Why Peak Oil Will Never Lead To $500/bbl Crude Oil
chrismartenson.com
chrismartenson.com
Ahh, wikipedia knows: The "b" may have been doubled originally to indicate the plural (1 bl, 2 bbl), or possibly it was doubled to eliminate any confusion with bl as a symbol for the bale. Some sources claim that "bbl" originated as a symbol for "blue barrels" delivered by Standard Oil in its early days; this is probably incorrect because there are citations for the symbol at least as early as the late 1700s, long before Standard Oil was founded.
Quote:
In the early 1860's, when oil production began, there was no standard container for oil, so oil and petroleum products were stored and transported in barrels of all different shapes and sizes (beer barrels, fish barrels, molasses barrels, turpentine barrels, etc.). By the early 1870's, the 42-gallon barrel had been adopted as the standard for oil trade. This was 2 gallons per barrel more than the 40-gallon standard used by many other industries at the time. The extra 2 gallons was to allow for evaporation and leaking during tranport (most barrels were made of wood). Standard Oil began manufacturing 42 gallon barrels that were blue to be used for transporting petroleum. The use of a blue barrel, abbreviated "bbl," guaranteed a buyer that this was a 42-gallon barrel.
EDIT: This will be difficult, as it is quite easy to find citations for "bbl oil" from before 1850 using google books, the first I found was on p. 239 of a book called "Railway engines and cars" from 1832. So the blue barrel legend can be firmly laid to rest in peas.
Ha! The doubled b in bbl is likely an outmoded typographical convention - as in book citation p437, and also pp495-500. I like such archaisms but agree it's a bit confusing and inconsistent with other conventions - eg we don't talk of $5 bbn to mean five billions.
The author expects "government intervention of some kind to occur before prices get much above $200/bbl."
Energy is the input to every single thing humans do. If you tax energy then the price of _everything_ will go up.
You can't build a wind turbine without energy. If wind turbines produce less energy than it takes to make them, you are stuck.
As it turns out wind turbines produce more, but not a lot more. Solar cells produce less.
Even nuclear power just barely produces more than the energy used to build the plant (at least in the first 10-20 years).
Renewable and nuclear power today, consume more energy in the making of them, then they produce (over 10 to 20 years).
Subsidizing them won't help - there isn't enough energy available.
If you take the long view, more then 20 years, the picture changes, but few renewables last that long. Only nuclear does.
But since no bank wants to loan money with a payout of longer than 20 years, nuclear doesn't get built. That's why they talk about loan guarantees for nuclear power.
There is no free-rider or tragedy-of-the-commons going on here.
I don't think that's true. [1]
> But since no bank wants to loan money with a payout of longer than 20 years, nuclear doesn't get built.
That's an oversimplification. There are numerous reasons why nuclear isn't being built, not the least of which are the various NIMBY and other environmental concerns, and the fact that things like Thorium reactors have yet to regain popularity due to the push for weapons-grade-yielding nuclear technology over the last several decades.
[1]: http://www.eoearth.org/article/Energy_return_on_investment_%...
Above $80 a barrel, alternative fuels (such as liquid fuels from coal) becomes profitable. I sincerely expect that this will expand extremely rapidly in the next 15 years.
While I'm not entirely unconcerned, I don't think there's any reason to panic.
Just the spike to $130/bbl in 2006 saw people switching away from SUVs to Priuses in droves. If that were sustained for any length of time, everyone would be driving a plug-in hybrid to work. The technology exists today, and the production capacity would ramp up pretty quickly.
If every switched from a 20mpg car to a 50mpg car where the first 100 miles of each trip was free, it'd more than make up for anticipated oil production declines over the next 50 years.
Those consumers will not be buying plug-in Priuses; and with consumption growing rapidly in the oil exporting countries, once they pass their national production peaks their export rates will decline faster than their own production rates.
1.) They'll substitute more efficient yet more expensive cars for gas guzzlers, as the TCO of a gas guzzler goes up.
2.) Efficient, cheap, yet small cars will start being developed for emerging markets. (This is already happening a bit - consumers in Beijing tend to drive much smaller cars than consumers in Houston.)
3.) They won't buy cars at all.
There's no innate reason beyond price why consumers in developing companies can't buy plug-in hybrids. And if price is the governing factor, they simply won't buy cars as well. Either way, it puts downward pressure on oil demand and hence serves to limit prices.
Neither of these are ever what determine the price. Price is determined by the intersection of what buyers are willing to pay and what sellers are willing to accept in payment.
Now, the cost to produce, as well as the production rate (in relation to the consumption rate at a given price) may well feed into the seller's decision about what they're willing to accept. But that's a second-order effect. Sellers charge what buyers are willing to spend. They'll make more of it if there's a good profit to be made; if nobody will pay very much, they'll invest their money in producing something different.
The price that a buyer is willing to pay is influenced by how important is the goal for which he wants to use the product, but also how readily he use an alternate product in substitution for this primary one.
Thus, he may be willing to forgo the purchase of a vacation trip, because it's just not worth the money.
He might also, in the longer term, substitute different goods. So in a longer time horizon, he might change jobs to one that allows him to telecommute, in order to circumvent gas prices. Or car manufacturers might see that they themselves are having trouble selling gas-guzzlers, and change production to alternate-fueled cars, like electric (whose power is ultimately generated by coal or nuke), or maybe engines fueld by natural gas, or something.
So in the big picture, there are many safety valves allow this pressure to be dissipated.
Yes, it will require a rapid expansion of CTL plants and demand will drop.
It would probably mirror the expansion of South African CTL plants after numerous oil boycotts.
http://en.wikipedia.org/wiki/The_Population_Bomb
And the solution, which apparently now sustains one third of the world's population:
http://en.wikipedia.org/wiki/Haber_process
My prediction, is that like before, science will solve the problem and this will all disappear into the memory. Man's capacity to wipe itself out is far outpaced by it's ingenuity to sustain itself.
Then: Cold War, oil shocks
Now: Terrorism, oil shocks
History always repeats itself.
a) oil != gasoline http://www.ranken-energy.com/Products%20from%20Petroleum.htm
b) Demand destruction doesn't preclude $500/bbl crude, it just means that when oil hits $500 there won't be nearly as many products that are dependent on it.
Soaring oil prices might have pushed a few consumers over the edge into mortgage default, but even if that hadn't happened I think the market would have imploded within a few months of the 2008 election anyway. Recall that Bear Stearns had to put up $3.2 bn to rescue its two hedge funds in June of 2007, and Merrill Lynch's inability to sell more than about 12% of the CDO assets it seized was the first clue (for the public at large) that the financial industry had a systemic rather than a localized problem - and this was almost a year before the oil price spike. By the time that occurred, the stock market was in decline, Bush had already administered a $145 bn stimulus (remember that $800 tax rebate in 2008?), Bear had collapsed, the NY Fed had underwriting their acquisition by JP Morgan to the tune of $25 billion. So our economy was already in poor shape by March of 08, which was when oil prices suddenly took off like a rocket. At the time, I wondered if the sudden rise was in response to the structural weaknesses in the US and European economies, which shared both enormous housing booms and huge amounts of counterparty risk: it seemed as if traders were looking at oil as a substitute currency (energy is a much better candidate for solid money than gold) and using it to impose a sort of reverse devaluation of the dollar and euro. With hindsight I don't really think so, though - it was a simple pile-in rather than the dawning of a new economic concept.
BTW thanks for that CIBC paper you linked to below - although I don't quite agree with the 'big picture' analysis it's still a great read.
What about the next billion?
If we wanted - and anyone who questions the existence of political will is right to be worried - we could replace our oil fuel use almost entirely over that timespan with nuclear power. I know, there's a peak uranium issue as well.
On the other hand, Europe and the US now find themselves awash in natural gas, which is a pleasant reversal of where we expected to be a few years ago; and renewable power generation is becoming price-competitive and deployed in sufficient volume to yield economies of scale, so we can reasonably hope for that trend to continue over the next 25 years too. I don't think we need to resurrect Thomas Malthus just yet.
Also online distribution, things like books might become prohibitively expensive in the physical form and drive everyone to ebooks, all creative products really.
http://www.telegraph.co.uk/finance/newsbysector/energy/oilan...
In any case, it's the first claim in the article, he should back it up.
There are no other sources of energy that are really practical today. Although some are close.
There are other eminently practical energy sources available. The main issue is that these have historically not been price competitive with oil. As oil extraction becomes more difficult the economics of energy will change.
If something made more energy than it costs to make it (over 10 to 20 years), then it would be built. Why not build it? It's guaranteed profit.
But, in actuality there isn't anything like that. Every single form of energy is being tapped to the maximum possible. It's the nature of capitalism.
If the price of oil went up, the price of everything goes up. If the price of raw materials goes up, it costs more to build some alternate form of energy, so you get nowhere.
For other forms of energy, such as bio-fuels, the net energy gain is presently smaller but this does not invalidate these technologies. As the complexity of extracting oil increases its net energy gain will reach parity with other energy sources, and then begin to lag behind them. The economy - with all its foibles - will eventually back the winners out of pure necessity.
That's true in it's most trivial sense, and false in any non-trivial sense. Quick examples - Qatar, Venezuela, Japan.
Louisiana was more productive than Japan for wild fish and fowl. (Largely destroyed now by bad planning, pollution, and man-made environmental disasters)
Oil is very inelastic in the short term, which is why small drops in supply lead to massive price increases. The long-term effect of unavailable or expensive oil will be "demand destruction"-- many of those who currently use oil will either move to alternatives or go out of business-- and political fallout with unpredictable results.
So the fact that oil could be manufactured from coal at $100/barrel now doesn't mean that we'll be able to do so when we need it most.
Unless, of course, the chemical process that converts coal to oil is exothermic, which is not impossible in principle. In this case, the energy conversion efficiency would be less than one, but it still might cost less than changing the oil-based infrastructure so that it consumes coal directly.
Several years ago I think I read that a pilot plant was being built that was (IIRC) technically successful but ran into problems with smelly emissions.
Anybody know what has come of that?
UPDATE: partial answer to my own question from Wikipedia: http://en.wikipedia.org/wiki/Thermal_depolymerization#Status...
"...He says the first generation of depolymerization centers will be up and running in 2005. By then it should be clear whether the technology is as miraculous as its backers claim." However, as of August 2008, the only operational plant listed at the company's website is the initial one in Carthage, Missouri. Changing World Technology applied for an IPO on 12 Aug 2008, hoping to raise $100 million. The unusual Dutch Auction type IPO failed possibly because CWT has lost nearly $20 million with very little revenue. CWT, the parent company of Renewable Energy Solutions, filed for Chapter 11 bankruptcy. No details on plans for the Carthage plant have been released.
...which doesn't tell us as much about the technical aspects as it does the business. It may all be tied up in the break-even point for the process, and the amount of government subsidies they've found.
Of course as the price of oil goes up, the price of coal goes up too, so the dollar amount goes up as well. But if you need oil specifically because it's liquid, then oil's price will go up more than coal, and eventually it will become worth it to use coal. We came close last year - they even started test projects in Pennsylvania.
And we have a LOT of coal. Centuries worth. And liquefaction is not even a serious environmental hazard (like burning coal is) because all the heavy metals are refined out.
Also: Southwest buys fuel futures to hedge its exposure, which is different from speculation. People hedge because they don't know what the price will do, and want to be OK regardless of price movements.
If it were possible to do significantly better than blind luck in speculation about future prices then there'd be nobody around to take the other side of the contract.
The reason why trades occur at all is that not everyone is a pure trader. Hedgers (e.g. Southwest) trade futures to reduce business risk rather than to make money. They tend to make a net loss on trading but earn back a greater amount of money via their core business.
Given what just happened in the RMBS and CMBS market, it's hard to claim that we live with an efficient market, particularly with respect to long-term trends.
Very imaginative. But not very likely.
I think peak cheap oil is likely within the next decade. What a person thinks happens after that says more about the person than it does the future.