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Peak Oil: How Supply Crunch Can Lead to Lower Prices (for a while!)
Posted by Gail the Actuary on August 5, 2010 - 10:30am
This is a guest post by George Mobus. George is an Associate Professor of Computing and Software Systems at the University of Washington, Tacoma. His blog is Question Everything.
There seems to be an on-going debate among peak oilers and many economists as to which came first, the chicken (peak supply flow) or the egg (peak demand). The first is attributed to the classical peak oil theory that when about half of the oil in the ground is pumped out, extraction rates start to go into deceleration and eventually peak, thereafter going into decline. The oil price spike of 2009 was quickly interpreted in this vein, the price of oil reflecting the fact that peak had come at last and oil was just going to get more expensive with declining supplies. There were dire fears that oil at that price would trigger a recession, which seems to have been the case. But then the price fell precipitously leading other analysts to conclude that the spike might have been an anomaly set off by speculation and that the subsequent reduction in oil flow rates was due to demand destruction owing to the effects of a global recession.
The problem with these kinds of interpretations is that they often look for a prime cause in a linear chain of cause and effect. In this case the prime cause would have been peak oil and all else follows. A general truth behind this explanation is that oil is depleting and will indeed, if not already, become so expensive, both in monetary and energy terms, to extract that our production rates will begin to decline and less and less oil will flow over time. But the economic system that is dependent on oil is far more complex and no linear model can really explain what we have been witnessing in terms of oil prices and economic activity (the general so-called health of the economy).
Feedback, Mutual Causation, and Dynamic Systems
Real life dynamic systems are dominated by complex feedback loops, most of which operate over different scales of time. This latter fact is very hard to represent in typical systems dynamics models since the latter tend to provide only one size of time increment (Δt) for a time step and to represent much longer time scale phenomena. It is necessary to use extremely small time constants in your equations – and hope the precision is OK – and run your model for excessively many iterations.
But it is this mixture of short and long time scale phenomena with mutual feedback that cause system variables to behave seemingly erratically. In an attempt to try and grasp what is happening in the oil industry at a macro scale, I have employed two approaches to linking the many variables involved in the oil markets and the general economy in causal diagrams that might help shed some light on the interactions and subsequent seemingly unpredictable behavior of the whole system.
The first method is to show the large scale feedback loops in two domains: the consumer economy, and the debt-based (financial) economy to show the relations between the variables. These diagrams are based on outlines provided by Gail Tverberg (personal communications) from her financial markets perspective.
The second approach is to put together a systems dynamic model which attempts to combine several short and long-term loops that may help explain the seeming dichotomy between peak oil and peak demand and why the price system doesn’t seem to operate in the classic, and direct, economic supply-demand fashion we would expect. This article provides a first look at the developing model in an attempt to gather useful feedback from readers to help improve it.
Going Through the Loops
I’ll start with a simple loop diagram to show the long-term feedback between oil supply fluctuations, prices, effects on consumers and the economy, and how these eventually feedback to cause an opposite effect on supplies. This feedback loop is surprisingly similar to the phenomenon of homeostasis found in biological systems. Lowering supplies, possibly from diminishing extraction rates put upward pressure on oil prices, but that has an impact on consumers’ discretionary spending.
Figure 1. Oscillatory-like behavior results from long-term feedback through the consumer-based economic system to counter the direction of oil supplies and prices.
Consumers buy less stuff resulting in a softening of the economy. But that, in turn, means less work and hence less energy consumption. Lower demand puts downward pressure on prices causing producers to reduce their short-term production. And that, in time, drives the price of oil back upward. The time constants for this loop are probably measured in weeks or months with the severity of the swings based on shorter-term factors. For example, one could add a smaller loop to the above diagram in which oil investors (speculators?) monitor the supply on a weekly or even daily basis and try to anticipate the future with bids they think will make them a profit in the future. This, aside from often being inaccurate, at best, acts as an amplifier that drives the swings upward and downward more than simple supply/demand pressures would do.
A somewhat more complicated picture emerges when we include the business world as consumers of energy and suppliers of jobs, and the banking role played in lending operating and investment funds to both consumers and businesses. Figure 2 shows these additional factors and how they may affect the overall cycle.
Figure 2. Businesses and consumers (who are also workers) borrow money from lending institutions to cover operating and capital costs with the intent of paying back the loans when work picks up. Due to the long-term average declining supply of oil, however, less work can be done making it difficult for both borrowers to service their debts. This additional negative feedback loop adds more difficulty to the supply loop since oil producers must rely on debt financing to expand their extraction efforts.
Oil supplies, relative to demand, are determined by the extraction rate supported by global producers. In the short-run producers (like Saudi Arabia) can up or down modulate their flow rates in order to adjust the supplies on a short time scale. However, in the long term, producers need to invest more capital and exploration costs to hopefully expand their production. They will do so only if for some period of time there appears to be a comfortable floor price for oil. They perform analysis of their returns on investment (ROI) just as any other business would to see if the investment today would pay off at some future (perhaps ten years off) time. In both figures above, the blue oval represents this investment time delay which introduces even more uncertainty into the problem.
However, there is one undeniable fact that can be shown to, in the long run, continue to drive supply relative to demand lower, and keep upward pressure on prices and that is the peaking and subsequent decline of oil extraction. The tendency for prices to inch upward acts like a speed governor damping demand and continuing to push the economy downward as less work gets done. Workers who lose their jobs, furthermore, will be buying less and thus acting to keep a consumption-based economy subdued (recession or worse).
Building a Simple Model
The second approach I am taking is to build a simple model of the dynamical system that impacts oil prices using feedback loops from both the supply and demand sides.
Below is a causal loop diagram of some of the major factors playing in the dynamics of oil and economic activity. I have explicitly left out players such as oil market speculators, financial institutions, and governments since these, in my opinion, act more like noise generators than meaningful feedback actors (except for my remarks about debt financing above). Perhaps a later, more refined model could incorporate them, but I think this version gets the major ideas across.
Oil price is the single most visible variable that people attend to in trying to get an understanding of the oil market. In the diagram, just above the Oil Price variable I show three different time scales of price tracking. The actual scale is not as important as is the shapes of the curves. When tracked on a weekly basis (for example as seen in the right-hand column of an Oil Drum page), the price appears quite variable. Lately the variability has been over a range of three or four dollars per barrel and monthly tracks put the range between $70 and $80 per barrel. This is fairly volatile by historical standards.
Figure 3. A causal loop model of oil price and economic activity dynamics. The arrows represent directions of influence. Positive signs attached to arrows means that the influence is in a numerically positive direction. Negative signs have the opposite meaning. The blue ovals represent various kinds of time delays or longer-term acting feedbacks.
Looked at over longer time scales such as a year or ten years we see the definite trend lines tending upward as various economic and physical factors create downward pressures on the net supply (i.e. EROEI is trending downward). In the longer term, it would appear that oil prices do follow the law of supply and demand as reflected in prices (assumed here to be held in constant dollars to avoid complications due to things like fiat money inflation).
Why then do we find periods when the price of oil is depressed by comparison with the trend? We are now prone to chalk it up to demand destruction which leads to an oversupply and thus downward pressure on price. Let me go through the various loops to see if we can see the pattern of supply crunch followed by price hikes, followed by demand destruction, followed by price deflation, but more importantly see these in the context of the overall economic activity and what it means to the health of the economy.
Starting on the left-hand side of the diagram, note that the variable ‘net supply’ has a direct positive impact on oil prices, but to generally drive them down. That is, the greater the net supply of oil, the lower the price should be, all other things being constant. The reason I chose net supply and not gross (which is the numbers most people attend to) is because of energy return on energy invested (EROEI). The time delay oval in the diagram represents a longer time-scale phenomenon in which EROEI is declining thus meaning that it takes more oil (or equivalent energy form) out of the production stream to produce the next increment of energy in oil. The net supply is what is left to supply the economy.
EROEI is driven most strongly by the physical realities of depletion of a fixed finite resource under the Best First principle and the sheer force of gravity. The only way to boost net supply against the ravages of EROEI is by increasing investment in new exploration and development, both of which take time (blue oval) before they begin to impact the net supply, and then only if depletion rates in already producing fields have not yet overwhelmed the new project production capacity. Investment, however, also hastens depletion (some shorter term developments like enhanced recovery may accelerate depletion).
Thus the net supply is a balance between on-going extraction from existing investments added to by new investments but countered by use rates in the economy. Oil companies make their investment decisions just like any other business based on the perceived return on investment (ROI), their profit prospects. ROI considerations are also made over time scales similar to development rates so the oil companies need to see some price stability that appears to provide a sufficient floor assuring their minimum ROI over the life of the new projects. If prices remain stable over this time scale, oil companies are willing to invest. But as the energy costs (and monetary costs reflecting that) reflected in EROEI continue to rise, especially if greater than anticipated, this can have an overall dampening effect on the process, generally reflected in putting a higher premium on future revenue streams as a kind of insurance.
The demand side of the diagram is influenced most by the rate of overall consumption in the economy. In the OECD nations, economies have largely moved to a consumer-based model which means that the more people spend the more the gross domestic product rises. Today we live with this myth that a growing GDP is a sign of a healthy economy.
But the caveat is that all economic activity, services, manufacturing, waste disposal, everything requires energy to do the work. As the price of oil has increased this has had a dampening effect on the economy in terms of general upward pressure on prices of everything. Labor is an example. People, especially in the US, live lifestyles that are extremely energy intensive. This isn’t just the energy they use directly to drive their cars or heat their houses. It includes all of the embodied energy in every product they purchase, every service they obtain, and every plastic package they put in the dump. Consumption is the big energy use driver in the developed world. This is as opposed to energy used to manufacture more energy efficient tools and appliances, which over their lives would help reduce the total energy demand rather than simply push it upward.
As one would expect, when demand exceeds supply oil prices do go upward (and that has been the long-term trend). This in turn leads to higher prices that help dampen consumption. We see this most effectively in the price of gasoline, but also in the price of foods that need to be shipped long distances. The oil price-consumption-demand feedback loop is the closest thing we have to a market-based regulation mechanism. The demand destruction, however, isn’t just left to consumers alone. When they start buying less, businesses that would ordinarily sell to them start to pull back. Economic activity in general declines, leading to a possible recession. It then takes time for this general reduction in energy demand to work its way back to the oil price variable. And all the while, the supply side resulting from prior years’ investments has pushed up the net supply (or at least its potential) so that once again prices are pushed downward from the overall trend.
The arrow looping back directly from oil price to net supply represents the shorter-term response of the oil industry to price declines or rises – the so-called spare capacity that can be turned on or off like a spigot. Since that is a generally small percentage of total maximum extraction capacity its impact on overall movement may not be that great.
The overall behavior of this system with respect to oil prices is similar to a final wave form in a superposition of various frequencies and amplitudes but with a generally upward trend. It is probably not possible to tell exactly what factor will cause the final ‘peak’ of energy flow in the classical Hubbert sense. But in a way it doesn’t much matter. The flow will peak and then decline and without a suitable substitute, the economic activity will follow suit. That much is certain.
Figure 4 is a hypothetical graph of several of the variables as a time series. This is just a hand-drawn output from the above causal diagram and should not be taken too seriously. Consider it instead as a form of hypothesis. Once the above model is built and running, we might expect the output to look like this.
Figure 4. A hypothetical time series showing lead and lag times between the major variables in the above model. Representative conditions are marked to give some idea how the various factors play around one another over time. This might be representative of our current situation with the end of the graph representing a possible “double dip” recession (green line).
Impacts of the Financial System
Another factor that further complicates the picture and which I have not tried to explicitly include in the above model is the role of financing investment and consumption from debt instruments (as shown in Fig. 2). Debt financing is feasible when the economy is growing, because what that means, in terms of the above model, is that more energy is flowing per unit time. It means that as far as anyone can tell, there will be so much more work accomplished in some future period that resources allocated now will be more than paid for later, i.e. the debt will be repaid with interest and the future profits will be realized.
The OECD and major developing countries had built an elaborate and complex infrastructure of debt financing, including systems for betting that the debts will be paid off (derivatives), that essentially burst when the pin prick of $100+ oil poked it. The resulting debt unwind has had a very negative effect on further financing of new projects and so could accelerate the effects of depletion in a much shorter time than we had originally thought.
Couple that with the recent debacle in the Gulf of Mexico, Deepwater Horizon and the oil gusher, and we have an even more dubious picture. In all likelihood there will be considerable increases in regulation costs, technology for prevention, and insurance premiums against cleanup costs. All of these should realistically be counted as more energy costs and further declining EROEI.
Conclusion
Oil extraction and delivery rates, so-called production, and oil prices have dominated the focus of attention as causal variables in understanding our high energy economy, its growth or decline. But the system is significantly more complex than can be understood just by tracking these variables. Many factors interact over multiple time scales to produce the behavior of the economy and prices of energy commodities like oil. This paper has attempted to sketch out a causal loop model involving some of the most, but not all potentially, relevant factors that play against one another to produce the dynamics we observe. What this model suggests, as a kind of hypothesis, is that the overall long-term trend toward diminishing net oil supply (due to peak oil) will have an overall upward pressure on oil prices as changes in demand lag behind.
Once the price of oil reaches a critical threshold it creates a drag on the economy that results in a downward trend and possible recession. That, in turn can have a negative impact on the price of oil as producers attempt to compensate by producing less. The longer term impacts of decisions to invest in additional capacity (and exploration) can respond to oil prices only so long as there is a general steady-state between economic activity, related demand, and a floor support for oil prices. But these investments take years to pay off, and in the meantime, other short-time scale events may diminish the expected ROI, further putting a dampening effect on producers’ willingness to invest in the future.
All along the decreasing EROEI resulting from having to find and extract increasingly energy expensive oil (also reflected in the monetary costs of new, exotic projects) puts a downward pressure on net oil supply to the general economy meaning that the cost of everything experiences upward pressures. Eventually price increases will propagate through the consumer economy and result in lowered purchasing power for everyone but this effect creeps at a slower rate that is hard to detect.
This model can be tested with real data to see if the correlations fit the predictions of the causal model. As always, more research is needed.
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Thanks George!
Very interesting post.
Some of this may seem kind of complicated to the newcomer who expects that there is only one way for prices to go--up!--as long as peak oil is a phenomenon. There are a lot of things going on at once, as George explains.
One of the easier things to understand is that high oil prices tend to cause recession, and this in turn leads to less demand and lower oil prices (at least for a while). Peak demand and peak supply are thus closely related.
Another that may be harder to see is that high oil prices tend to lead to higher debt defaults and indirectly to cutbacks in credit availability.
The cutback in credit availability (like recession) can lead to a lower demand for all energy supplies, including oil, natural gas, coal, and electricity in general. This can dampen demand for new production of all sorts, including wind and solar PV.
George points out other interactions as well. So the situation is indeed complicated.
Some of this may seem kind of complicated to the newcomer who expects that there is only one way for prices to go--up!--as long as peak oil is a phenomenon
A 'porpoising' effect seems the most likely, though trending downward with respect to GDP and 'paper' wealth. And the response of different countries (based on their current and future exposure to oil prices/shortages) is likely to be widely variant, so the model would need to be run for each. Some countries may have little direct dependence on oil (e.g. Costa Rica) but may be hit hard by indirect dependence (tourism).
Indeed, this is a multi-variate feedback control financial problem, and other factors include;
- The current GDP of a nation (or region) - highly consumptive countries might see greater impact.
- Reliance of a nation on the import or export of petroleum or petroleum-influenced commodity
- Policy direction ("We need to encourage consumption" vs. a thrust for energy efficiency, conservation, renewables, etc)
Might a model be able to extract signals out of the noise of GDP, oil prices, and other data? Are those the correct data points to be monitoring (i.e., might we use instead HDI, GPI, or GNH)?
George, I agree with your implied pictoral inside some of the 'bubbles' that each of the them will have properties such as;
- Time delay
- Amplitude (varying by input level and time)
It might be interesting to train a neural network with historic data based on key indicators to see if it extracts useful patterns, though it may not know how to deal with something like peak oil as it is not precedented in the last century of related commodity data (at the level of dependency that we have on oil).
My thinking is that a systems dynamics model will allow us to postulate causal relations among both historically tracked variables (like price, supply, and demand - suitably adjusted for inflation, etc.) and the non-tracked, but more important variables (in my opinion) like net energy. If we then plot known historical data in an appropriate time series and it follows the causal model closely, that will help us have a better sense of what to expect from the non-tracked variables.
Neural nets are ok for pattern recognition and categorization tasks, but don't provide much information about causal relations (except the ones in our brains that are actually geared to encode causal relations! see: Toward a Theory of Learning and Representing Causal Inferences in Neural Networks
George
What about the pricing done in US dollars adding to the confusion, or did I miss this? I refer to headlines like,
" the price of oil increased today based on the decline of us dollar as investors......"
It is often hard to follow all the reasons why for the fluctuations in price as it porpoises, although we often do adjustments for historical comparisons.
Thanks for the great article.
Paul
I fall back on the old ploy - all other things being equal! The model isn't concerned with predictions of prices but rather with the dynamics of prices relative to the other variables.
Thanks for the interesting post. It raises quite a few important points.
How much does the "momentum" of the energy industry exacerbate the problem? For instance, once the industry adjusts to a certain global flow rate, a sharp reduction in demand will lead to excess capacity back up the supply route (sort of like water-hammer in pipes). Tanker ships are already en route, refinery production plans established, etc. I wold expect that a gradual decline in demand would have less price volatility than a sharp decline in demand.
Yes! Exactly. These are the kinds of questions we should be able to ferret out if we are to claim we understand the oil (or any complex) markets. Unfortunately standard neoclassical econ doesn't do this very well.
This post begs the question: can the free market move us off oil without causing the economy to contract due to the large price swings that come with resource scarcity?
My view is 'no.' Businesses have trouble dealing with high price volatility. They can sometimes hedge effectively but often they bet wrong and often those bad bets can be lethal. Dave Cohen produced this graph to show how prices react when scarcity of a resource occurs:
A more effective approach than just letting the market enter this oscillation phase would have been to gradually increase the price of oil over time along a predictable time table. Purchase decisions would be influenced by the relatively higher cost of oil compared to its alternatives at the time of purchase as well as the expectation that the price would increase in the future, thus improving the ROI of the purchase even more.
Steve from Virginia pointed out that, given how the economy is structured now (especially the U.S. economy), the "economic damage" pointed out in the graph above might actually occur even at the lower price point for oil. It's a valid point but I don't have a way to prove or disprove that idea.
(Another more general criticism of the graph is that "economic damage" is a subjective term. If one believes, as I do, that the economy is unsustainable as it is run now, then "economic damage" might actually be viewed as "economic rehabilitation" or even "giving the poor planet a break.")
In any case, now it seems that price volatility is unavoidable and all businesses must get good at guessing future oil prices and/or hedging.
Hence why Lloyd's of London just warned:
http://www.chathamhouse.org.uk/files/16720_0610_froggatt_lahn.pdf
One nit to pick about the otherwise excellent article. This assertion:
isn't substantiated. Given Jevon's Paradox or the more recent Khazoom-Brookes Postulate, I actually think the assertion is false under the conditions of the immediate past. Efficient energy use reduces its price and allows us to use it for less and less essential purposes so that we now have devices that help us do a wide variety of non-essential activities.
Only rationing or a high price reduce energy use. Without either of those items, efficiency tends to increase energy use in aggregate.
In your price / time graph, is it possible that the price at which it becomes economic to invest in alternatives is
higher than the price that damage to the economy occurs? could we in effect be in an industrial system which is so dependant on cheap portable dense liquid energy, that it is impossible to transition smoothly to an alternative energy source or more efficient use of said oil?
In other words, $100 oil might simply lead to steady economic contraction in line with the oil supply, until society fundamentally reorganises itself, probably at a much simpler level?
In other other words, is collapse now inevitable?
Exactly...that was what I trying to convey when referring to Steve from Virginia's comment.
My answer to the question is: "hard to say." It would be good to explore this some more with some data and analysis.
In the meantime, there is a good chance that we are heading into a depression even before high oil prices bite again so we won't be able to run a clean experiment, as it were. And even if we limp along until 2013-2015 (when I and others, including Lloyd's expect the next oil price shock) without entering a depressionary spiral, when the next oil shock hits we will likely enter one immediately just because of the debt overhang that needs to be cleared.
In other words, your question is never going to be satisfactorily answered, I believe.
That comment reminds me of the slow self-realization of the dire predicament and onset of death that occurs to Lord Jim in Conrad's classic of the same title. IOW, could the first price spike, in 2008, have been a fatal shot to the global economy and we are only slowly becoming self-aware of the circumstances? I think the ongoing financial crisis supports this notion, and the fact that the first spike and related nosedive has left global economies in an unstable state.
We seem to be planning/modeling/hoping for a cardiac patient that can withstand undergoing multiple heart attacks over a prolonged period, but perhaps the first one has us marked as terminal regardless of more, and the next one could be the last.
It's fiendishly simple, just follow the bouncing oil price:
Basically what aangel said! As long as the production of alternative energy capital equipment and infrastructure (as well as installation and maintenance) are subsidized by fossil fuel energy I suspect there will never come a time when the price of oil will make alternatives look good (allowing a suitable time delay for the price of oil to work its way through the supply chain). Alternatives, to be truly renewable (sustainable) must supply their own power for production of replacements and operations into the distant future. If that can happen, then they should be viable even if their final EROI is not much more than say 10:1. But, that also means our civilization will be living at a much, much lower energy consumption standard (in my view a good thing).
It would be interesting to look for and hopefully someday see: PV manufacturing, or wind turbine plants that eventually install enough renewable product(s) that those product(s) supply all the energy the plants use or at least enough for an 8hr day shift.
Raw material aquisition, processing, transport, as well as transportation and installation of the finished products all rely heavily on fossil fuels at this point. Renewables have a tough row to hoe before becoming truly "self sustaining" energywise.
We should be building and installing renewables with urgency and purpose while fossil fuels are affordable. Some are already doing this. When we are forced to prioritise our use of petroleum in particular, the costs of everything goes up.
Raw material aquisition, processing, transport, as well as transportation and installation of the finished products all rely heavily on fossil fuels at this point.
Not really. Mining is often electric, as is processing. Rail can easilyi be electric. I know you know this, more or less, but it needs to be said: oil is useful, and we use it extensively, but we don't "need" it in the longterm.
Renewables have a tough row to hoe before becoming truly "self sustaining" energywise.
The very high E-ROI of wind power means that it's cost won't go up much, compared to it's benefits.
My educated guess is that existing worldwide wind and PV power already provide enough energy to totally supply the required electricity for current PV and wind manufacturing. However it's transportation that accounts for the (vast?) majority of the energy currently used to finalize installation of renewables (and that includes transporting workers, not just products). And given that transportation is generally not already electrically powered, that is the real kicker. Potential 'solutions' would involve switching more transportation to modes that can easily be run on electricity (i.e. trains), and using less energy to transport products and workers to installation sites (i.e. the end of global supply chains being typical).
Don't forget, however, that the electricity (form of energy) produced by PV, CSP, wind, etc. needs to not only account for its own regeneration but produce enough electricity profit or net energy to supply some form of economic activity. The scaling argument comes down to a clear case that these alternatives will never scale up, nor could even conceivably ramp up in time to match the demands of our current (US-level) economy and probably not even a northern European-level of consumption. Thus we have to consider this from both the minimum acceptable consumption level (to have a decent but not exuberant life style) of energy needed and the maximum possible supply that alternatives could supply.
It is likely, in my judgment, that given the time required and the resources (energy and financial) at hand, that the supply from alternatives (and I include nuclear in this) cannot ramp up to fill the gap that will be created as fossil fuels decline post-peak. This is especially the case if the alternatives are expected to bootstrap themselves to net energy levels while our society converts from liquid/coal fuels to all electricity (if that is even truly feasible). That is because a bootstrap is essentially a major long-term investment the payoff of which will be discounted in our classical profit-motive, capitalistic, private ownership model. The payoff won't come for years while we build up the excess capacity to generate self-sustainability AND net energy for consumption. Today's capitalists are not about to find that a profitable investment. Besides, once we do have self-sustaining energy production, the margins are likely to be exceedingly low so the long-term profit picture will be bleak at best.
I bet you the major energy companies have done this calculation and that is why their involvement is nothing more than keeping their hand in the game in case there is some kind of breakthrough game changer. They are not committing their stockholder's capital to such a program.
My thought is that the only rational way to solve our energy problem is to make a herculean effort to reduce waste and really stupid discretionary uses of energy, continue to work on whatever increases in efficiency that we can find (that can be quickly and cheaply deployed - we can't wait 20 years for the fleet of cars on the road to swap out to EVs) AND nationalize all energy production to get rid of the for-profit/short-term investment mentality. The market will not accomplish what needs to be done in the time needed to do it. Politicians, unfortunately, will not be able to do it either. There needs to be a major, revolutionary change in our whole economic and political system for such a process to be feasible (which thus makes the solution infeasible!) What are the chances????
George
It's way too early to speculate about the effects of peak gas and coal. Peak oil can be bridged with coal and gas, if need be.
Capitalists routinely invest in stuff that won't pay off for many years. This is no problem. The markets' short-sightedness is a myth.
Do you have a basis for this assertion? Why wouldn't the margins be typical?
Such an effort will take place when motivated by economics. There is a lot of low-hanging fruit so I have no doubt it will work well, especially in the US.
None. But you are wrong, fortunately. The markets can handle this if we let it.
It is likely, in my judgment, that given the time required and the resources (energy and financial) at hand, that the supply from alternatives (and I include nuclear in this) cannot ramp up to fill the gap that will be created as fossil fuels decline post-peak.
This is entirely unrealistic. For better or worse, we have enormous amounts of coal. We have plenty of time to ramp up wind, solar and nuclear.
The much larger challenge is ramping up low-CO2 sources of electricity quickly enough to avoid really serious climate change. Unfortunately, due to the invisibility of the changes and the lag-times involved, I'm not optimistic about this. PO, by comparison, is a piece of cake.
Alternative already look good: rail is cheaper than trucking for many things right now; wind is cheaper than oil for electrical generation or home heating; the Prius is cheaper than a comparable ICE vehicle to drive.
The alternatives are here, and cost-effective.
Perhaps. To replace the battery pack costs $2600.
LCD and plasma screens were very expensive in the beginning, b/c they were so nice compared to the old bulky CRTs. Thus some early adopters were willing to pay a high price, even though production hadn't been ramped and R&D-costs weren't amortized yet. But we knew early on that LCD/plasma would eventually be real cheap, as the raw materials cost, as well as transportation costs, where lower. The rest is just getting the production scaled and optimized.
Now, what is the raw materials cost of batteries?
IIRC, it's a small percentage of the current $350/kWh price of li-ion batteries, well below 10%.
Well, so far the battery seems to last the life of the car: Toyota reports almost no replacements, even with some cars at 13 years of age, and some tax drivers putting on 250K miles.
That price, of course, includes a hefty markup: OEM car parts traditionally are very pricey.
Would you happen to have a link for that price?
Good morning,Aangel
I generally find your arguments very persuasive, but today I see a possible variable you might have overlooked, at least in what you have posted here recently, in respect to Jevons paradox.
I believe the concept is valid, but only within the context of a middle to long term time frame.
A typical composite purchaser of a car that is extremely fuel efficient cannot, or at least won't, change his basic behaviors overnight.
It will take him a while to reorganize his habits to include more driving time and less of his time spent on other activities.
It probably would take the economy in general several years to reach a new more or less stable dynamic state of eqiulibruim in respect to the use of energy for various purposes.
I am curious as to how long people who are serious researchers, such as yourself,think it takes for the effects of Jevon's paradox to become apparent in actual practice.
For what it is worth,I am with Alan of Big Easy in some respects in this sort of discussion;I don't care how cheap energy is, I will not set my thermostat below seventy or so during ac season, or above seventy four or so during heating season.
Now I will read the link to the Kazoom postulate, which is new to me.
Hi, OFM.
Yes, I didn't explicitly call it out but time matters, too, though perhaps not as much as you may think. Over the medium and long term purchase decisions by other agents will certainly be impacted. However, even for an individual they can be impacted immediately.
Have you ever bought something for less than you planned and immediately said to yourself, "Since I paid less than I expected, I'm going to buy this other thing I had wanted now instead of waiting till later?"
If you have — and I think most people have — you can see that there is no time delay whatsoever between when the extra cash is available and the spending of that cash.
Even if you discover at the end of the month that there is more money left than was budgeted for at the beginning, since our desires are insatiable, resources generally do not lay around unused for very long.
"Extra cash will be spent" is a very good rule of thumb. That's why many financial planners insist that their clients, "pay themselves first" meaning that their retirement fund gets the first check during a bill paying session. If the client leaves it till the end, they might discover there is no money left and, looking back, that it was spent on things far less important than their retirement.
Same thing with oil. It will be used if it is available because it is so incredibly useful and anything, like efficiency, that reduces its price will lead to higher, not lower, consumption.
Which is an argument against conservation if your concern is the CO2 and pollution produced. As far as oil is concerned, it is a waste of time. Not true of coal, though.
However, learning to use less oil at a personal level still makes huge sense. It means that when it gets scarce, you can still afford to buy as much as you need, unlike the guy next door who still drives that full size SUV.
The personal level is the only level at which we can really get anything done in a big way on short notice.
Lots of people are doing things now that they have never seriously considered before, such as installing new windows,adding insulation,building wood sheds,installing wood fired "water stoves",and even adding sun rooms to thier houses.
They have decided that by doing so now,they will get a big return on thier money in terms of savings in energy costs in the future-a bigger return than they can get in other investments, especially any that are low risk.
I have been considering the purchase of some pv panels myself,but I have held off so far due to the fact that the prices have been dropping over the middle to long term so fast that delaying the purchase has so far been the best decision, in monetary terms.
I simply cannot save enough in five years to recover half the price of a given quantity of panels, and it seems possible that everything else equal, panel prices in real terms might decline even faster in the future due to expiring patents and the many additional small but additive improvements in cost and efficiency that will come about due to the steady increase in the number of people working in the field.
Furthermore,in five more years my old refrigerators, freezers, and air conditioners will be ready for the scrap heap, and the replacements will be far more efficient.I might even be able to buy a refrigerator at a REASONABLE price that is well enough insulated and equipped with a permanent reservoir of ice such that it will hardly ever run except when the panels are cranking, and equipped with a chip to make it run in that fashion.Ditto the freezers.
On the other hand,when energy costs shoot thru the roof,there may develop such a seller's market for panels that the real money prices actually go up-perhaps a lot, even though the industry is expanding fast.
Any links to serious articles exploring this "otoh" possibility will be appreciated, thanks in advance.
I am also intrigued with the possibility of down sizing the engine horse power of a very small car such as an old rear wheel drive(due to the greatly increased simplicity of the conversion)subcompact by installing a SMALL diesel engine, such as the ones used in very small farm tractors.
Swapping such an engine into a front wheel drive would be a nightmare for anybody concerned with the costs, but I could do the rear wheel drive conversion myself,over the course of a winter, as a hobby job, at a reasonable cost.
Such a car might only achieve a cruising speed of forty five or so, but with the engine running in its sweet spot most of the time due to its small size and consequent heavy load,the mpg achieved would be impressive indeed.
Such old cars are exempted by grandfathering from pollution inspections, and the taxes on them are trivial.
A good back yard mechanic could keep such a car running almost forever, if he could keep it from rusting away.
Mac,
Check out this website about 12/24v refrigeration. It's aimed @ boaters but is adaptable to PV or small turbines (which are both used on boats).
http://www.kollmann-marine.com/
aangel you hit the nail on the head about markets as regulators. With so many complex feedbacks with sometimes orders of magnitude time delays, markets by themselves simply cannot effectively be used to extract the kinds of signals needed to manage an economic decline as oil flow diminishes. We need good solid scientifically based understanding to drive policies re: prices, etc.
You are right about Jevon's being a problem, but for the same reason that markets alone cannot properly regulate activities. My point was simply that energy can be used to produce worthless stuff and services or it can be used to build tools that provide work leverage and hence have the potential to save energy in the future. That the latter leads to excessive use of energy by expansion of the former is very much a problem.
No, we need prices to drive policy. Science can't tell us how much of the world's warming is due to solar activity and Urban Heat Island effects and how much is due to CO2 forcing, you really expect it to tell us what a bureacrat in Washington should be paying for a gallon of gasoline? (answer: zero, he should be working on the internet from home)
I have a question- what we will we run out of before we can build enough energy sources to supply 10 Billion people enough energy to live in a house with heating and a/c with running water and 1500 calories a day and a broadband internet connection to a television and 5 lightbulbs- assuming we don't limit that development with empty worries over sustainability, global warming, or bureaucracy, and assuming that the loans necessary to build all this out can be repaid via agricultural surplus (including raising zebras for hunting), tourism (Sahara dune buggy racing), mining, or information (including Bollywood movies).
I know you'll say oil, but oil energy can be replaced. So will it be coal? Water? Silicon/Germanium/Indium/Aluminum? Uranium? Land for wind turbines?
A simple calculation is all I ask: 10 Billion people times X of resource - # resource < zero. I'm pretty sure it's not the sun, land, or saltwater.
reflecting on the history of civilization, and the clear and present pitfalls and tribulations that we see coming, I cannot help but see our civilization as a fat, bloated, decrepit old creature, which spent its life smoking an drinking and whoring and generally making enemies, in the process of dying from a multiplicity of ailments.
From time to time its addled old brain makes remarkably accurate diagnoses of the state its body is in, and what it should do about that, but eating and smoking and drinking and whoring and generally making enemies comes naturally.
I fully understand the desire to apply ointments, prescribe diets and generally look for cures. The future is getting scarier by the minute. But whatever we do, this patient is beyond saving. We may try to keep heart, lungs, liver and kidneys going artificially, but this will make for a long, painful and especially greedy death. Because this monster will eat anything and everything to save itself.
Maybe we should just help it to die and hope that some of the babies that will spring from its corpse have more sense.
lukitas
shoulders back and balls front, don't lose your dignity in the face of death
Many in the EV community have suggest that there be some type of 'floor' that gets put underneath gasoline prices in order to allow alternate fuel vehicle businesses (EV, fuel cell, bio-fule, whatever) to develop without being crushed by erratic gasoline prices. Investors and consumers cannot make rational decisions if the price of gasoline is so erratic.
Right now, I am predicting a 'gas guzzler' bubble since gas prices appear relatively low and stable and that encourages people to buy gas guzzlers. However, within 5 or so years (within the operating lifetime of vehicles purchased today) gasoline prices will probably be sharply higher leading to a glut of gas guzzlers on the used car market. We already saw this to a limited degree when gas hit over $4/gallon. It will happen again.
High gasoline prices will crush EV sales as SUV and giant pickup truck sales provide an internal subsidy for the 'alternatives'. The EV's will function but the companies won't be able to sell them at a price that (fuel constrained) wage- earners can afford.
Prius - http://www.toyota.com/prius-hybrid/trims-prices.html
Volt and Leaf - http://www.csmonitor.com/Environment/2010/0727/Chevy-Volt-vs.-Nissan-Lea...
I believe Tesla is an investment scam or fraud.
Auto manufacturing is strictly an at- scale operation (except for Ferraris and Aston- Martins, etc.). Without cheap fuels there is no auto industry, even in China or India.
Giant vehicle sales are tax- subsidized from government- owned industries. Without the subsidies and quasi- nationalization the US industry would crash.
http://www.smsmallbiz.com/taxes/Tax-Deductible_Business_Vehicles.html
http://www.acea.be/index.php/news/news_detail/car_production_in_2009_at_...
http://globaleconomicanalysis.blogspot.com/2010/04/gm-repays-government-...
Government Motors just bought a sub- prime replacement lender for GMAC (which lost $billion$ before being taken over by the US government in 2009 at a cost of a further $17 billion. GMAC is also saddled with almost $70 billion in debt).
http://www.businessweek.com/news/2010-02-25/gmac-bankruptcy-could-have-c...
Obviously, GMAC was so successful offering 0% loans to deadbeats (so GM could move its cars off the lots) that it believes a redux is in order!
http://www.nytimes.com/2010/07/23/business/23autos.html
To remake the point that Aangel referred to in his comments, the 'floor' that you speak of is below the level of GM's and the rest of the auto industry's level of profitability. Four dollar+ gas puts the auto industry (and the airlines) out of business.
You are a bit over-pessimistic. In Europe, gasoline can cost $7/gallon and taxes & registration on cars is very high but they still have an auto industry. They just have fewer cars and smaller cars. And much better public transportation.
Things are just going to have to scale down . . . we will become more like Europe. No more driving a massive 5000lb SUV to work with one person in the car. But at $10/gallon, people can still drive a Prius or a Fiat 500.
The $41K price tag of the Volt obviously prices it out of the market for most people but hopefully it will come down in the following years. The $32K Leaf is in within reach of average people. After the $7500 tax-credit, that is only $25K. And when you consider the savings on gasoline (which will be very large when gas goes above $4/gallon again), it is a very practical car. Yes, it is small, has a limited range, and takes a while to charge. But when gasoline is $5/gallon or $10/gallon . . . well, it sure beats walking.
$10/gallon gasoline in the U.S. translates to about $300/barrel oil ($10/$2.5 = x/$75). It won't stay that high for long before the economy buckles under the strain and contracts, just like what happened in 2007/08.
That means that the savings from purchasing an electric vehicle won't come from $10 gas but instead from some lower price. Let's say gasoline — at some point — reaches and stays at $7/gal. I doubt it would stay that high for very long either but it's not a terrible working number. Let's also say the person is ditching a 22.5mpg car, the current average for the light-passenger vehicle fleet.
15,000 miles / 22.5 = 666 gallons per year
or $4662 in fuel costs
Electricity is pretty cheap by comparison right now, although hopefully we wise up and price coal electricity higher. Without going through the math, let's say it costs $500 for the year, leaving a difference of $4162.
Definitely worth purchasing an electric car if there is a model that can replace the gasoline car, which there isn't yet. The Nissan Leaf goes only 100 miles on a charge but that's on flat ground in warm weather without the air conditioning on (certainly not in San Francisco, where I live). Plus, it will probably become common knowledge not to go below 30% battery charge so that the battery pack lasts longer. An educated driver probably can expect between 30 and 50 miles per charge, in the real world, at best. (Beware manufacturer's specs...that 100 mile claim is more of a marketing number than anything else.)
In other words, there is a small market for the Leaf right now. The technology will improve by 2020 for sure but the bottom line is that electric cars have a long way to go still before they are a strong competitor to gasoline. By 2020 we should see the equivalent of a Nissan Leaf going 100 real-world miles per charge through a combination of better batteries and lower vehicle weight.
In the meantime, the Volt, which is a pretty smart idea to get the extra range, still uses gasoline so the savings won't be as great.
Probably more accurate to say the contribution of oil to the economy has to contract to support $300/barrel oil.
This can happen both by the economy as a whole contracting and by movement to alternatives.
If we are luckier than we have any right to be the movement to alternatives will be sufficient to keep the economy bumping along without too much shrinkage.
the Volt, which is a pretty smart idea to get the extra range, still uses gasoline so the savings won't be as great.
The gas engine would only be used for about 20% of the miles, for the average driver's current driving patterns. Meanwhile, the Volt will get about 50MPG when driving those miles, so it will only use about 10% of the fuel of the average car. IOW, the average driver driving 13K miles will only use about 52 gallons of gas.
Finally, using gas is a choice in the Volt: It wouldn't be hard to modify those patterns a bit to get that percentage to 10 or 15% (a little trip planning, and maybe using rail a bit), and it could be close to zero if one really wanted.
People were almost giving away Dodge Rams and Ford Super Duties right at or after the peak;a year or two later, they were/are selling for as much as four or five thousand dollars more than they were then, even with another twenty thousand miles on the odometer..
Luckily (?) for us there exist no such thing as "free market", being a theoretical concept. Your question would more be: what kind of gov. interventions and/or market regulations can we think of to prevent a system feedback / loop will run out of hand by other loops. Like anti-cyclal government spending, instead of economising, in times of economic contraction. This took us quite a while to learn... The loops that George Mobus is describing are even more complex. I found a proposal for CO2 compensation by Equator quite mind dazzling... They have an oil field under one of worlds biggest biodiversity hotspots. Leaving the oil under the ground the state would miss 7 billion " opportunity" dollars (opportunity costs?). Burning it would result in 0,5 billion tons of CO2. For 3,6 billion dollars they would be willing to leave it where it is. 7,2 dollar per ton CO2, that's a bargain. According to the Kyoto protocol, the compensation would be re-invested in energy conservation/renewables. We all know that monster(energy) projects lead to monster corruption. We have to find a way to efficiently spend CO2 compensation money.
It seems like this would be an easy hypothesis to test by trying to recreate Figure 4. with real data. The main question is one of scope: Do we just look at the US or do we try to look at the whole world? The feedback loops mentioned may not apply to the whole world equally well.
On an annual time scale, global #'s should be easy to get:
The price and supply #'s can be had at the monthly scale as well but GDP and investment would be harder to find. But they probably don't have meaningful movements at the monthly scale.
It would be nice to see real numbers used to shore up this analysis.
Best hopes for testing theories with real, historical data.
Jon
Jon, your the man for that!! Want to help?
Anybody got a good suggestion for an annual time series to stand in for "global investment in fossil fuel extraction"?
Also check out the World Bank's Open Data initiative and Google Public Data
Good links.
I liked the article, and will be sending pdfs of it to acquaintances who claim that Peak Oil is false because the price is down.
One important aspect, which we are currently seeing especially with natural gas, is pumping despite low prices, which further depresses prices. This is caused by drillers who have a debt load to pay off and must flow as much oil or gas as they can to service the debt. I'm not an expert on shale gas but my understanding from what I read about it is that they are drilling frantically so they can pay off the last well and have to drill another well to pay off the one they're currently doing. It is a race to the bottom. My conventional NG wells in central Alberta are throttled back, but even so, we are also forced into flowing a minimum amount not because we have any debt (the wells are paid off) but because we have contractual obligations for wellsite maintenance and pipeline allotments.
Here in Alberta, one restriction on conventional drilling in my experience is the stickiness of rig costs due to labour and camps. The crews still want high wages, and they have their own costs because it is a long tough drive to some of those sites, and somebody has to feed and house them. You can't always drill next to a four-lane divided highway ten minutes from the city.
Dale, perfect summary of all the hidden variables that should be factored into EROI analysis but are so often ignored.
Dear George,
I do not find many of my Facebook friends at TOD. You are the second. Fred Magyar was the first.
My understanding of your research and perspective is limited, as you know. But what I am able to grasp makes sense. Thanks for all you are doing on FB, your blog, with Charlie Hall, here now and elsewhere to help us understand, and take the measure of, the human-forced global predicament looming before humanity and threatening both future human wellbeing and environmental health in our time.
If it pleases you to do so, would you, Gail, Will Stewart, mos6507, Ghung, Jason C. Bradford, Fred Magyar and others take the time to provide your perspectives on the how a global human population numbering 6.8 +/- billion now and projected to be 9+/- billion by 2050 will impact peak supply, peak demand, peak oil, peak capital, peak soil, peak natural resource dissipation, peak pollution and peak ecological degradation?
Sincerely,
Steve
Steven Earl Salmony
AWAREness Campaign on The Human Population,
established 2001
http://www.panearth.org/
Hi Steve,
I doubt the 9 billion figure will come to pass. Human demographic models do not incorporate any biophysical constraints or feedbacks. It is as if all the pollution, the limits to growth model scenarios, etc., just don't exist.
Since I believe they do exist, I would expect an earlier population plateau followed by a decline. Really don't have much clue how high it will go or how far it will fall over what time period, but 9 billion in 2050 then a steady population unlikely.
Jason
Hi Steve,
I personally believe that unless there is some profound global paradigm change population will hit limits sooner rather than later. For my personal amusement I've begun playing with jonathan.s.callahan's population databrowser. http://www.theoildrum.com/node/6816#comment-695197.
I don't claim to have a crystal ball but I'm not seeing population growth approaching 9+ billion, I fully expect regional contractions due to resource limits, in the next decade or two to start leveling off the global population growth numbers. To be clear I don't see this as a cause for celebration but rather a very negative consequence of our currently uncontrolled and unaddressed population growth problem.
Best,
Fred Magyar
Dear Jason and Fred,
Thanks for your perspectives. What I find wondrous about this particular thread is that George Mobus means it when he say "Question Everything". There are no "last taboo" topics or as I have said, "Examining human population dynamics is the very last of the last taboos."
As I recall, it was St. Augustine who reported to all of us,
"Men go forth to wonder at the great heights of mountains, the huge waves of the sea, the broad flow of the rivers, the vast compass of the oceans, the courses of the stars: and they pass by themselves without wondering."
Humankind has come a long way since the time of St. Augustine but I remain convinced that the willful blindness, deafness and muteness of the brightest and best among us, when it comes to wondering aloud about human population dynamics and human overpopulation of Earth, is a tragic failing with potentially profound implications for future human wellbeing and environmental health. We need to look at ourselves so that we come to more accurately understand "the placement" of the human species within the natural order of living things.....with all deliberate speed.
All that I report is to say simply that human beings need to wonder about our population dynamics and our impact upon the planetary home God has blessed us to inhabit. Forward movements toward sustainability will follow, I suppose.
Sincerely,
Steve
Dear Jason and Fred,
Thanks for your perspectives. What I find wondrous about this particular thread is that George Mobus means it when he say "Question Everything". There are no "last taboo" topics or as I have said, "Examining human population dynamics is the very last of the last taboos."
As I recall, it was St. Augustine who reported to all of us,
"Men go forth to wonder at the great heights of mountains, the huge waves of the sea, the broad flow of the rivers, the vast compass of the oceans, the courses of the stars: and they pass by themselves without wondering."
Humankind has come a long way since the time of St. Augustine but I remain convinced that the willful blindness, deafness and muteness of the brightest and best among us, when it comes to wondering aloud about human population dynamics and human overpopulation of Earth, is a tragic failing with potentially profound implications for future human wellbeing and environmental health. We need to look at ourselves so that we come to more accurately understand "the placement" of the human species within the natural order of living things.....with all deliberate speed.
All that I report is to say simply that human beings need to wonder about our population dynamics and our impact upon the planetary home God has blessed us to inhabit. Forward movements toward sustainability will follow, I suppose.
Sincerely,
Steve
Steve,
You may have noticed in figure 3 the population "loop". I didn't say much about it but I assure you it is probably the second most powerful driving influence in this whole mess. Energy flow is primary, and as you have pointed out work by, for example, Pimentel, have shown that the more energy that flows the larger the population grows. But it is a positive feedback because the more the population grows the more it demands energy! I plan on doing some more explicit modeling similar to The Limits To Growth handling of population in the near future.
As for the effects: The damage was already under way at 3 billion people on the planet. It was just hard to see it through those rose-colored glasses called progressivism.
George,
You may be slightly understating the hand that Population plays?
Personally, I believe it ranks as number 1, but there are a few other factors that intertwine with Population and the mess we now face, results from a combination of all of those factors.
In respect of population numbers, I suspect that we will see that Peak earlier, rather than later, possibly around
2030-2040 and we could struggle to get to 8 Billion!
The only areas of the world with fertility that is not either below replacement, or moving strongly to get there in the next 5 years, is Africa.
Lately, a lot of villages in India are getting TV reception, and....fertility is dropping sharply. The same thing happened in S America. Apparently, even though we consider TV a very low form of information source, it's very useful education for those who are poor enough...
George,
Your means of drawing these causal maps is confusing the hell out of me. For instance in Fig 3 it looks like you have a heap of positive feedback loops. However when you look at them carefully the loops seem wrong. For instance: Higher oil price > higher ROI > higher investment > higher net supply > higher oil price. Which is wrong, it should end up be a negative loop.
I tend to keep the nodes as quantities and the edges as descriptive simple changes - it becomes easier to see the wood for the trees and recognise the loop types in that case.
I think you left out the negative effects of decreasing EROI. But I will take a look again. I did ask for helpful feedback. Would like to get these loops about right before I code all this up! Thanks
Does that mean we will soon get to see a high resolution, full color 3D time lapse animation of the flows and feedback loops? Heck if you gave it a Wii interface and allowed for user manipulated inputs you could market it as a pretty cool doomsday consumer game. I'm imagining a quiet lagoon exploding into a feeding frenzy of giant prehistoric ichthyosaurs to represent the demand cycle >;^)
My thought would be to put the parameters in to an already existing strategy game, like FreeCiv [ http://freeciv.wikia.com/wiki/Main_Page ]
Those simulation games are fabulous for teaching the interaction of various components of a civilization — especially limitations. Nothing happens without a cost in either resources or time.
I'm a big fan (along with millions of others) of Civ4.
Yeah, but you've got to admit that a feeding frenzy of giant prehistoric ichthyosaurs, suddenly churning the waters of a previously quiet blue lagoon into a deep crimson froth, where just moments before a school of fish had been placidly swimming along, kinda grabs and focuses your attention a bit more acutely...wouldn't you say? >;^)
There are progs out there that can animate these easily, no coding.
The main problem is getting such system models balanced and stable under 'normal' conditions. Key is getting those negative feedback loops right. That and the non-linear behaviours they demonstrate to 'switch' behaviours. For instance, an individual can deal with rising fuel prices for a while, cutting back on other spends. Eventually things 'break' though, creating new behavioural loops and energising other larger scale loops. Getting that right is a right pig, even for a national level.
Could you list some you like, please? I have some animation I'd like to do and don't know the territory well at all.
Edit: I'm on a Mac primarily and prefer that platform (coming from a Unix background) but I run Windows in a virtual machine when required.
Err, just to be clear, by animate I mean allow you to enter nodes and edges and then see what happens when you let the feedback loops run. Not pictures of little people running around (aka Sim City).
You could try http://www.ochoadeaspuru.com/fuzcogmap/software.php which since its Java could work on a Mac. Or http://www.fcmappers.net/joomla/index.php?option=com_content&view=articl... using Excel. Personally I use someone's PhD output, which isn't freely available.
Ah, I see what you mean. Ok, thanks.
Nicely thought out George, and I look forward to what you can wring from this work. However, there is another factor that your model ought to include, but in practice may be very hard to quantify, and that is the effect of culture. While price most certainly has an effect on behavior, it is also sometimes overwhelmed by social pressure. It is my observation that “enlightened self interest” has as much to do with social status, as it does with economic forethought. For example, Light-duty trucks now account for nearly half of all vehicle sales in the U.S., ( Auto Sales - Markets Data Center - WSJ.com ). On the motivation of consumers, I would have to qualify this very much as a ‘want’, not a ‘need’. Many people still look down on my Prius with disdain, as surely I must be a ‘looser’ from the vantage point of their mock-monster pick-up. If an action grants enough perceived social status, it will spur actions that are contrary to survival, (like easter island), despite ‘price’ signals. This cultural influence could have profound effects on the feedback loops of your model, and ultimately the shape of the graph we are approaching in our real lives. Economies do not live outside of cultures. Unfortunately for us, cultures have more relative momentum than a full super-tanker.
Gyurash,
I certainly sympathize with your view of the mock monster trucks and the lack of need for so many trucks, but the buyers of such trucks are not always hoodwinked by status issues.
Modern small pickup trucks are very comfortable and practical vehicles, and I would prefer drive one rather than a car equally well equipped for ten miles, or for five hundred miles, due to seating and visibility considerations.
They hold up better, and cost less to drive, in every respect, over the long term, except for fuel costs.And if you need a truck even as seldom as once every few months, the cost of renting one can wipe out the money saved on fuel, or a good portion of it.
But the real consideration, from a practical pov, for the potential practical owner of a small truck,is total operating costs.
Given the great cost of purchase, taxes, insurance, repairs, and depreciation, the difference in driving a twenty mpg truck and a twenty five mpg car,or even a thirty mpg car, a few hundred or a thousand miles per month doesn't amount to very much at all.
I parked my Escort because I can't save enough on gas driving it to pay the additional insurance premuim; I just drive my older compact Toyota pickup all the time now.
On the rare occasion when I need a car, I drive the family Buick, which is usually reserved for weddings, funerals, trips to the doctor,and family get togethers.
Mac - I parked my 8 MPG full size van when I realized it was 8 gallons an hour on the highway, $24/hr just in fuel. (Wish I could get some of that $0.80/gal wholesale ethanol, it would breath new life into it.)
My F-250 Super Duty gets 17 or more, to get to $24/hr will require $6.38/gal diesel - expect it to be that in 2-3 years or so. A couple friends swear the correct after market chip will allow 23 MPG,that would allow $8.63 diesel. For what you get gas trucks can't come close for fuel economy.
Like you I live in a rural area, I need a truck to haul the tools of my trade, to haul the wood to heat my house, to plow my 635 foot driveway (I live in Central Maine), to haul my flatbed trailer etc.
I do OK by rural standards but am not wealthy. Somewhere around $30/hr for fuel is my limit - so I wonder at the options when we reach that point, which may not be that far off. Of course the obvious - get a Jetta TDI for any non-essential use, but insurance, excise taxes & maintenance have to be considered until fuel is quite expensive - but for local use, I wonder if an aftermarket kit to hybridise the truck would be practical, say a 60hp elec motor to the front tires instead of a transfer case - just thinking out loud here - or maybe stretching the diesel with propane??
Ideas?
Hi, Seagatherer,
My expertise does not extend to rechipping late model diesels-I only work on older vehicles, and I'm not a real expert even on old models-I'm just a well trained amatuer, so to speak, and I get farther behind every year.
I do mostly keep up with the contents of a few good trade publications, and I hang out often with some excellent full time mechanics who are good friends , plus I take a couple of automotive courses at the local community college from time to time.Access to the machine shop and the opportunity to get some hands on experience with computerized diagnostics under the guidance of the very good instructors makes the tuition a bargain, for somebody who enoys this stuff and can get to the classes.
I doubt if a new chip can improve your mileage very much,unless it puts your engine at risk by causing it to operate outside its intended design parameters.
An older car can be made to get considerably better mileage by rejetting the carburetor to run lean, and advancing the ignition timing.If you do this, and drive it very gently, and very carefully, you might get away with it , for a while.
But the usual result is an engine with burned valves and pistons, and broken piston rings, after a few thousand miles.
I would keep this example in mind before rechipping for economy.
Paradoxically, rechipping for power is actually less likely to harm your engine, because it will still run within normal limits except when you only occasionally put your foot in it to pass or pull away from a light.Putting your foot in it frequently would be begging for a very expensive premature rebuild.
In my personal opinion , any extensive modification of an existing vehicle drive train is virtually certain to be a mistake,financially, and in terms of reliability,unless you can do professional quality work yourself, and even then,the results are going to be questionable, financially.
The odds of being able to electrify an f250 and coming out ahead financially are probably VERY close to zero.
There are a few exceptions to the modification rule;converting to lp gas or propane might pay off, if you can get the lp cheap and fuel up at home base nearly every time.
And you can convert a gas truck with a worn out engine to a diesel, if you can find a suitable wreck with a good diesel in it to use as a parts donor;this means a complete vehicle of the same make and model, so you can get everything needed off it for the conversion.
You can convert from a three or four speed automatic -if it is in need of replacement-to a five speed stick and possibly save both on the actual repair costs and fuel expenses,but again the suitable donor rule applies.
I suppose you will eventually have to simply figure out some new tricks.
I know of a guy who built a sloped flatbed on the back of a Ford Ranger to haul a big zero turn mower.He flips down a ramp and drives right on and off, thereby saving the use of a trailer and lightening the loaded truck up considerably,so that it gets better mileage and is much more maneuvarable to boot.
And another fellow I know personally who runs a backhoe for hire business simply drives it everywhere he goes. He stays within twenty miles or so of home and cannot drive it on freeways.He makes sure to avoid being on the highway if at all possible during the morning and afternoon rushes.
The backhoe will only average twelve to fifteen mph, but there is no loading or unloading time,cutting fifteen to twenty minutes off the total trip time, and even though the machine wieghs 15,000 pounds, it gets VERY GOOD mileage, compared to a dump truck pulling a flat bed trailer AND the backhoe.
He can get to a job ten miles away in forty to forty five minutes;when he had a truck and trailer, it still took twenty minutes driving time, on secondary roads, plus the unloading and reloading time.
His additional maintainence expenses for the hoe, due to driving it on the highway, are only a small fraction of the expenses involved in maintaining a truck and trailer to haul it.
When he gets a job requiring the use of a truck, he splits it with a friend who is an independent dump truck operator.
Of course it is not likely that these solutions will apply to your own situation .
Learning to drive with a light steady foot on the gas at very moderate speeds is the single easiest and most effective way to cut fuel costs.
You are right about working culture/psychology into such models. In my other work (with Hall) I have segregated asset types in several categories (e.g. consumables, discretionary short-term, etc.) each with their characteristic build up factors. Societies that put high value on junk will have a lot of energy wasting and entropically decaying assets compared with societies that are frugal and put their work into long-term use-based assets. That looks like it will show the former kind of society will crash faster and deeper (makes intuitive sense) but I am a long way off from working out the details. That model is many times more complex than what I've suggested here.
This is all well and good but it seems like you are really just trying to somehow rationalize or justify a preconceived notion, that being that we are nearing peak oil. It doesn't wash for me. If we were anywhere near that stage the price would reflect it, we are talking Econ 101 here. You seem to understand that which is why you have tried to cloud the issue with an overly complex analysis to try to explain why prices aren't higher. The fact is we don't even know what is in the ground.
Exploration is expensive, it is done as needed when existing reserves are running low. For ANYONE to claim we know the true amount of recoverable oil on this planet is absurd. Every time the prediction has been made we are maxing out it has been wrong. I would think anyone who is making these claims might include some analysis of existing reserves, and what actual consumption is. I am not seeing that. The economy is soft here but China is booming, wouldn't they be offsetting some of the reduced demand here?
You have been on this forum for 6 weeks. I checked on that because your comment is a parrot of "standard dogma 101" and anybody who's been here a while and learned much would be unlikely to say such things.
I've been here a bit longer and can attest that this standard deterministic causal approach never works, unless you have toy problems. Human behavior at the aggregate level is stochastic and fits in better with an entropic world view. Whenever one tries to pin down a specific feedback rate, you know some that somewhere else a different feedback loop is operational (e.g. China, as Kroyall notes). Some people consider this chaotic and nonlinear, but I just believe this is the principle of maximum entropy at work. Agents and particles that act on the resources will tend to fill in all the states of the system (i.e. China taking up slack) and a model that takes this extreme variability into account will more likely capture the long-term dynamics of what we will experience. All fat-tail and Black Swan effects arise from assuming huge amounts of variation and by ignoring probabilistic effects we will essentially repeat the same mistakes that the financial markets repeatedly make.
Naive economic models ignore the missing links: resource constraints and stochastic variability. You can find lots of research that includes one of these factors but to include both is what I believe is the best direction.
then why do you think there is more?
if your correct in your eco 101 world view then the underlying assumptions is that the amount in the ground must be related to price somehow despite your position requiring that we MUST NOT have reliable estimates of how much is there.
the Money knows before you have looked
because the reserves are only discovered after the price goes up but a lower price must mean there is more..
can you see the contradiction there?
just take time out to reflect how odd an idea that is
moreover irrespective of what the price is or how much is left to be produced/found there is always less left today than yesterday so is the price related to how much is left?
Thank you George.
Draw a direct line from gas and oil to the consumer.
I argued for a tax on carbon as it sees th light of day. This tax to be paid to the consumer.
This line would be the tax.
I see that the line would have the same sign as the input to the consumer.
This would make the system unstable.
So I have changed my mind.
Instead we should tax the consumer on the amount of oil being extracted, to stabilize the system. (the more oil we extract the less money the consumer has, and versa visa)
Unfortunately the stabilized system would enable more carbon to enter the atmosphere for longer.
Which would be the greater evil.
So I have changed my mind back again.
I've said for a long time there is simply no easy "solution", if any at all. We have what Greer calls a predicament (problems have solutions, predicaments usually lead to more problems!) The best I hope for is to try to grasp some understanding of the complexities and try to find what Donella Meadows called leverage points where we might apply pressure to better manage the decline of a high energy society. Good luck to us all.
The best leverage point is the allocation of energy to the consumer. Rationing proved to be an effective and adaptable system for the allocation of scarce resources during both world wars by countries both directly and indirectly involved.
The difficulty will be to foster a siege mentality in the population without starting a real war.
I get it, like the cold war. Truman: “scare the hell out of them! “
I'm posting what I wrote yesterday on the Peak Capital forum, because it actually is more relevant to this and this thread seems more likely (dynamic system interaction) to be relevant to the ideas I want to explore in the next sections. Thanks to TOD comments so far and feel I should just repeat that the below is purposefully stylized to try and gain insight. I have tried to frame different perspective in internally rational ways (i.e. what they disagree about when correctly framed is a future that is intrinsically indeterminant and therefore not knowable)
Long time reader, first time poster. Thank you for the good-natured erudition of this site; not that all posters are good-natured, but the site as a whole comes across without the shrillness of less assured forums.
I want to suggest something that I think The Oil Drum in general has gotten wrong in its attempt to create a physical-economial synthesis. I agree that any progress towards the creation of such a synthesis, whether by rigorous modeling, intuition, anecdote, change of perspective, etc... is much needed. Hopefully in this spirit, the below is a stylized version of what I think the underlying philosophic tension is between the two approaches.
I call this the dialectic of price.
One camp of people believe it is never possible to run out of something that is correctly priced. This theory of price rationalization is the intellectual foundation of such disparate beliefs as: we have geopolitical peak oil if we have it at all vs. the key to solving peak oil is having very high oil prices. Many people trained in the economic tradition, using that word very broadly, don't realize that this is the premise, the pre-thought foundation, of their deductive processes regardless of what conclusions, often very disparate as noted above, they come to on a given issue.
Another camp of people believe that you're guaranteed to run into problems if you apportion certain key things based on their market price. You could call this notion the theory of the revenge of physical systems. Again, very disparate beliefs rely on this foundation. From the notion that we'll use more of cheaply priced resources than we have any moral right to vs. the often opposite idea that we'll use more of cheaply priced resources than we rationally ought to given their knowable future scarcity.
The economic camp sees price as the great epistemological tool. If you have a problem you cant solve, its because it hasn't been correctly priced. End OPEC or the ban on offshore drilling and you'll have cheap oil, or if you don't get cheap oil you'll find an alternative. Put a price on carbon and you'll have greater societal utility. If people don't want a price on carbon its because they don't truly value climatic stability. If climatic stability is a concept that has any usefulness then it will be necessary to show that people are willing to pay for it. If they're not, then its not a useful concept.
A useful way to categorize this series of ideas is as follows: In a world where everything is functionally constrained by price, nothing is fundamentally constrained by anything else.
The physical camp sees price as a flawed epistemological tool. The flaws are too numerous to list given different critiques, but there seem to be two main avenues. The first is that price as a man made construct deliberately destroys the things that don't have obvious and immediate value to man, whether these be eco-systems, species, the climate, and ultimately the planet. The second is that the epistemological theory of price errantly presupposes that a solution in the future exists to every problem correctly priced in the present. There is a subtle but profound difference in how these two critiques think of technology. The first thinks that man will use every technology available to destroy non-human systems until eventually...the second thinks that man will incorrectly assume that there is a technological solution to all problems until this supposition is proven false and we confront a problem we cant solve, even if the problem is correctly priced.
A useful way to categorize this series of ideas is as follows: In a world where our desire to do what we want is not functionally constrained by price, there are important ways in which our ability is fundamentally constrained by things other than price.
Now this post is already too long...so Im going to stop and outline what I intend to do next.
First I intend to summarize what I view as Gail's (and TOD"s) view of a physical critique to the epistemological theory of price. Namely, that at certain critical junctures high prices will reveal underlying physical realities that cannot be solved by those corresponding high prices. At these junctions the aggregate economic system will contract until enough economic activity is destroyed to regain equilibrium with the physical system constraints.
Next I intend to offer a measured critique of this synthesis. The general approach will be to argue that the constraint is not the physical system limitations, but rather the fact that we lack a way of coordinating economic activity, and specifically the intermediation of savings and investment, at these junctures. Its not that our capital stock in the present doesn't produce enough surplus to allow for current and future prosperity, but rather that we have no new conventions to utilize resources in the present based on what we think they'll be worth in the future. In this narrative, peak oil is a challenge to the underlying meta-narrative, the future will look like the present Keynesian certainty convention, that has allowed for much risk taking and investment ultimately (but not obviously) based on cheap fossil fuels.
Obviously this whole post is more than a little presumptuous and I am uncertain whether the above ideas are even interesting to other TOD readers, or whether they just represent my own grappling with the issues I see and read here every day. If there is interest I will continue with the approach I outlined above. If not, Ill write it for my own private benefit and say thanks to all at TOD for the stimulation.
tyler.
So far so good Tyler!
I do believe that we live in a time of amazing surplus and even with a lot fewer fossil fuels, and with all the difficulties with renewables with respect to storage and intermittency there is no strict biophysical reason that economic growth is over. However, I do have a hunch that the way money is created is incompatible with the need to change expectations about the rate of growth, where it does and does not occur geographically, and the fact that much of what we invest in undermines crucial life support systems that if compromised too greatly will fail (are failing). (I do worry that it is actually too late to prevent catastrophic positive feedback loops with respect to co2 pollution and climate, but since I could be wrong I act as if we have time).
Overall, I therefore see our predicament being just as much about culture as geology and the environment.
I do have a hunch that the way money is created is incompatible with the need to change expectations about the rate of growth.
I don't think it has anything to do with money, or the structure of finance (except for a relatively small minority of financial game players). It has to do with the desire for a better life. It is extremely frustrating to be told that we have to stop trying to improve health, or education, or services to the young, old, or disabled, because we have an energy problem.
People thought energy was an old problem, something that was fixed and put away. To find it rearing it's head, due to PO or AGW, is a very, very hard thing to have to accept. We will have to, and we are, but it diverts investments away from other, important things. That's a reality, not something we should attribute to something trivial, like the structure of finance.
Tyler Mcclellan , your tone of abstract analysis is refreshing and I would like to see it continue.
Additionally, I wonder where my position stands under its illumination.
I am a true believer in the technology fix to the resource depletion problem. But I am in a distinct minority here at TOD. I believe that there will always be someone smart enough to replace an energy source with a viable substitute if the price of this old energy source gets to or beyond a critical substitution price plateau.
For example, as long as OPEC keeps the price of oil below this substitution price level, development of an oil substitute won’t happen. Development capital for a replacement won’t flow and the transition to the new energy paradyne won’t occur.
The assumption here at TOD is that oil is an absolute requirement for the survival of mankind. I don’t think that this is a healthy attitude to take. After all, oil from whales died along with most of its feedstock; we found substitutes, and are still kicking.
The carbon tax may be a way to reach that critical substitution price plateau quicker than might otherwise happen.
This time as per the majority TOD consensus, is this absolute desirer for human survival in an advanced civilization unattainable and at this juncture are we irrevocably DOOMED to a new dark age?
Developing countries might be able to grow with oil prices higher than 80 dollars. More "developed" countries who cannot create extra growth anymore by simple innovations, might get stuck already with oil prices around 80 dollars. I think we have seen that 80 dollar/barril is not high enough for a real stimulation of renewables... This would mean that the economy of the developed world cannot afford (with same consumer habits/energy efficiencies) renewables! Taxing CO2 or taxing more gasoline at a moment that the price of oil is above 80 dollars would bring the economy even more in danger. Unless.... the tax is used to expand the renewable sector (creating jobs instead of paying for oil import?)? The only thing is to establish a large think tank or new science on how to spend billions without loosing more than 10% on corruption and other not-efficient "overhead".
Just do the damn CO2 tax and let the improved price relation stimulate renewables. Let the tax revenues go into the federal coffers to cover some of the budget deficit.
These feedback loops are very familiar to Instrumentation Engineers.
Artificial timely powerful feedback loops need to be established.
Information flow can be in milliseconds.
Money is information.
If deliberate control of the system is desired then appropriate tax (information) loops need to be created.
Once created the loops will need to be tuned. There are various empirical methods to do this.
An example is to count the period of the oscillations and apply known formulae to obtain the proportional, the integral and the differential.
Another is to open the loop by removing the tax, applying a perturbation and obtaining the slope of the resultant curve.(the reaction curve method)
Further reading. Instrumentation and Process Control pp 252 to 255 "The Ziegler-Nichols methods."
My assumption is that it is desirable to keep the machine humming along and pumping CO2 out. Without this powerful feedback loop in the model, all else is meaningless.
I have in mind a powerful computer owned by the tax office, observing the automated trades in nano second times and tapping directly into the dividend before it arrives at the traders account.
This will smooth out a lot of the noise.
This is exactly what they do to my salary. Tax is taken out before I get it.
Wall street can be brought to heel using the tools of Wall st.
Might be interesting to be 'a fly on the wall' of the datascenter, to see what the taskings are for the top supercomputers.
http://en.wikipedia.org/wiki/TOP500
Edit: The top ten appear to be run using Linux, too :)
Yes, we are looking at a problem in classical hierarchical control systems! That said, I don't think the objective is to keep the machine pumping out CO2. Rather, the objective would be to reduce the wild fluctuations and find ways to manage the decline for the least pain.
Yes.
It was pointed out that the Fed has only one lever to play with, and that is interests rates. Very boring and one dimensional.
We should give them all sorts of knobs and dials, so they can control the beast better.
Make it curtsy and pirouette prettily.
George,
Thank you for you post. It is too dense for me to dissect as an integrated whole at the time being. I am commenting on the financial/economic side because I feel more confident I understand your thinking there. I have some substantive disagreements with you, though Im not sure they matter because I don't know how much analytic work this part of your argument does. It seems possible to me that your actual interest and analytic structure is grounded in the second/physical part of your analysis and that the economic overlay is mostly that, an overlay to describe the appearance of the underlying phenomena in a financial world.
I think you make a few subtle errors on the economic side that can have potentially large effects.
The first is that the money economy is on short time scales a closed loop. If the money price of oil goes up it is simply not true that the economic effect is a loss of discretionary consumer spending. That is one effect of the relative change in prices between oil and all other goods. But, the exactly equal and opposite effect is an increase in the money terms of trade of the oil exporting countries. Over medium term horizons the relevant question is not the loss of the discretionary consumer spending that high oil prices induce, but rather the structural capacity of the world economy to replace this lost consumption with an economic flow of equal or greater magnitude. Like I said previously, this has to happen definitionally over very short periods of time, but this is a relatively trivial observation.
In fact high oil prices induce excess savings in the world economy in money terms for a simple reason, the oil exporters cant spend the money fast enough. And because these oil exporters have a higher marginal propensity to save than the oil consumers, oil shocks increase money savings in the world economy. But, and I do believe this is the core of the peak oil argument as it relates to the supposed closedness of the money economy, because of physical constraints in the oil exporting countries they cannot actually invest the amount of money that high oil prices ought to engender in their own oil economy. This means that even over moderate periods of time, some of this money must be reinvested in the oil CONSUMING countries. This has always been the crux of the oil problem, and in my mind the strength of the peak oil argument in financial terms, even at high oil prices for moderate amount of time, the oil (and gas) business and the oil and gas countries cant produce enough economic investment in these industries/countries to demand capital from the rest of the economy/world. What better evidence could we have that there are non-money constraints to the ability to produce more fossil fuels?
As you can see now, it is relatively trivial to show that if the money reinvested in the consuming countries piles up (capital account surplus to offset the current account deficit) out of proportion to its usefulness (Cue financial economy X) then the solution will be to destroy enough economic activity via losing labor and demand (usually for the mal-investment) to bring the current account balances down primarily by lowering the money price of oil. But here is where there is a subtle difference between your view and the one above; there is no a prioi reason (I mean this in the sense of within the system and without anyway lessening the fact that it is precisely such an a priori reason that underlies the system) why the surplus capital could not be reinvested by society in a way that intelligently uses the available reasons. There might be exogenous reasons why the surplus capital will always and everywhere be wasted, but I am somewhat suspicious of this and actually think it is not that interesting of a question. The future is indeterminant so the question is give yourself a chance of at least getting to the future. With regards to investment, the Hayekian epistemology that no plan is always better than planning, can basically be reversed to any plan that coordinates economic activity is better than an insight that has no coordinating power.
Ill get to the second part later today,
It is basically to be careful of avoiding the debt trap in one's analysis. For society, debt is important in making use of the factors of production, labor, technology, capital but it is not the end all be all of that system. Everyone seems to forget, the return to the capital stock has nothing to do with debt, it has to do with the profitability of society's capital before the claimants upon that capital stock (debt holders, proprietors, equity claimants) exert their claim. While debt is important to the additions to the capital stock, gross additions, and that is in turn deeply important because investment is an economic flow that employes resources such as people. For example, how many people know that more than all of the fall in real economic activity in the U.S. is explained by just one economic activity, construction?
Ill go into the return to capital arguments and data later, but just suffice it so say for now, that the focus on debt can prevent people from realizing that the return to the world' capital stock has continued to INCREASE through the crisis and now "recovery". We're producing plenty of funds internally in the economy, we just dont know how to spend them in a way that utilizes available resources in a way that is ultimately sustainable. Or to say it better, we dont have a plan that a sufficient number of people believe to employ present resources for long term production. A plan can be the unspoken meta-narrative of globalization, et.al which grounds but does not directly inform disparate free market decision making, or it can be an explicit plan of coercion. It doesnt much matter, what matters is that whether people admit it or not, economic activity relies on conventions. The dominant one of the last thirty five years has been eviscerated by this recession.
The subtleties may be beyond me!
I'd like to know more about this assertion. It has been proposed by several economists that one of the contributing factors to the bursting of the sub-prime mortgage bubble was the higher transportation costs associated with higher oil prices, with the 2009 spike really bursting that bubble and a few other debt-related (e.g. credit card) bubbles. People on low incomes (who should not have qualified for loans) could barely afford transportation to their jobs. When oil rose above $60 a barrel, and gasoline shortly followed the upward pressure, a number of people lost their ability to get to work. Food prices also rose due to transportation cost increases as well as some supply problems (competition from corn ethanol?)
The money price of oil, held up for a long enough time, propagates through just about everything else, raising prices or squeezing margins (ask truckers about that pain). One way or another, everyone ends up with less purchasing power for goods and services because the energy cost to produce those has gone up. One way to compensate is to borrow more money making it look like discretionary spending is staying the same, but that caught up to us really fast after 2009.
One problem that we have in our tracking of the economy is that we don't actually measure and account for the emergy content of goods and services from extraction through the whole value-added chain. We simply expense energy costs in dollars at each node in the network. If we actually integrated all energy costs throughout the whole chain, we would see how a slight change in basic energy input costs would put inflationary pressure on everything (and this doesn't even address costs of externalities). In the end the only thing that determines value is how much work was done to produce and the dearness of the energy that it took to do that work. Money is an illusion.
Sure,
The identity holding true over short time periods (because you cant change the factors of production that quickly unless something like a flood puts everyone out of business) is simply that money sold is money produced. A gallon of oil sold is a gallon of oil bought. A further 100million dollar burden on the U.S. Consumer is an equal 100million dollar surplus to the producer. Either the consumer can stop buying by running out of money, debasing his currency, finding substitutes in which case the money price falls suitably to re-induce equilibrium, or the consumer can be lent the money by the producer to a) either maintain the current economic system 2) slowly redeploy resource consuming factors of production to resource prolonging factors of production on the producers dime.
So for example, 2007 was not a good year for U.S. economic growth, we were already struggling to adjust to high oil prices, a busted banking system, and a non-viable construction sector. BUT it was the best year for global growth in the entirety of this second era of Globalizaton (Deng to present). Im not making any claims about decoupling etc...all im saying is that 2007 (a year where my memory tells me crude ended pretty close to 100) is a pretty good representation of the closedness of the money economy in the short term. But, as I mentioned previously, I think this is a relatively trivial observation because this in no way points to the ultimate efficacy of this identity. The consuming nation can get poorer over the medium term with or without the producing nation getting richer. The borrowing nation can use the resources lent back to it in the petrodollar recycyling in rational ways (defined however you want, but I would suggest that TOD's great insight is that the only ULTIMATE criterion will not be whether that borrowing is centrally planned or free market disaggregated but rather whether it increases net energy available from non-oil), or in irrational ways.
What I am trying to suggest though is that it limits the forcefulness of your argument to say that well we did X,Y,and Z until the oil price made it all non-viable. The error is that we didn't have to do X,Y, and Z. The economic activity that was destroyed by the recession was not business as usual (been to a doctor lately, just as busy as ever, and so on down the line for many sticky factors of productions) but rather the long term enterprises that became non-viable for a variety of reasons, a major one being there was no longer the cheap fossil fuel to sustain the convention that there would always be room for more and bigger and better X,Y, and Z in the future.
But, you cant seriously think that had we known in 2001 what oil prices would be in 2008 there is nothing we could have done that would have been a better use of oil resources than what we actually did. But that is the treadmill your argument leads to ultimately. That we have economic activity and we just wait until the oil price blows it up. It is trivial to demonstrate however that a significant amount of economic activity can be changed based upon our expectations of the future. (investment jumps out which is approximately 20% of gross economic activity. let me elucidate that, it is 20% of existing economic activity. lets say it is exactly as resource intensive as the rest of economic activity, there is strong reasons to think this is not true but it doesn't mater, this means 17million barrels a day is being used to employ other economic resources in the present based on what we all collectively think the future will look like). I simply don't understand how one could argue that theres no way to use these 17 million barrels better than we already do/did because fossil fuels subsidize X,Y,Z. SO WHAT, they already subsidize X,Y,Z and in my example X,Y,Z arent consumption of any kind. Meaning, this is the employment of oil resources just in investment. The relevant question is how to use those (stylized) 17million barrels best, and if were serious that there is an oil problem isn't it likewise trivial to demonstrate that we should at least use them to provide for greater net energy in the future.
Now that might be impossible/difficult to determine/or a whole host of other things that i take seriously but it just want to argue that your connection between the oil system constrain financial system constraint is not as simple as laid out in your post. We have plenty of oil available to subsidize all sorts of economic activity because it already is doing so and were free as humans to choose which of those activities to vouchsafe and which not.
The notion of poorly invested energy is not a new idea. The need to invest in a future renewable energy infrastructure can be taken as read.
Gaining control of where the 17mpd is spent is ATEOTD political.
I'm afraid I will need to admit in public that you've lost me. At this point I have no idea what you are arguing, nor does it seem to me that you understood my post to be a hypothetical that could help provide an explanatory basis for gyrations and counter intuitive movements in oil prices and it is not a means for predicting anything substantive at this point. That it might be developed into something (a working model) more substantive in the near future is another matter.
All I could decipher in your screed is that you claim the world is more complex than my model suggests. Well - yeah. I think I said as much.
I believe He is stating there is a non optimal allocation of resources for future needs(who doesn't?). This leads him to think modeling the economy as though it could not be optimized better is invalid or faulty
Doesn’t it depend on the shape of the oil supply curve? (ie. It is the average cost of production that determines whether discretionary consumer spending falls, not the marginal price of oil). For example, if the oil price rises from say $5 to $100 overnight, but there is just one barrel with a production cost of $100 setting the marginal price and all the other barrels still have a production cost of 5$, then the price increase is simply a huge transfer of wealth from oil importing to exporting countries (ie. the exporters earn a huge rent). In this case there is no necessity for a loss of discretionary consumer spending - it will just be different people consuming different things (or they may of course choose to save and invest it). On the other hand, if the production cost of all barrels rises to $100 overnight, then it is not simply a transfer of wealth, it is a real cost to the economy as vastly more resources need to be spent on producing the same amount of oil. In this case there would be a material reduction in discretionary consumer spending. I suspect reality is somewhere between these two extremes – some is a transfer of value and some is increased costs. In my view, for what it is worth, over time it will move to be more of the latter as the cheap production gradually fades away and the oil supply production curve moves inexorably upwards.
Excellent post by the way George.
Yes, rising production costs would cause the economy to shift it's productive abilities to oil production.
OTOH, the other trend will be away from oil consumption. In the long run, we'll just make oil obsolete.
Im assuming that the market price is the marginal price of producing the last barrel (not a good assumption in this case, but it doesnt make a huge difference). Given the price pattern of oil around relatively small changes in total oil supplied, we can be pretty confident that the oil supply curve is very, very convex. In fact, I think a particularly good statement of peak oil is that the supply curve for oil is way more convex than for classic economic goods, suggesting there is something "different" about it.
And yes youre right about the average cost, but I wasn't saying that consumer spending on oil doesnt go down I was saying that over small periods of time world GDP doesnt go down. This is as you point out, a trivial observation. We cant eat oil, it provides no satisfaction to us other than for what it allows indirectly so if we have to devote more and more resources to finding it we are poorer in every real sense. For my argument it doesn't matter whether the resources are consumed within the oil production system itself (wages etc.. of workers in that industry) or recycled outside the industry. This difference is relevant to other analyses however, as you correctly point out.
It is a hallmark of oil however that the average cost doesnt change nearly as rapidly as the market clearing (marginal) price. I wrote about this earlier for why increased oil prices tend to lead to an increase in money savings and that identity actually relies on precisely the difference you mention, the marginal price transfers economic rents from oil consumer to oil produces in a way that cannot be absorbed by the producers internally.
By the way, given the huge spare resources of labor currently, reinvesting oil money into oil investment should be a net positive for society even if it significantly raises the average cost of oil, i.e. takes money from the rest of the economy. (because it very well might take money from the party of the economy that is currently not employed in production of any kind).
George,
Why doesn't your model include substitutes? For instance, above about $20 per barrel oil can no longer compete with coal for electrical generation. Above about $50 per barrel it can't even compete with wind power. Oil accounted for 20% of US generation before the 1979 oil shock, and now only accounts for .8% (and dropping).
Similarly, when oil goes above, oh roughly $30/bbl, it can no longer compete in the home heating market: home heating oil has gone from 5% of US oil consumption in 1979 to about 2% now (and dropping).
The same applies in freight: trucking is losing market share to rail, which is 3x more efficient. If oil gets much more expensive, rail will start electrifying, eliminating oil altogether.
Same thing for personal transportation: a Prius uses only 40% as much oil, and is already cheaper to own and operate than a comparable pure ICE vehicle. EVs like the Leaf, and EREVs like the Volt are arriving.
If you don't include substitution in your simulation it will be badly, badly inaccurate.
Yes, but show us the speed of these substitutions with credible models that include the financial difficulties we are experiencing — and all indications show are getting worse. That is the crux of the matter.
I have shown you studies that project something like 400,000 EVs sold per year by 2020, assuming a healthy economy. Even quadruple that sales projection and the numbers are still completely irrelevant to our situation.
Show us:
a) how many vehicles you think will be sold by when
b) how much diesel or gasoline they save in aggregate
c) the percent that makes up of the total fuel use
I've done that calculation in my video (for the U.S.) and came up with only a 4.5mb/d saving if half the vehicle fleet were to double its efficiency overnight.
We need to save much more than that and I have no faith that that number of vehicles will be sold in any timeframe that is reasonable. The vehicle turnover period is currently about 22 years and is likely to increase again as credit tightens even more.
I believe I have asked this before so I apologize if you posted them and I missed them...what numbers do you come up with?
Andre,
When you ask for "the speed of these substitutions with credible models that include the financial difficulties we are experiencing", the kind of information you're asking for is, in large part, the output of the kind of model that George is working on. In effect, you're asking me to produce this model.
I'm suggesting that substitution needs to be included in the model. In effect, you're agreeing with me.
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Let me address a few lesser details:
speed of substitution
That can be very fast: Trucks, ships and personal vehicles can reduce fuel consumption by 20-50% % in seconds, just by slowing down or other similar strategies. Carpooling can reduce fuel consumption by 50-80% in a matter of days. On the other hand, substitution is often complex and non-linear. It can change with time in step-functions i.e., at the beginning of an oil shock people just wait to see if it will go away, and respond very differently at the 2nd oil shock vs the first. It can and usually does grow exponentially: wind and solar have been doubling every 2-3 years, due in large part to forward thinking public policy.
The feedback loops from energy to economy to energy may not behave the way you expect. For instance, Alan Drake tells us that in the Great Depression consumer spending fell dramatically, but that business investment only grew, even in the depths of the depression: apparently they were trying to save money by improving labor productivity (which of course, in the absence of proper management of the finance sector, created a downward positive feedback which made things worse). So, investment in energy efficiency and oil substitutes is likely to accelerate in a oil-shock induced economic contraction.
I have shown you studies that project something like 400,000 EVs sold per year by 2020, assuming a healthy economy.
Yes, and I have replied that these studies are obviously based on BAU. IOW, they don't anticipate that there will be any oil price increases or oil shocks in the future. This, I think you would agree, is unrealistic.
only a 4.5mb/d saving if half the vehicle fleet were to double its efficiency overnight.
That's enormous. A decrease in consumption of 4.5mb/d would have a dramatic effect on the world balance of oil supply and demand.
As far as my projections: the US uses about 9M bpd for personal transportation. There's no reason the US couldn't reduce that with EREVs like the Volt by 50% in 20 years, 90% in 30 years, and 100% in 40 years (including ethanol for 5-10% of VMT). Will the US do so? It depends in part on the behavior of liquid fuel supplies: if they decline the way you suspect, than such a response becomes more likely. If they decline the way Aleklett expects (11% in the next 20 years) then the response will be somewhere in the middle.
Similarly, the 2.5M bpd used for freight transportation could be reduced even more quickly by moving to rail. Asphalt could be replaced with concrete; plastic could be recycled to reduce it's hydrocarbon consumption by 90%, and the remaining 10% could come from coal (plastic does sequestere carbon, after all), methane or biomass; the list goes on. Only aviation, which uses about 10% of oil, would be technically difficult and slow to replace. For better or worse, we'll have more than enough oil to power aviation for the roughly 30-50 years that it will take to find the best substitutes for jet fuel.
The vehicle turnover period is currently about 22 years
That overstates the problem. Before the recession vehicles less than 6 years old accounted for 50% of all miles travelled. That might have risen to 8 years now, and could be reduced back to 6 (or less) by the availability of vehicles that were actually substantively different from existing vehicles (as opposed to the situation of the last 50 years, where new cars were indistinguishable from old models).
I'll address just one part of your response since I've got some deliverables on my plate; hopefully others will address the other points.
The notion that the middle class will purchase these expensive vehicles (~$35k for the Volt after the tax credit) as they close their wallets during a deflationary spiral is, I believe, the fundamental mistake you make. Based on recent monthly data, annualized car sales are approximately 11 million vehicles per year, down from a high of 16 million per year.
Given that the recent economic downturn has cut vehicle sales already by about one third, I think you are willfully ignoring a self-evident trend — car sales are going to decline further as the economy contracts. When the price of gasoline went up, sales of smaller cars did increase but not anywhere near enough to make up for the decline in overall sales.
Let's say annual sales are about 5-6 million per year by 2015 — a reasonable guess if the economy merely shrinks and doesn't completely crater in a cascading stock market crash. There is no way electric vehicles will make up more than 20% of that amount by 2020 and even that would be 1.2 million per year, already 3 times greater than the estimate from the study I quoted.
I believe your prediction of tens of millions of electric vehicles on the road in the next decades is wishful thinking. Most people are going to put their declining income toward repairing the vehicles they have. That is a well-established response during tough times. People don't go out and buy big ticket items. Sales of durable goods almost always decline in economic downturns:
1929 Depression
1960 Recession
1970 Recession
1990 Recession
Household expenditure cycles and economic cycles, 1920 – 2010
http://www.chapman.edu/esi/wp/recessions_1929_2007.pdf
This brings us back to what I've been saying all along: we will be using much less oil but that will be because the economy has continued to shrink, not because some significant portion of the populace has switched to electric cars.
Edit: 2.5 -> 3 times
Aangle,
Consumer durables only have a slight drop in recessions, and as Nick pointed out, the 1-6 year old( or 1-8year) vehicles account for 50% of VMT. Furthermore, most households have 2 vehicles so if gasoline really becomes tight or very expensive or rationed, those few million PHEV and EV are going to be the ones used most and in car pooling, combining school drop offs shopping evening travel etc, instead of the SUV that will be parked except when the low gasoline consuming vehicle is not available.
Have we forgotten there were no SUV's on the road in 1980, why do we think it impossible to have 150million PHEVs getting 200mpg, and accounting for >80% of VMT in 20years?? Vehicle models are completely replaced about 7-10 years.
Recessions, yes, depressions, no. From the graph above, durables decreased by more than 45% in the Great Depression.
I believe we are heading for a depression.
The most important number is the vehicle turnover rate, not the model replacement rate. It has increased from 16 years to 22 years and was at one point 27 years when vehicle sales were around 9 million per year.
It's very simple math. We will not replace the vehicle fleet any appreciable amount before 2030. The penetration rate of new vehicles in the vehicle fleet will decrease as we enter the depression, not increase as Nick is oddly asserting. Thinking that the technology will penetrate faster is, in my view, wishful thinking.
Certainly people will defer big-ticket purchases like cars, but they are doing that already. You can only do that for so long before the old car gives up the ghost. I agree that turn-over won't be fast but I think it can happen even with financial difficulties.
If someone has a job to get to and the person's old car dies (and there is no viable public transport option), then they will have to do what they have to do to get a car. They certainly could buy a used car and many will. But many will go for a new car even though it is damn expensive. You've got to get to your job or you don't have a life. So things like the lease options will look attractive if they can't buy the car. After all, there is one thing that is available cheap today . . . money. Granted, people have credit problems but if they have a steady job and can pay the $2.5K upfront cost, I'm sure GMAC will allow the lease. Bernakke's religion is that you keep the money flowing freely if you are in a depression.
A minority of cars account for a majority of fuel consumption. For instance, in Tokyo taxis account for about 2% of the car population, but they account for 20% of fuel consumption. New cars are driven more than old. We'll get most of the benefit of EVs before we replace most of the cars.
The fact is that the US has far more cars than are needed for the basics. The average car is only about 1% utilized!
Many households have 2-4 cars: there are 230M cars in the US, and only about 100M households. This means we can replace a small fraction of the cars in the US, and get most of the benefit.
The average commuter car only holds 1.15 persons. Increase that to 3.45, and reduce the fuel needed by 2/3. It can be done literally in weeks, and costs nothing.
Really, we don't need oil, either to get to work or run our economy. One of these days we'll wake up and decide to no longer be addicts, and we'll kick the habit.
Do you have the natural resources to build batteries for those 150 M cars?
http://www.theoildrum.com/node/6228
Yes, the lithium is out there1.
First, read the comments on the article you linked. second, read http://energyfaq.blogspot.com/2009/02/could-we-run-out-of-lithium-for-ev...
1 Of course, we're not limited to lithium - there are a lot of chemistries that would work. Heck, conventional lead-acid would work well enough, if needed, and there are improved versions of LA that haven't gotten funding because they couldn't quite compete with li-ion: google "Firefly Energy".
I would virtually guarantee you this for the forseeable future: Nothing that gets put on the road will ever get 200mpg.
The technology is not there. People need something with mass market affordability, 4 wheels, a roof & doors, some basic crashworthiness, feasible to maintain and repair, etc. Never mind equalling the current vehicles. At 200mpg they probably couldn't compete with 1940s vehicles.
I know some cool stuff has been built over the years, but very little of it survives the practicality/affordability tests. If it's not affordable then people will just keep driving what they already have even when oil prices have gotten pretty high.
Neil is talking about miles per gallon of liquid fuel.
The Chevy Volt uses about 1 gallon of gas per 230 miles, for the average driver. Of course, if you really wanted to, you could use none at all, and get infinite MPG.
The Chevy Volt can theoretically get high gas mileage. And my conventional gasoline-powered car can also be run on $75 worth of batteries and no electrical grid power at all. But that doesn't mean we can build a car that gets 230mpg, a $75 battery, and no electrical grid usage.
GM itself has retracted the 230mpg number and given a number of 85mpg for the Volt more recently. (And if this figure is anything like the traditional official mpg figures then it might easily be 20% too high.)
The Chevy Volt can theoretically get high gas mileage.
Yes, but that's not that important. What's important is that 80% of the time it won't use gas at all.
And my conventional gasoline-powered car can also be run on $75 worth of batteries and no electrical grid power at all.
??
GM itself has retracted the 230mpg number and given a number of 85mpg for the Volt more recently.
I'd be curious to see a link for that - I don't think they've given any estimates like that at all. In any case, what you may be thinking of is something that attempts to combine electricity usage and gasoline consumption. That's not what I'm talking about. I'm talking about the fact that if you drive a Volt 12,000 miles in a year, roughly 9,600 will be driven on electricity, i.e., with no gas at all. The other 2,400 miles will be driven on gas, and might require about 50 gallons.
12,000 miles divided by 50 gallons is 240MPG.
Given that we're facing Peak Oil, but we have plenty of electricity, the pure gas-only figure of 240MPG is what's relevant.
Correction: GM released the 230mpg claim and then didn't continue to support it later. The EPA "backed away" from supporting that figure. Their more revised mileage comuputation method calls it more like 85mpg. GM has not challenged that later number so far. (A couple minutes of google searching didn't give a great summation of the issue in a single link. But this seems to be the story overall.)
We have plenty of electricity as long as we're not using it to replace crude oil in cars & light trucks. But the electricity supply will not scale up so easily if we try to get off gasoline in a big way. There are a hundred ways to argue that this stuff "could work" but they all involve some kind of significantly reduced individual and total transportation patterns.
One could argue that makes the huge 200+ mpg figures technically supportable. But it's still a distortion of the data to portray it this way. I'm saying our mileage figures aren't going to just sprout another zero in the next decade and fix our fuel supply problems. It would be more like robbing Peter to pay Paul in resource terms.
We have plenty of electricity as long as we're not using it to replace crude oil in cars & light trucks.
Because electricity is so much more efficient, you don't need as much of it. Drivers in the US drive 2.9T miles. At .25 kWhs per mile, that's 725TWhs per year, or 83GW average. That's only an 19% increase over the US average of 440GW over 25 years, or .7% growth per year. That's very small.
Further, it would be at night, when we have surplus wind and nuclear power. In fact, EVs would support the build out of wind by providing night time demand.
Maybe this disagreement boils down to you & I having different views on what constitutes "realistic".
I don't consider a 19% increase to be small. In fact I consider it an achievement to maintain the current scale for that long. Growing the grid by 1/5th is certainly do-able, but I am not optimistic that it will actually get done. We're seeing rolling blackouts in places like Cali right now because the existing system is so overtaxed. (And Cali has lots of rich white people living in it. Imagine how much effort will be put into boosting the grid in someplace like the Gulf coast.) Remember it was govt force that made the original electrical grid cover the whole country in the earlier 1900s. I don't think the US govt today will do anything that noble in our working lifetimes.
I would agree that electrics are stuck in a bit of a chicken & egg scenario because of the infrastructure they require. I just don't think our current govt will ever build the "chicken" needed to make it practical to switch to "egg" power.
US electricity production grew 19% between 1997 and 2007. Nick asked for such an increase over 25 years. That's easy. If the demand is there, it'll get done, even in the stupidly over-regulated and fragmented US electricity market.
It might be the right move but I don't see it happening to the extent than it should. IMHO we are not the same country we were 10 years ago, let alone looking any farther back. (As I said before - rich white people in California are getting blackouts right now. Before the oil production really even starts to fall from oil peaking.)
It will happen if the demand is present and visible I guess.
To shift the argument a bit - I also wonder about the resources scaling up to produce the massive fleets of electric vehicles. Rare earth metals, lithium, copper, etc. Not many forecasters seem to crunch the costs of an electric fleet on a very realistic scale IMHO.
Of course we can't know all this stuff ahead of time. But it stands to reason that when we're talking about major shifts in resources being used to produce & maintain vehicles, at least a few of them can be expected to shoot upwards in price and counteract those that fall. (And much press is always being made about how the battery prices should fall. Well, we've been waiting for 100 year so far. Every handheld device we own from laptops to cell phones to flashlights would greatly benefit from improved & cheapened batter technology . . . still not happening yet . . . )
The raw pricing issues could be a major deal-breaker without some serious govt subsidies (with what money?). The existing electric & hybrid cars are selling for prices that are something like 5-20K upside down right now. Lots of popular gasoline cars & trucks are more like 2-10K rightside up. The electrics might win the math comparison in the long run but people aren't known for making good decisions that way. Give them the option of a more expensive-looking car that costs much less up front, and that will keep a lot of buyers burning gasoline.
rich white people in California are getting blackouts right now
What are you referring to? AFAIK, California hasn't had significant blackouts for several years.
I also wonder about the resources scaling up to produce the massive fleets of electric vehicles. Rare earth metals, lithium, copper, etc. Not many forecasters seem to crunch the costs of an electric fleet on a very realistic scale IMHO.
You might want to research this further (for instance, see http://energyfaq.blogspot.com/2009/02/could-we-run-out-of-lithium-for-ev... ). This isn't a major problem.
Here is a CNN story on increasing blackouts in the USA.
The problem is not catastrophic. But my point is that this is how well the current govt is keeping our system working right now, before any increased demand from electric cars and before the effects of PO really start to swipe all out its loose capital:
http://www.cnn.com/2010/TECH/innovation/08/09/smart.grid/index.html
As for resources scaling up - what about the effects of increasing energy prices (of all types) pushing down the levels of "commercially producible" resources? I don't have numbers to refute what you are saying but I just don't see this issue being discussed much at all.
There is good attention being paid to the decreasing EROEI of stuff like crude oil. But I am concerned that the issue does not seem to be looming very large in the minds of many other resource industries. I feel like the X industry is saying "We will need more Y in the future to keep production up" at the same time the Y industry is saying "We will need more X in the future to keep production up." This Gordian Knot has a logical solution, but it involves us getting less of both resources than we expect.
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I guess this is more of a generalized concern that I'm raising and not as specifically relevant just to electric cars. I just have these questions pretty much any time someone pitches the idea of a huge-scale change in society like switching the whole transportation fleet.
Whenever I hear someone refer to the "medium-term" or "longer term" supply of something being better than it appears, my mind tends to translate that as "There's plenty of it once we're willing to pay a whole lot more money per-pound for the stuff." And whenever I think "once we're willing to pay more for it" it usually means "once we're willing to put more fuel energy & metals into the extraction process." When you're getting increasingly short on both the resource in question AND the energy, this becomes a circular argument that spirals down to zero.
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I have never doubted that EVs have a place in our future but I just think that role is frequently overstated. I'm ready to believe that the equivalent of 100mpg is coming in a realistic timeframe, but not 200mpg. And not in the kinds of conditions that we will demand. I am not satisfied that the battery technology is there for what we need. The energy density is not great.
Another point I must raise is the cold weather and rough conditions don't seem to be addressed from what I have seen. These are moderate issues on paper but they are huge issues in the real midwestern state that I live in. These states have have snowdrifts that challenge 6000-lb diesel 4x4 pickup trucks. One is tempted to think "well EVs won't replace EVERY gasoline-powered beast of burden, just the lion's share of them". But in many states of the USA these 3-ton behemoths are a significant portion of total personal transportation by sheer necessity.
The familiar response is "these problems will be solved as battery technology grows with widespread use". But we've been hearing that for about 100 years so far. IMHO this is sort of like saying "The time/distance problems of interstellar travel will be overcome as soon as we get conventional rocket propulsion replaced with something better."
my point is that this is how well the current govt is keeping our system working right now, before any increased demand from electric cars
The point of the article you linked is that a "smart grid" would improve the stability of the grid. When they say "smart grid" they're talking about the kind of things that are associated with an EV. Leaf and Volt drivers will be able to charge dynamically, depending on information sent by the utility. EVs will make managing the grid easier, not harder.
what about the effects of increasing energy prices (of all types) pushing down the levels of "commercially producible" resources?
Are you concerned about commercial mining operations not being able to afford diesel? I don't think they'll have any trouble at all out-bidding other consumers, like car-owners.
my mind tends to translate that as "There's plenty of it once we're willing to pay a whole lot more money per-pound for the stuff."
A Prius costs less than the average new car. With economies of scale a Volt won't cost any more.
I am not satisfied that the battery technology is there for what we need. The energy density is not great.
The Volt battery weighs 400 lbs. That's no big deal. Heck, it's not that hard to design around a 900 lead-acid battery, if necessary (though that's not likely).
in many states of the USA these 3-ton behemoths are a significant portion of total personal transportation by sheer necessity
Electric motors are better at handling large loads. That's why the biggest freight trains use them.
these problems will be solved as battery technology grows with widespread use
These problems have already been solved. Now it's just a matter of ramping up production, and using economies of scale to get costs down. See: http://www.greentechmedia.com/articles/read/lithium-battery-prices-on-sl...
I'll try to answer a little later, when I have more time.
The problem is: you haven't shown that the economy is going to contract, you're just assuming it. You're assuming you know what the results are of George's model before he builds it.
You're assuming that we'll face deep deflation. Let's look at the evidence for this.
Stoneleigh is the foremost proponent of this idea, and her forecasts have been completely wrong for the last 2 years. She keeps saying that we're in the middle of a flukey "dead cat bounce", but that in the next few months things will collapse completely. And that keeps on not happening.
Clearly, her ideas are not independent of energy: they're based on unrealistic assumptions about energy. For instance, she's talked about expecting $500 oil.
James Hamilton is quoted as a reasonably mainstream, "PO aware" economist. Yes, he feels that oil shocks can cause or deepen recessions. OTOH, if you read his work he makes it clear that he expects this effect to be temporary.
Similarly, if we look at the Philadelphia Federal Reserve Branch study that you have posted on your website, we see that they expect the effects of an oil shock (a 10% reduction in oil consumption) to be minor ( a one-time 2% drop in GDP overall) and temporary.
If we look at the Ayres study that you have posted on your website, we see that primary energy, including oil, only accounts for 13% of economic growth.
It's easy to look at the oil shocks of 1979, say, and think that oil caused all of that recession: that's not so. Much of that recession was caused by 18% interest rates, courtesy of a Federal Reserve that had suddenly changed decades of monetary policy, and chosen to "wring out" inflationary expectations due to 15 years of building inflation.
Similarly, it's tempting to look at the oil shocks of 2004-2008and think that oil caused all of that recession: that's also not so. Oil imports clearly created part of the problem by creating too many petrodollars that needed to be recycled via CDO's, and rising oil prices helped pop the bubble, but at heart this was a good old-fashioned business cycle and bank panic. We've had many of them before, and we'll have them again. We had gotten complacent since WWII - we thought we'd solved the bank panic problem, but it just took longer than usual for us to get overconfident, and dismantle the Depression-era regulations that had prevented a recurrence.
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Now, a few details:
The Volt, at about $35K, is only about $6K more expensive than the average new US vehicle. That $6K is only about two years of savings at $5 per gallon. So, it's really not "expensive". One might expect the subsidy/tax credit to expire in 5 years or so, OTOH economies of scale will reduce the price of the Volt roughly the same amount.
Heck, the Prius is less expensive than the average new US vehicle, and reduces fuel consumption by 60%! The Prius is right here, right now. If you want a plug-in, you can add a battery and a plug for only about $3,500 with a professional after-market conversion.
Yes we have, repeatedly. You just ignore all the evidence we've provided or interpret the results of the studies we present in funny ways to get the result you want. Of course the impacts on the economy were temporary for previous oil shocks...the price went back down and the economy was able to start growing again.
That high oil prices negatively impact economic growth is extremely well established (somewhere just shy of "throw a ball in the air and it comes down due to gravity") but you seem to be the only one who questions it with your really, um, interesting logic.
You just ignore all the evidence we've provided.
I've responded to everything you've provided. I try to always do that - surely you've noticed that.
interpret the results of the studies we present in funny ways to get the result you want.
You've either agreed with my interpretations, or didn't responded to my discussions of specific studies. For instance, the Philadelphia Fed study on your website: I said that it found that a 10% decline of production would cause a one-time loss of 2% of GDP. In a recent reply to a comment in which I mentioned that, you simply said that you disagreed with the study (you said that studies of previous time periods didn't apply, because of lower debt levels). So, as far as I can tell, you agreed with my understanding of the study.
Or, take the Ayres study on your website: he found that primary energy accounted for only 13% of economic growth. I've mentioned it before, and you haven't disagreed. You can address that explicitly, now: do you agree with that understanding?
the price went back down and the economy was able to start growing again.
Well, we don't really know that, do we? Oil consumption dropped dramatically, mostly due to substitution, so oil prices had to drop. Oil consumption always does that when prices go up, and in the past that's usually forced prices back down.
We don't need growing oil consumption for economic growth. That's easy to see. Look at the US: we're using the same amount of oil now that we used in 1979, but GDP is 2.5x larger, and manufacturing output is 1.5x larger. There are many other examples.
Let me say it again: we don't need growing oil consumption in order to have reasonably healthy economic growth.
For example, from 2004 to 2008 the world economy kept right on growing, until the housing bubble popped. You can argue about what caused or popped the bubble, but there's little question that growth continued for several years in the face of high prices, so obviously the oil-price to GDP relationship is not at all as simple as you're suggesting.
That high oil prices negatively impact economic growth is extremely well established.
Of course: what I'm disputing is the size of the impact: could the US or world economies reduce their oil consumption by, say, 20% in the next 20 years, and still have reasonably healthy growth (perhaps reduced from 4% to, say, 3% per year)? The Phil Fed study says yes. Hamilton would agree.
And that's where we'll have to disagree. This graph says it all and everything else is just details.
I'm not going to spend more time on this, sorry.
This is a good example of our discussions: this chart proves my point, not yours. Look at the rate of growth of oil vs GDP: the growth rate of oil is always lower than that of GDP, and sometimes it's about zero. Look at 1993: oil consumption isn't growing, while GDP is growing strongly. Look at 2006: if the chart continued to 2008, it would show very low growth of oil, while world GDP growth continued merrily along at about 5%.
Further, you could make a similar chart for copper, or many other commodities: their consumption goes up and down with the economy: that doesn't mean they control the economy. Obviously oil has more impact than most other commodities, but that impact is much less than you're suggesting, especially over the slightly longer-term.
" Israel, as its Prime Minister put it on Jan. 21, 2008, “set itself a goal of making our lives better and cleaner…[and by 2020, being] completely free of petroleum and its by-products as the fuel which powers transportation.”"
http://blog.betterplace.com/2010/08/the-better-place-center-a-center-of-...
We can rid ourselves of our dependence on oil. We can do it fairly quickly.
Well, for starters, I didn't set out to produce a model of everything. I am just looking for the general dynamics that seem to describe the fluctuations we see through feedback loops. You may be right that some form of explicit inclusion of substitution might improve the longer-term behavior. But I have no idea what those substitutions might be. The ones you mention all involve greater expenditure of energy to transform from, say, one version of transportation to another (ramping up to Volts isn't going to be oil free). I chose to focus on oil because it is the kingpin energy form for modern industrial society. Any attempts to move away from oil as it is currently used will have additional energy costs that will eventually be reflected in the prices of everything involved, so it seems to me to be a wash. But I will give it some thought.
I understand - you can't include everything. But...I have to say, this is important. It wasn't included in the Club of Rome's LTG, and it completely invalidated it. Made it not useful. If you want your model to be useful and credible it has to include substitution effects: they're crucial to understanding the dynamics of energy markets.
I have no idea what those substitutions might be.
Yes, this is a hard topic. That's why it's worth doing, and doing right. I can offer some information. I offered some in my reply to Andre (Aangel) above, and here are some more:
http://energyfaq.blogspot.com/2008/09/can-everything-be-electrified.html and
http://energyfaq.blogspot.com/2008/09/can-shipping-survive-peak-oil.html
The ones you mention all involve greater expenditure of energy to transform from, say, one version of transportation to another (ramping up to Volts isn't going to be oil free).
I would strongly disagree. Manufacturing Priuses takes less energy than building the average US vehicle; Volts don't take significantly more; and if we're replacing SUV's, both will take significantly less. For better or worse, coal has a very high E-ROI. I hope we use wind power instead (which also has an E-ROI of well above 20), but we don't have to to deal with PO.
v Any attempts to move away from oil as it is currently used will have additional energy costs that will eventually be reflected in the prices of everything involved
Again, I would strongly disagree: it depends entirely on the pace of the transition. If we transition over several decades it will cost less (energetically and financially) than the status quo. If we choose to move more quickly (which I hope we will, to deal with AGW) then it will have significant but not large costs (heck, a transition from coal to wind would cost less than one Iraq War).
Pretty strong claim. And this is where we would diverge strongly.
I can understand that. I didn't say that quite right, so let me restate it:
I would agree that the LTG model was useful - it showed what overshoot looked like, and showed that overshoot was possible in a model of limited resources.
It did not demonstrate that it was a model of the real world. The model was extremely simple. For instance, resources were unitary: they weren't broken down into minerals, energy, food, or anything like that: just "resources". That's a mighty simple model.
This simplicity, and the exclusion of substitution of non-limited resources for limited resource made the model very, very far from anything that might be expected to model the real world. As the authors said repeatedly, these were scenarios, not forecasts. It was treated as such by the economics community, much to the puzzlement of environmentalists who didn't understand just how limited the model was.
I assume you want your model to be considered something more than an academic exercise intended to test a few very narrow hypotheses. I assume you would like it to, like mainstream econometrics models, be able to make credible forecasts about the real world. If so, it has to include substitution effects. Otherwise, it will gain acceptance here, perhaps, but it will be ignored by the wider community of economics, and justifiably so. And, ultimately, it will be unable to make good forecasts, which is the bottom line.
I almost laughed out loud when I read this.
Hmm... you mean like the ones that predicted the financial crisis and the great recession? The LTG model is powerful because of its simplicity - that is the beauty of it. The whole point of a model is to simplify the real world so that we generate new insights and improve our understanding. The economy simply cannot be modelled mathematically to produce credible forcasts - it is a non-linear reflexive system and just too complicated - third order non-linear differential equations anyone? So the best we can hope for is simplified scenarios like LTG. Mainstream econometric models are actually worse than useless because they give the impression of knowledge when in reality it does not exist. Try reading Taleb's Black Swan (Chapter 10) for a very amusing demolition job on the inabilty of economists to make accurate predictions about anything.
In any case, the point about LTG with respect to substitution is that it does not deal with relative scarcity (ie. the relative scarcity of one resource as against another), but with absolute scarcity (ie. the scarcity of resources in general - specifically low entropy). When it comes to absolute scarcity, relative prices and substitution have no role, but then mainstream economists don't believe in absolute scarcity.
When it comes to absolute scarcity, relative prices and substitution have no role
How does absolute scarcity apply to solar power, which is roughly 20,000 times as large as human fossil fuel energy production, or to iron or aluminum, which exist in much larger quantities than humans might ever use?
A few resources exist in quantities that are sufficiently limited that they pose short-term problems, e.g., copper, and oil. Others exist in much larger quantities (including coal, unfortunately) and pose medium-term problems, and still others exist in such large quantities that as far as human consumption is concerned, absolute scarcity is simply not a problem.
I agree that LTG provides a useful simplification. Unfortunately, it's usefulness is pretty limited. The lack of substitution is a fatal flaw for any kind of forecasting.
By the way, I think you have an reasonable point about the difficulty in forecasting the economy. Still, some forecasting methods are better than others. Permabears simply keep being wrong except when, like the old saying about a stopped clock being right twice a day, they happen to catch a recession.
And, finally, isn't that an argument for better models, rather than very limited ones?
"Peak Oil" is media sound bite simplistic fluff.
It always has an implicit price included - move the price, and you
now have a new peak.
That's why there have been many "peak oils" already, and you can find as many as you care to look for.
Peak Consumption is a firmer data-point, as that does not have a moving goal post of per-production-cost, and it is also more insulated from speculation.
Don't forget, there are speculative vested interests, who make big money from moving oil prices.
So, it is much smarter to focus on Consumption (firm data) and Average production cost, and new production cost, as well as alternatives production cost.
Those too, can explain why the price comes down.
Very interesting posting, but the above model appears to miss one important REGIONAL feedback loop - manufacturing re-localisation/de-globalisation effects, which will tend to be a positive feedback loop in the developed (high net consumer) nations of the world. Namely, when prices (or if prices) of energy go above a certain key threshold, which in itself is related to wage differentials/transport costs between manufacturing developing nations and developed consumer nations, than oil demand pressures re-assert themselves in the developed nations through a tendency of manufacturing to re-locate closer to the net consumer. The above model appears to be a net global model, and in my opinion fails to take into account regional feedback loops.
In a predator prey model I devised for OECD oil demand, it showed crude oil demand (not consumption) eventually accelerating faster than the developing countries on a equal weighting setup, but like all feedback models, it is very dependent upon the starting value of the model.
The sad fact is that historically cheap energy, and therefore cheap to run global transport hubs, have allowed the OECD / developed nations to export it's oil use (as a percentage of GDP) via globalisation. This is likely to reverse quickly in the years ahead.
The sad fact is that historically cheap energy, and therefore cheap to run global transport hubs, have allowed the OECD / developed nations to export it's oil use (as a percentage of GDP) via globalisation.
Do you have good data on that? Manufacturing output in the US is 50% larger now than it was in 1979 (though some of the plants are not domestically owned, and fast manufacturing labor productivity growth has reduce manufacturing employment dramatically); German and Japanese domestic manufacturing is pretty solid.
Sure, some manufacturing has moved from the UK and US to lower-wage countries, but I think the magnitude of this change is over-estimated. I'd love to see good data...
"Manufacturing output" has probably outlived reality.
It should be split into Fabrication, and Sales.
As a good example, Apple has very strong "Manufacturing output" numbers, but the hidden reality is the products are designed by Apple, have Apple software, but are Fabricated & Tested mostly offshore.
The bottom line, and solid profits, are mostly Apple's.
- but they are not a 'Local Manufacturer' in the classic sense.
I'm going by the following:
http://www.census.gov/manufacturing/m3/index.html, including http://www.census.gov/manufacturing/m3/historical_data/index.html ,
Historic Timeseries - SIC (1958-2001), "Shipments" http://www.census.gov/manufacturing/m3/historical_data/index.html.
Are you thinking that they're inaccurate due to imported parts/components? I'm pretty sure that Apple's manufacturing isn't included.
Your link lists these categories, seems Apple/Dell/Hp all would
fit in here ?
M3/ NAICS code M3 category title with comparable NAICS titles
34A Electronic Computer Manufacturing
334111 Electronic Computers
34B Computer Storage Device Manufacturing
334112 Computer Storage Devices
34C Other Computer Peripheral Equipment Manufacturing
334113 Computer Terminals
334119 Other Computer Peripheral Equipment
34D Communications Equipment Manufacturing, Nondefense
334210 Telephone Apparatus
334220 Radio and Television Broadcasting and Wireless Communications Equipment
334290 Other Communications Equipment
34E Communications Equipment Manufacturing, Defense
334210 Telephone Apparatus
334220 Radio and Television Broadcasting and Wireless Communications Equipment
334290 Other Communications Equipment
34F Audio and Video Equipment Manufacturing
334310 Audio and Video Equipment
Sure, but the question is the accuracy of data collection.
I mean, if an iPhone says "Made in China", is it really going to be reported in these stats?
Well, my iPod doesn't say "Made in China". Like all Apple's products, it says "Designed by Apple in California. Assembled in China." I've always thought that was comical wording, but now I'm wondering if in fact it is designed for legal effect, and perhaps does affect manufacturing statistics. Mind you, I have no real idea...
now I'm wondering if in fact it is designed for legal effect, and perhaps does affect manufacturing statistics.
I'm sure it does. Apple couldn't say it was made in the US, but they wanted to take credit for the design, so they came up with this wording.
You may be right that such relocalization will have an impact in the future, but the model is only attempting to look at the current and recent past situation. As energy costs for transportation rise past a certain point I fully expect to see the effect you mention. When the reversal becomes significant I imagine some tinkering would be appropriate. Something to keep in mind as it develops.
There are a variety of techniques to analyze the response of changes in input on output. From the perspective of a career analyzing process variables and relating them to product quality I would say that the simpler the analysis the better. Compared to problems I’ve solved this one seems relatively simple.
One approach is to do a sign test: During periods in the past count every time the price of oil went up or down by x percentage over t years. Did the GDP go up or down in relation to the change in oil price? If oil price went up and GDP went down, score a +. Otherwise score a minus. Compare that to the odds of a coin toss to test significance.
Another test is the controlled experiment of a bump test where you deliberately change a variable, record the outcome change, and reset the variable to the original condition and see how the process responded. With oil that is what we have done. The economy should have recovered when the price of oil fell. It didn’t.
On the other hand, housing has usually had a significant positive correlation with GDP. Housing hasn’t recovered and neither has GDP.
There were two periods of excess debt (excluding WW2 government spending). The first was the Roaring Twenties. A depression followed. The second was the Housing Bubble of the 2000’s. A depression followed. Incidentally, there was a housing bubble in the 1920’s and also a lot of consumer debt for autos and appliances. The WW2 debt was repaid about 25%, then inflated away.
In process engineering you also learn that everyone has an opinion and most of them are wrong. Only by understanding the fundamentals of the process, such as being able to rank the effect of variables in order of importance, are you likely to successfully solve a complex problem.
The most difficult problem I ever solved required dynamic material balance software.
One approach is to do a sign test
That would suggest that copper, and a wide number of other items, have the same power as oil. Most of the time in the past oil has been a dependent variable, not independent.
Of course we are looking for large oil price changes, like the 1973 embargo, the Iran-Iraq war and Desert Storm. The economy eventually went into recession after each event.
Among investors copper is said to have a PHD in economics because changes in the price have historically been the earliest leading indicator of the future direction of the economy. The correlation is positive.
Striking that all 3 of those included M.E. war. I'll have to look back at precisely how prices and GDP changed in those case - it would be interesting to do a quantitative analysis. Of course, some others that I think have mentioned above have already done so (Hamilton, Phil. Fed), and found significant but small (from a TOD kind of POV) effects.
copper...The correlation is positive.
Yes, that's the kind of think I had in mind: economic growth causes investment in buildings and manufacturing, which causes copper orders to rise: the arrow of causality is from GDP to commodity, not commodity to GDP.
Conversely there are a few periods following oil price declines. The first is 1931, during the depth of the depression when East Texas field was being developed and oil prices reached the all time low. Hard to say that low oil prices helped, at least not immediately, partly because it would take several more years to make the refinery improvements that would significantly lower the price of gasoline. Having the oil did help the US win WW2!
The price collapse in 1985, which helped undo the Soviet Union a few years later, helped the long economic expansion in the 1980's. Low oil prices after Desert Storm and especially after dissolution of USSR coincided with one of the longest expansions on record.
http://www.wtrg.com/prices.htm
The price collapse in 1985, which helped undo the Soviet Union a few years later, helped the long economic expansion in the 1980's. Low oil prices after Desert Storm and especially after dissolution of USSR coincided with one of the longest expansions on record.
Yes, low prices did help: high prices create a headwind for the economy, low prices create a tail wind.
We can look at prices, or we can look at volumes of production/consumption. It's interesting to note that despite low prices, volumes of oil consumption rose very slowly after their bottom in the early 1980's: GDP is now 2.5x as large, but oil consumption is no higher than it's peak in 1978, and only 20% higher than it's bottom in the early 80's.
Interesting web-site. There's a good discussion of how price controls in the US from 1973-1979 made the price spike worse, because both substitution and domestic oil production were suppressed.
Question everything...
Do you mean the oil price spike of 2008?
Of course, relative to the 1998 price of $14, the average annual price of $62 in 2009 was more than four times the 1998 price and the 2009 price was higher than all pre-2006 annual prices (US oil prices).
In any case, as noted before, I think that the year over year price declines are very interesting--down to $14 in 1998, down to $26 in 2001, and down to $62 in 2009. Each successive year over year price decline was about twice the previous decline. If this pattern holds, the next year over year price decline will bring us down to an average price of about $120.
Ha!
WTI averages:
2007 $72,2.
2008 $100.06
2009 $61.92
A few years ago, who among us would have asserted that $62 would be considered "low?" We seem to be steadily redefining upward what we define as "low," which is the point about the (so far) geometric progression in year over year price declines.
Note that the average price to date for 2010 exceeds all prior annual prices, except for 2008.
Blessed is he who reminds us of the human tendency towards Shifting Baselines. :-)
G
Oops! More or less! Thanks.