Peak oil, the market will save us (at a price)

From the Institutional Economist blog we’ve just seen an article on peak oil.  I agree with the author that markets will facilitate any movement from using oil to using a substitute.  As yes, the market will help to develop further exploration for oil fields – which will provide more oil.  But I feel two points are underplayed:

  1. The market facilitates this change by increasing the relative price of oil to other things.  This is costly to society.
  2. A natural resource like oil is like “capital stock”.  As it is non-renewable it is limited.  By consuming oil we are consuming this capital stock – I wonder if the author would be as happy to see firms cut back their capital stock in order to increase production.

Ultimately, I think there is some oil in the ground and the best way to allocate when are where this oil is consumed is with markets.  However, we should definitely not ignore the fact that, one day, the oil could run out and that would have a negative consequence on society – negative consequences that we can’t do anything about.

Peak oil theorists aren’t “economically illiterate” persee, they are just concerned about the fact that we could have this negative outcome.

  • ben

    I’ve never understood the peak oil bluster.

    The upshot of it seems to be that the solution to oil scarcity is pretend oil is more scarce than it really is, by taxing and regulating its use today and to bring forward the day when transition away from oil will occur.

    That does not make any sense.

    Plainly, peak oil is inimical to human welfare. Absent an economic alternative to oil, in effect pretending there is less oil in the ground just makes us needlessly poorer.

    I don’t know what the future for energy holds, but 500 or 1000 or 5000 years from now when oil really does start running out, we can have at least some confidence there will be an array of alternatives and substitution will have happened long before the taps run dry.

    (by the way, the usual repost to this argument is: but what about climate change – we can’t just keep pumping CO2 into the air.

    Fine. Good argument. But it has nothing to do with peak oil.)

  • Sam Powrie

    Ben – I don’t believe that, from what you have written, that you have the slightest ideas as to what Peak Oil is about or for that matter, what worries those expressing concerns about it. Oil scarcity is only of peripheral relevance to Peak Oil. Indeed it has very little relevance if any. What is relevant is ‘flow’ or production rate and the the associated rising energy inputs required. This is what Peak Oil is about – what it costs financially and in terms of energy inputs (substitute ‘technology inputs’ if you like) to get it to where it’s needed. Nothing to do with scarcity or ‘oil running out’. I can understand this concept and, with a little reading and research, see the reality – why can you I wonder? Suggest you read the Exec Summary of the IEA’s 2008 ‘World Energy Outlook’ if you really want to understand (and comment on) Peak Oil.
    Sam P.

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  • ben

    Sam, I read the exec summary as you suggested. It projects increased oil consumption up from 86 million barrels/day to 106 by 2030. Oil production will not have peaked by 2030. Unit costs will be higher. Oil’s share of total energy consumed will be modestly lower.

    It also calls for massive government intervention in energy markets, mainly to protect the climate. Now while it (correctly, in my opinion) calls for an end to energy subsidies, the intervention called for is, of course, to make other energy sources artificially cheap and current energy sources artificially costly – which is to say, scarce.

    You are incorrectly ascribing to me confusion between total stock and flow of oil. Peak oil is an argument about scarcity of supply. I get that. Yes, I suppose my language could be more precise, but I understand the difference between stock and flow, and increasing marginal cost of extraction. Duh.

    Higher taxation and regulation of investment in oil and increased subsidy for investment in alternatives raises total energy costs and makes access to energy more, not less, scarce. So what’s the justification for massive intervention peak oilers and the paper you cite calls for?

    Actually markets do signal scarcity and encourage investment when it arises. The only role for government in energy markets, at best and ignoring their apparently limitless capacity to achieve the exact opposite of what they say they will do, is to internalise externalities, and at current tax rates some governments (not the US) already tax oil products beyond the point required to internalise those costs. (If you do the conversion NZ is well above the US and UK optima).

  • jb

    “The market facilitates this change by increasing the relative price of oil to other things. This is costly to society.”

    Um… It would be costlier to society if we kept the price artificially low and then experienced massive shortages.

    Rising prices are a good thing. It forces people to think hard about how they want to spend their money.

    If we stopped using oil tomorrow, people would just find the next thing on the list, and complain about how we were using up that “capital stock”

  • Classic nonsense article, that to which you refer. Apples with apples is the key, and big picture.

    The Hubbert Curve (the projected rate of extraction of any finite resource) is the proven key. Google it, both written and images.

    Then google: campbell 2004 scenario. The green rise and fall at the bottom of the stack, is Hubbert’s prediction of a 1970 peak for the USA, and it’s never looked like anything but down from there.

    Extrapolate it for the planet. google: oil discoveries (images) and note that they peaked in 1964. Note the sheer fall-off. ‘Big new finds off Mexico’ (note no quantities stated or compared) are part of that, and as you can see, make no difference at all. They have already been anticipated.

    Unfortunately, substitution of this one is not so easy. Theere is more imbedded oil in a pottle of yoghurt, than there is yoghurt.

    Physical replacement aside, there is the energy problem. Economists call energy 3% (or whatever) of ‘the economy’, as if it could exist without. A heart attack only stops the heart too, but the rest of the body ain’t much use subsequently….

    We went over the top in mid 2008, although it is mathematically possible to revisit that rate, until mid-2010. Thereafter, EROEI and export/import beats you.

    EROEI is energy return on energy invested. If it takes a barrel of oil to raise and proffer a barrel of oil, it’s not worth it at any price.

    The export model, is that oil exporting nations are using exponentially more internally. When they peak – and 53 countries are now post-peak – their available-for-export goes from positive to negative, and does so rapidly. Indonesia is the classic local example.

    Visible constraints from 2010, staggers from 2012, real trouble by 2015.

    If somebody raises the prospects of total-replacement alternatives, I’ll reply – 30 years of energy study and I’m comfortable with it…..

    Then theres the real question: If energy has peaked, so too (second law of thermodynamics) has ‘work do-able’. You can eliminate the trip to the dairy, and put it into the tractor, but you can’t grow.

    Can your current fiscal regime – based on growth – survive with none?