacity for that year, but most of the time is substantially over.
Famines kill poor older people and poor people's children mostly, because they are not powerfull enough to fight for food, or have savings enough to buy it, or economically usefull enough to borrow money and buy food.
What is happening in oil now is more like shifting ecotomes during climate change. The rain just stops falling as frequently and intensely as it used to.
Hmm
1.) Fighting for it ? Yep
2.) Only the strongest/wealthiest get it ? Yep
3.) Economically powerful enough to borrow to buy it ? Yep
Actually my point is in the real world everything your saying is not happening is happening.
Geologic depletion itself presents the problem as a slow steady decline in most models its not clear that they are correct.
But reality is a different picture. In a few years we will know the truth but the chances of you being correct in your description are slim just like I'm willing to bet 100 dollars that future production will be less then is predicted by the model used in this paper. Are you willing to take that bet ?
I'm glad you agree with me. What made you change your mind? (Just trolling! I'm joking, joking!)
:)
Actually its important the reason for the production curves for oil is because of above ground factors certainly the details of the reservoir effect its production profile but we could have produced our reserves for 1000 years if we chose to.
Or never for that matter.
Geologies input is given a certain extraction profile whats the final result.
Everything else from the extraction profile i.e who/what/when/where/why of oil extraction on up is above ground decisions.
This is important because real future oil production is at the moment on a month by month basis depending on geopolitical events and hurricanes in the gulf. And major disruption in oil supplies from now on out will probably lead to war that will further disrupt oil supplies. After the US elections tension may drop and we are back worried about geologic depletion but its going to keep flipping back and forth.
As we flip this coin so to speak the chances are incredibility high that above ground factors will result in lower oil production then we would see vs the baseline geologic depletion.
At the longest we are at best on a five year horizon within five years peak oil will have to be accepted within five years after that chances are society will be quite different from what it is today.
This is certain even from the geologic graph.
Some dodgy pseudopsychology in posts above:
On the contrary, one of the most important facts of human psychology is great individual differences in many respects. For instance Mozart said he considered death would be his truest friend, and Schubert every night hoped he would not wake up the next morning. In a late decadent society such as here/now, there will be a preponderance of short-termism, wishfulthinking and pretentiousness, but still it is not universal. But some behaviours dominate a society. The wastefulness of high-livers tends to defeat the efforts of more prudent others. High spenders force up prices for everyone else. Peaceful people are dominated by warmongers. Etc.
No. Some more basic principles of science are basing one's conclusions on demonstrable evidence and reasoning. And getting beyond mere "authority" assertions by providing justification of one's assertions by presenting one's data and reasoning. This means that everyone can judge the scientific case for themself (in principle) rather than having to rely on some contest of either status or numbers or a mix thereof. I didn't take the view that AnthroGlobalWarming is happening until I saw the case behind the (near)consensus. The (near)consensus (of intellectual prostitutes) is certainly utterly wrong on other matters such as the hiv-aids hoax.
This is why I celebrate and do not castigate the presence of investment demand in the back end of the crude oil futures curve. I am also a strong advocate of the idea that we need more speculators in oil, not less. Functionally, that large institutional capital that has flowed into the out years of the curve is available to oil and gas production companies that want to take advantage of it. I'm also quite confident that an enormous amount of thought and research lies behind much of that investment demand for oil in the out-years. The smart money reads the Oil Drum, and agrees. It's OK. Rex Tillerson doesn't get it and doesn't want to. However, CEO's of other oil and gas companies do. The sooner we get future expected prices into the present, the better.
G
Memmel
One of the other distortions we need to consider with respect to the cost of production is the differential between capital cost and production cost.
A substantial portion of the cost of production is the capital cost of the oil production facilities. In many cases (and increasingly so into the future) this capital cost represent a greater portion of the production cost than does ongoing operations. Once the project is committed and built then this is a sunk cost. To continue viable production the operator only needs to overcome the hurdle of the ongoing operational cost, a much smaller number.
If you examine the receeding horizon issue raised by Nate then you need to treat new field development in a different way than production from existing developed fields.
Right receding horizons is a bigger problem for new fields agree 100%.
But with most of our fields getting pretty old infield drilling is at best slowing decline. The problem is without a fairly continuous supply of new fields esp in the small field case with lifetimes of 5-10 years you quickly hit the point where more and more fields are in the heavily depleted steep decline case. Its only the new fields we have developed over the last 20 years that has kept production up.
This is on top of the broad hopefully slower decline of the giant fields that dominate the production. Deep Water for example precludes development of smaller fields same with artic etc. Simply because of costs and receding horizon problems make it uncertain how much of the arctic or deepwater will ever be developed.
We are losing our shallow water smaller fields that really kept production going over the last 20-30 years and the new replacement choices are prohibitive in cost capital wise and energy wise.
Nate: I assume you meant "Law of receding horizons reflects the basic fact that many costs accelerate along with revenues"
D'accord. Merci
polytropos said:
Simmons is saying $500 oil. maybe he is right. in which case $200 production costs would be very reasonable
If it takes 10 years to get that oil to market, we should start now
Why? Is the aim simply to keep economic growth going for as long as possible, whatever the cost? What would be your position once oil is well into its decline and there is no possibility of ramping it back up? Is it only then that you would think, "hold on, we're going to have to figure out how to live with declining energy supplies, better get onto that project as a matter of priority"?
Why do so many people want the world to use a strategy of reaction, instead of proactive planning? Wouldn't it be better to assume peak in 2010, at whatever price, and plan accordingly? You can't put this off for ever.
It's worth noting that you're not necessarily contradicting the previous poster.
If you assume a peak in 2010, "how much is available at $500?" is essentially a quantitative version of "what's the shape of the post-peak decline curve?"
Knowing that - and knowing how the world economy is likely to react - is a key part of planning accordingly.
Maybe because, to be truly proactive in planning, planners would have to admit that we passed the limit to growth long ago. It's a tough call to tell 6 billion people they have been fired and will have to get off the planet. At the same time those planners would have to be setting a new earth friendly industrial system in place for the remaining populous, possibly by beginning with some sort of sustainable energy source such as a massive wind power project...hmmmm!! ;-)