Friday, June 12, 2009

I Don't Get the Whole "Peak Oil" Thing...

So here's a fancy story:

There's a commodity that exists in limited supplies on the Earth; let's call it awesomite. Awesomite can currently be harvested and brought to market for $5/oz, and at that price we can satisfy all the demand from people who are willing to pay that much. Eventually, some of the supplies of awesomite run out, and it becomes more difficult to meet the market's demand. We can get more awesomite for $7/oz than we can for $5/oz in this now-somewhat-depleted world, since that price would allow us to buy a sweet line of awesomite-carrying trucks which would help us reach sources of awesomite that simply couldn't be harvested without them. And at this higher price, some people decide to stop using awesomite; we can meet all the remaining demand for awesomite at $7/oz. Eventually, we start to deplete the supplies of awesomite even further, and so it becomes increasingly difficult to meet demand at $7/oz. For $10/oz, though, we can definitely get at some of the hardest to reach sources of awesomite, since we could buy a totally rad array of processing equipment that would enable us to get the valuable commodity out of ore that would otherwise be too impure to use. And at $10/oz, way fewer people want to use awesomite, so we can balance things again.

This entire time, we've known about a substitute for awesomite: spiffium. With current harvesting methods, we can get spiffium for $9/oz, but even at that price we can't produce all that much -- the technology is very limited. When awesomite cost $5/oz, people were only really using spiffium for specialized applications; it simply didn't make sense to use it when you could just use the much cheaper awesomite instead. The same was pretty much true at $7/oz. But when awesomite prices hit $10/oz, the spiffium producers went into high gear. They quickly found that they had maxed out the amount of spiffium they could produce, and suddenly people were willing to pay $10/oz for whatever they could put out. Accordingly, a lot of people started to invest in some excellent new methods to produce spiffium.

See, there was always a whole lot of spiffium that could be harvested, but no one ever really cared to figure out how. Developing any one of those new methods would be expensive and may never turn up anything. And besides, the price of awesomite was just so low; the investment would only have been worthwhile if it produced a radical breakthrough that totally revolutionized spiffium production, and that was a pretty big risk to take. But at $10/oz, things looked a lot better for spiffium producers. As awesomite supplies continued to dwindle, its market price continued to climb and awesomite producers continued to use even more remote and awesomite-poor resources to satisfy the market's demand for their products. But at these high prices, spiffium producers could justify radically expanding their own production and investing in all new methods to get spiffium to the marketplace.

As time went on, the spiffium producers had a series of breakthroughs which fundamentally changed the way that spiffium was produced. They could now get way more spiffium out of the ground than they ever could before with cool new pressurized water harvesting systems and computerized geological data processing programs that spiffium company engineers created once the investment dollars started flowing in. And they could do it at lower and lower prices. Soon the price for spiffium started to drop below the price of awesomite, and now it was only the specialized applications that used awesomite; any application that could use both commodities would be hard-pressed to justify using anything but the much cheaper spiffium.


As might be rather obvious, I intended the above story to be an allegory for the growing concern about oil supplies. Oil -- the equivalent of awesomite in our story -- is really cheap right now, and has been for a long time. If you believe some people, it's too cheap! Why? Because at current prices, oil is preventing "needed" investment in alternative sources of energy -- a real-world version of spiffium. And the reason we need to be investing in alternatives is because we're going to run out of oil, and this would be terrible.

But as we saw in the story, when we started running out of awesomite, the price rose and we started using sources of awesomite that would have been uneconomical at lower prices. And eventually, prices rose high enough that it was clearly worthwhile to start investing in alternatives. The price mechanism automatically sent signals to the relevant actors that told them what they should do!

So I really fail to see what is the big deal about "peak oil" and dwindling oil resource supplies. As we start to actually run low on oil, suppliers will be hard pressed to meet market demand with their current resources. Prices will rise, people will cut back, and currently uneconomical oil resources will come into production. When prices rise high enough, alternative fuels will begin to make sense, and we will start to see a transition away from oil in applications where substitutes can be utilized efficiently. It will be just like how people slowly stopped using awesomite and switched to spiffium in our story.

Now, this shouldn't necessarily be taken as an indictment of social funding of alternative energy research; that's an entirely different issue with a whole separate range of considerations. But what I do think this discussion supports is the idea that people should take a few deep breaths and stop getting so worked up about peak oil. It will be okay.


Michael said...

Good post.

People who worry about "running out" of oil (e.g. the 17-year old me) simply do not understand the basics of supply and demand. Once you learn that markets clear, resource depletion becomes a non-problem.

"As we start to actually run low on oil, suppliers will be hard pressed to meet market demand with their current resources. Prices will rise, people will cut back, and currently uneconomical oil resources will come into production. When prices rise high enough, alternative fuels will begin to make sense, and we will start to see a transition away from oil in applications where substitutes can be utilized efficiently."

A persistent doomster, however, will respond that "this cannot go on forever; continuous growth cannot be sustained in a finite world!"

But this view implicitly relies on a scientistic, objective, static theory of resources, which leads to a depletionist conclusion.

The correct (Austrian) theory, which is subjectivist, functional, and dynamic, on the other hand gives us an expansionist conclusion: the limits to growth are vague and porous, if they exist at all.

See "Resourceship" by Robert Bradley.

Neverfox said...

Concerning another vital resource, water, which has no alternative, I've often wondered about something: why is it so damn cheap if it is always in danger of running out (I live in CA and that's the constant headline)? I pay about $35/month for my water usage and I don't ration it. I take long showers, run the water in the sink while I shave and floss etc. I simply don't conserve water. Why? Despite a general desire not to waste a rare resource, I simply don't have the financial incentive to make me slow down. I love long, hot showers and $35 isn't going to make me stop.

Why, if water is about to run out if the rain doesn't come, does water seem so cheap? Are the drought scares exaggerated? Are governments interfering to artificially lower the price or are markets merely reflecting the best price given the scarcity? Is this an example of "take a few deep breath"?

Also, do you think that market prices ever have a tendency to underestimate future shortages so that they systematically undervalue a resource thereby speeding up the drain? It seems reasonable to expect people to underestimate bad outcomes and overestimate good ones. They also tend to value the present over the future. People don't miss things until they are gone, so to speak.

Radical Hippo said...

I think another problem (in the eyes of the elite) with peak oil is that the US is built upon a centralized economy where products are produced halfway around the world for pennies on the dollar and shipped to the US where the price is inflated and the capitalists get rich. As oil prices continue to rise, the cost for everything in the US will increase dramatically until a new manufacturing base is created in local economies.

But this signals the end of the US hegemony, and the end of our capitalist/mercantalist economy. Approximately 70% of our economy is consumption, which means 70% of our economy will crash since most people's jobs can only be considered productive in insofar as they rely on the exploitation of foreign economies.

Leslie Viljoen said...

What if we need awesomite to extract awesomite? If you don't go for the "oil is created from lava" theory, when the oil runs out we would have to go to gas and coal. When they run out, I suppose nuclear, assuming we convert all our vehicles to run on electricity, which would be hard to do when batteries require such rare elements. The problem is not the depletion of oil so much as it is the depletion of everything. Once ancient super-energy-rich fuels are finished, we are left with much slower attempts to harvest energy from light, without solar panels (since mining and batteries are effectively off the table).

Already biofuels are pushing up food prices and people are starving: the price mechanism will do a lot of damage as rich car owners use poor people's food as fuel.

Perhaps our high energy fuels will last long enough for us to find some "future tech" to perpetuate our comfortable lifestyles - or else life will become much harder for most people. Well I guess life is already very hard for most people.

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