As resource economist Julian Simon taught us years ago, we never have, and never will, run out of scarce resources like oil because as a resource becomes more scarce, its price will rise, which will set in motion a series of actions that will counteract the scarcity. For example, higher prices for oil will increase the incentives to: a) find more oil, b) conserve on the use of oil, and c) find more substitutes. And that's exactly what's happened recently in response to higher oil prices - domestic crude oil production reached a 14-year high in March, and the share of rigs drilling for oil (vs. natural gas) set a new record high of 70% last week.
And now an LA Times article today highlights how companies are making efforts to find substitutes for high-priced oil, here are some examples from the article:
1. Ford has eliminated 5 million pounds of petroleum annually by using soybean-based cushions in all of its North American vehicles. The company also got rid of an additional 300,000 pounds of oil-based resins a year by making door bolsters out of kenaf, a tropical plant in the cotton family.
2. BioSolar of Santa Clarita, Calif., dealt every day with the fact that solar modules are typically made with a glass front, an aluminum frame and a back sheet made out of a petroleum-based plastic or polymer.
"We saw where the price of petroleum was going," BioSolar CEO David
Lee said. "We're not economists, but we knew that the price of oil was
going to keep going up. The cost of photovoltaic cell manufacturing was
going to skyrocket." BioSolar has changed its process to instead use castor beans.
3. Los Angeles businessman Neal Harris once relied on beads made from a
petroleum-based polymer to hold fragrances for his company's products. Harris' company, Scent-Events, sells fragrances as a marketing tool
to enhance movie premieres, concerts, parties and products. This year,
he'll use ceramic beads 95 percent of the time. "It's saving us money, and we no longer have to keep track of oil prices," Harris said.
4. In March, McDonald's began a trial of double-walled paper hot-drink cups in 2,000 restaurants, in place of
polystyrene containers, which start out as petroleum.
5. Coca-Cola and
PepsiCo are becoming bioplastics bottlers.
As Daniel Yergin, energy consultant and Pulitzer Prize author of a book on the
history of the oil industry, told the LA Times, "Now there are accelerating efforts to
squeeze oil out and find ways to substitute for it. That is the power of
price."
Related: Duke economist and blogger Mike Munger explains here why "peak oil" is "peak idiocy" and why "Of all the idiotic things that people believe, the whole "peak oil" thing has to be right up there."
Do I detect the aroma of market forces at work? What a surprise!
ReplyDelete"...we never have, and never will, run out of scarce resources like oil because as a resource becomes more scarce, its price will rise, which will set in motion a series of actions that will counteract the scarcity.
ReplyDeleteFor example, higher prices for oil will increase the incentives to: a) find more oil, b) conserve on the use of oil, and c) find more substitutes."
Oil is a finite resource. Here's what someone said about Peak Oil:
"The question is why do we need new frontiers if oil production isn't peaking? It is an odd concept that oil companies would spend millions of dollars in politically unstable countries and areas where the physical barriers are immense such as the Arctic just for the hell of it.
The truth is all the low hanging fruit have been picked...What we are seeing now is increased exploration in increasingly economically dubious areas such as the Canadian tar sands, deepwater drilling, and fracking and horizontal drilling in tight oil plays.
It is as if the pundits pushing this line have never seen a globe before. The world is round. There is a finite amount of land and ocean that can realistically be developed to economically produce oil."
Peak oil is the point at which oil production declines, not the point at which all oil now in place in the ground has been extracted and exploited.
ReplyDeleteThe only "idiocy" here would be to argue that oil is an infinite resource. Obviously there will be peak oil. The only question worth debating is when.
Sixth Estate: "The only "idiocy" here would be to argue that oil is an infinite resource."
ReplyDeleteSorry, but I think you misunderstand the objection to Peak Oil theory.
Energy available to humans is, for all practical purposes, an infinite resource. When petroleum becomes too expensive, other sources of energy will be used. Human ingenuity will continue to develop cheap sources of energy.
Many peak oil advocates refuse to accept that human ingenuity will overcome the eventual scarcity of petroleum. Instead of allowing supply and demand to function, they propose centralized planning to "solve" the peak oil problem they created in their minds.
If peak oil advocates just made the statement that petroleum is finite and then shut up, no one would pay them any attention. It is when they propose government intervention in free markets that they threaten our standard of living,
solar and soy beans rather than fossil fuels?
ReplyDeleteBLASPHEMY!
so when fossil fuels crap out and we switch to wind/solar ... it's the "market" at work?
shazzzammm...
Larry G: "so when fossil fuels crap out and we switch to wind/solar ... it's the "market" at work?"
ReplyDeleteI don't think anyone knows with certainty what will replace fossil fuels. The worst move right now would be for government to try and pick the next fuel source. Central planning doesn't work. Get it?
Peak oil is simply "Peak Flow Rate."
ReplyDeleteTo argue that there are substitutions, and mitigations is only logical. It says Nothing about the likelihood, or timing, of the "peaking event (or, in the real world, "plateau) itself.
Rufus II: It says Nothing about the likelihood, or timing, of the "peaking event (or, in the real world, "plateau) itself."
ReplyDeleteActually, I think it does. Reminding everyone that scarcity of petroleum will be mitigated should say that the timing or likelihood of the "peaking event" or the "plateau" doesn't matter.
I don't think we should equate finding substitutes for oil (likely) with not running out of it as some point. They should be considered two discrete concepts.
ReplyDeletesean: "I don't think we should equate finding substitutes for oil (likely) with not running out of it as some point. They should be considered two discrete concepts."
ReplyDeleteWhy?
It is exactly the finding of substitutes for whale oil which caused the earth to not run out of whales.
It will be exactly the finding of substitutes for petroleum which will cause the earth to not run out of petroleum.
Oil is a finite resource.
ReplyDeleteSo?
What we are seeing now is increased exploration in increasingly economically dubious
"Economically dubious"? Ha!
The truth is all the low hanging fruit have been picked.
ReplyDeleteRidiculous statement.
That which was low hanging when we could drill to depths of only hundreds of feet is meaningless when we can now relatively easily drill down to depths of many thousands.
Oil companies go to politically unstable countries because...um...there's oil there! It's not a low hanging fruit issue. It's that oil companies have to go where the oil is and a lot of oil is in the shitholes of the world.
"We're not economists, but we knew that the price of oil was going to keep going up."
ReplyDeletePeak cheap oil, the economic gradient on the way towards peak oil.
Apparently, even Dr. Perry is a peak cheap oil believer.
ReplyDeleteAnd the marginal cost of production continues its upwards path.
As resource economist Julian Simon taught us years ago, we never have, and never will, run out of scarce resources like oil because as a resource becomes more scarce, its price will rise, which will set in motion a series of actions that will counteract the scarcity.
ReplyDeleteThat is true as long as government does not act to interfere in that process. And, of course, peak oil theorists want exactly the type of interventions that will produce peak oil.
Peak oil is a self-fulfilling prophecy.
Some people are in denial.
ReplyDeleteOil is $100 in a depression, and $40 to $80 when real GDP recedes in the depression.
We're a long way from the $10 oil in the late 1990s, when the economy was booming.
Peak oil will constrain economic growth for at least 10 more years, until alternative energy is developed to compensate for the oil decline.
Peak oil will constrain economic growth for at least 10 more years, until alternative energy is developed to compensate for the oil decline.
ReplyDeleteNatural gas?
'As resource economist Julian Simon taught us years ago, we never have, and never will, run out of scarce resources like oil because as a resource becomes more scarce, its price will rise, which will set in motion a series of actions that will counteract the scarcity'...
ReplyDeleteHmmm, well if one believes that Oil Is NOT A Fossil Fuel - It Is Abiotic then one could consider joining the likes Google Execs and James Cameron and consider mining asteroids...:-)
"Some people are in denial"...
ReplyDeleteIs that a confession peak trader?
"Peak oil will constrain economic growth for at least 10 more years, until alternative energy is developed to compensate for the oil decline"...
Ahhh, actually I think governments do more to constrain economic growth then the technical aspect of crude harvesting...
"Energy available to humans is, for all practical purposes, an infinite resource. When petroleum becomes too expensive, other sources of energy will be used. Human ingenuity will continue to develop cheap sources of energy."
ReplyDeleteFor one thing, if indeed (which I assume will happen) we turn to alternative sources because petroleum is too expensive, than that would be peak oil. Peak oil and peak energy are separate issues.
Secondly, energy is obviously not an infinite resource. This is asinine. Trace out even a modest rate of growth in annual consumption over a thousand years or so and you'll see what I mean.
Sixth Estate: "Secondly, energy is obviously not an infinite resource. This is asinine."
ReplyDeleteThat's not a very respectful term to use, is it?
The amount of energy the earth receives from the sun every year is almost 10,000 times the energy humans consume.
The amount of energy contained in tidal flows is probably greater still.
The geothermal energy available beneath our feet is probably even greater.
I don't know how much of the solar, tidal, and geothermal man may eventually be able to harness. I doubt that anyone can make a reasonable estimate.
IMO, the potential energy from just these three sources is effectively infinite. I don't believe the human species will exist long enough to consume it all.
Jon, within the next 10 years, improvements in engine efficiency may accelerate instead of a massive shift into engines fueled by natural gas.
ReplyDeleteJuandos, your article concludes: "Electrification of the transportation sector can and will succeed on its own merits."
Does that mean you'll be buying a Chevy Volt soon?
Regarding your final point -- well, that would be one way out of the problem of finite resources. I was kind of assuming we'd try and minimize the possibility of that happening. Long-term planning on the assumption that eventually civilization will simply die off and so we don't need to worry about energy being finite hardly seems appropriate. Of course, if the species die out, that solves the problem. That would be somewhere past the point of peak energy. :-)
ReplyDeleteIf we've moved to the point where we're blanketing the Earth in solar panels, I assume that means we've past the point of peak oil. Hence, we seem to agree on this point. I share your confidence that at whatever point petroleum becomes more expensive than alternatives, alternatives will take on an increasing share of our energy budget. But that would seem to be precisely the point regarding peak oil.
Solar, geothermal, and tidal energy would be obvious solutions to develop at that point. If energy consumption remains relatively stable, they'll do us for as long as we're on this planet. If energy consumption continues to grow over the long at around 2.5-3% per year, then obviously they will only last a few centuries.
Edit -- Millennia, I should have said. Although maybe it's centuries. I don't know what the math is on geothermal or tidal energy.
ReplyDeletesixth estate: ' But that would seem to be precisely the point regarding peak oil."
ReplyDeleteI don't think you undertstand what has been argued. Peak oil doesn't matter. What does matter is all the proposals to try and plan for peak oil. Central planning doesn't work. Central planning prevents the emergence of viable alternatives.
Sixth estate: "If energy consumption continues to grow over the long at around 2.5-3% per year, then obviously they will only last a few centuries."
ReplyDeleteWell, if we grow energy consumption 3% a year for 400 years, we will require 125,000 times as much energy. I don't think that's very realistic, of course. But I'm not convinced even that would exhaust all the potential solar, geothermal, tidal, and other energy.
I expect orders of magnitude changes in energy efficiency. And I expect the global population to stabilize.
sixth estate: "Long-term planning on the assumption that eventually civilization will simply die off and so we don't need to worry about energy being finite hardly seems appropriate."
ReplyDeleteIMO, forces completely beyind our control - perhaps an asteroid collision or a supervolcano or gamma rays from a supernova - will eventually do us in.
For what its worth, I view long term planning as a major threat to humankind. Planners will lead to government interference in free markets and just screw everything up.
Sixth: "Secondly, energy is obviously not an infinite resource. This is asinine. Trace out even a modest rate of growth in annual consumption over a thousand years or so and you'll see what I mean."
ReplyDeleteThat's not very meaningful. You can also project population into the future to a point where those standing along the coastlines will have to hold hands to keep from being pushed into the ocean.
To claim energy is finite in any meaningful sense, you would have to know all the possible future sources.
I don't think you undertstand what has been argued. Peak oil doesn't matter. What does matter is all the proposals to try and plan for peak oil.
ReplyDeleteIs this is what we think we're arguing about, then no, I don't understand. I agree that the discussion worth having is what to do (or not do) about peak oil, not about whether peak oil will (eventually) be reached.
Up above, you told me that total solar energy was equivalent to 10,000 times current energy consumption. Assuming that figure is correct, then within 400 years of 3% annual growth we would exceed that by more than an order of magnitude.
Long-term planning stifles innovation but allows us to stretch out our remaining resources longer. It doesn't solve any problems. Free enterprise offers a better chance of devising increasingly efficient and radically new forms of power production. Since energy isn't infinite, neither of these actually "solves" the problem so much as kicking the can down the road. Which one would kick it farther, I'm honestly not sure. Eventually our number will be up either way.
Asteroid collisions are certainly not beyond our control. Given a few millennia I doubt supervolcanoes or gamma ray bursts would be either. These would pose interesting collective action problems.
"It is exactly the finding of substitutes for whale oil which caused the earth to not run out of whales. "
ReplyDeleteAlthough, isn't whale oil a renewable resource? Something to consider maybe :)
" Although, isn't whale oil a renewable resource? Something to consider maybe :) "
ReplyDeleteby THAT definition, coal and oil are renewable also...
Peak
ReplyDelete"...within the next 10 years, improvements in engine efficiency may accelerate instead of a massive shift into engines fueled by natural gas."
while that may be true, there are definite physical limits to the amount of work that can be squeezed out of current fuels and engines, and the room for improvement isn't very great. Certainly not enough to make much difference.
Sixth: "Asteroid collisions are certainly not beyond our control."
ReplyDeleteYeah, that was a fun movie, eh?
"Given a few millennia I doubt supervolcanoes or gamma ray bursts would be either.
You think those problems can be solved, but you're concerned about energy? that's funny.
It's pointless to extend a line on a chart out 1000 years and say "Uh-oh, those people will have a real problem on their hands."
We will see, eventually.
ReplyDeleteHigher prices will increase the incentive to find more oil, but it won't change the possibility of finding it.
Money equates to resources. Eventually the resources used to get the oil will be worth more than the oil, at which point the incentive disappears.
we never have, and never will, run out of scarce resources like oil because as a resource becomes more scarce, its price will rise....
ReplyDelete===============================
Meaning some people will have oil, and everyone else will run out. I'm not sure I see the difference between that and the idea of peak oil.
Either way, most people won't have it.
The amount of energy the earth receives from the sun every year is almost 10,000 times the energy humans consume.
ReplyDeleteThe amount of energy contained in tidal flows is probably greater still.
The geothermal energy available beneath our feet is probably even greater.
===============================
Yes, but it is diffuse, low quality energy. It costs a lot to collect. As sson as that cost is less than the cost of oil, we will have reached peak oil.
Just as we reached peak whale oil. Whale farms anyone?
It seems to me that peak stupidity is confusing Peak Oil with Running Out of Oil. That said, let us take Dr. Munger's comments one at a time.
ReplyDeleteIf we did start to use up the oil we have...(though, counting shale oil, we still haven't used even 10% of the total KNOWN reserves on earth, and there are lots of places we haven't looked)...but suppose we were on our way to using it up.
Let me stop here. First, nobody in the Peak Oil camp has argued that we would use up our oil. They have only said that production will peak at some point. Second, kerogen is not oil. Too many people confuse tight oil in shale formations with 'shale oil'. These are two different things and for them to be counted as reserves they have to be economic to produce. Right now there is only a small amount of tight oil in shale formations that is economic. And upgrading kerogen in any meaningful volume is not economic.
Three things would happen.
1. Prices would rise, causing people to cut back on use. More fuel effcient cars, better insulation on houses, etc. Quantity demanded goes down.
Good. But this is a demand response which says that we can live with lower production by pushing the marginal user out of the market.
2. Prices would rise, causing people to look for more. And they would find more oil, and more ways to get at it. Quantity supplied goes up.
Not exactly. Yes, they would look. But we already have looked for oil for centuries. There will always be small fields that we can develop but that is not a problem for the Peak Oil argument because those very small and very expensive discoveries will have to offset a depletion rate of 6% from conventional reservoirs and 80% in shale formations before they can add a single barrel to the total.
3. Prices of oil would rise, making the search for substitutes more profitable. At that point (though not now!) alternative fuels and energy sources would be economical, and would not require gubmint subsidies, because they would pay for themselves. The supply curve for substitutes shifts downward and to the right.
This does not change the Peak Oil argument. There will still be a peak in oil production that will require a transition to new supply. What the Peak Oil people have argued is that too much money and time has been wasted on shale, solar and wind and that we need to move rapidly to a viable Plan B instead. Destroying capital by drilling for shale gas is not a solution to our problems. It is just malinvestment.
This is econ 101. Even Paul ("I sold my soul to become a wanker") Krugman would credit this scenario.
But we ignore econ 101. And so we get this debacle. Ethanol was bad enough when it was just inefficient to produce and wasting more energy than it created. But we actually went further and bought too much of the stuff.
But as I pointed out, nothing in the argument is damaging to the Peak Oil case. Yes, we expect demand to adjust when supply falls. Yes, we expect to look for other alternatives. And yes, at some point in the future someone will come up with some solutions. But that does not do anything to show that the claim that oil production will peak is wrong.
Here are my 'solutions':
Look for natural gas in traditional areas by drilling deeper. Our knowledge of geology tells us that there should be a lot of natural gas in the Middle East and Mexico. Every little bit will help. Look for a way to develop methane hydrate deposits. Look rapidly to a coal/nuclear build program to increase cheap electricity production and ways to manufacture liquid ammonia that can be used as fuel for vehicles.
" What they missed is that we do not have clear market responses any longer."
ReplyDeleteon a worldwide basis?
All 200 countries have the same approach?
ReplyDeleteon a worldwide basis?
All 200 countries have the same approach?
Most of the planet has little in the way of geological potential as far as fossil fuels are concerned so we do not worry about areas that are unlikely to yield any returns on that front. The countries that do have a lot of natural gas potential have national oil companies that prohibit others from finding the reserves that should be there. Everywhere you look you find NGOs trying to stop projects that might help us get through the transition. So yes, it is everywhere that matters.
" Everywhere you look you find NGOs trying to stop projects that might help us get through the transition"
ReplyDeletealright.. I'm NOT being a smart-ass here but I THOUGHT it was GOVERNMENT that needed to "get out of the way".
no?
sixth estate: "Given a few millennia I doubt supervolcanoes or gamma ray bursts would be either. These would pose interesting collective action problems."
ReplyDeleteAs I understand gamma ray bursts, the earth would never be able to plan for one. Gamma rays travel at the speed of light. So a gamma ray impact would occur at the same instant as detection.
I think it is extreme science fiction to believe humankind will ever be able to mitigate the effects of a supervolcano - other than by leaving the planet.
IMO, collective planning for either event would be a ridiculous waste of resources.
alright.. I'm NOT being a smart-ass here but I THOUGHT it was GOVERNMENT that needed to "get out of the way".
ReplyDeleteno?
Yes, it is. But governments are influenced by NGOs and stop viable development that would help locals and the global markets.
But governments are influenced by NGOs...
ReplyDeleteAnd most NGOs get preferential tax treatment.
I think it is extreme science fiction to believe humankind will ever be able to mitigate the effects of a supervolcano - other than by leaving the planet... IMO, collective planning for either event would be a ridiculous waste of resources.
ReplyDeleteIn response to my previous comments, it was suggested that it was not beyond plausibility to speculate that over 100,000 times current levels of energy consumption could be harnessed through solar, geothermal, and tidal sources of power. Assuming that's the case, which I kind of wonder about, it's kind of pointless to say we couldn't do anything in anticipation of a supervolcano, an asteroid collision, or a gamma ray burst given a millennium or two worth of advances in technology and science. And I mean collective action problems in the event those become something more of a certainty. I don't propose setting up a Department for Supervolcano Mitigation tomorrow. :-)
All of this speculation may be fun, but it's getting fairly far away from the sole point I intended to interject, which was that since oil isn't infinite, it's hardly "idiocy" to point out that we will reach a point of peak oil consumption, probably extremely soon on evolutionary or geological timescales.
I then made a throwaway comment which believe me I now regret, though not because it was wrong, that we will reach peak energy on a somewhat longer timescale, and for much the same reason. Barring, of course, whatever unpreventable natural apocalypse we want to speculate about.