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More economists thinking about Peak Oil

I’m sure I haven’t yet come to grips with the views expressed by commenters on my last post about economics and peak oil, but here is another paper on economics, Hubbert’s Peak, and peak oil.  In short the authors  model resource extraction scenarios in the manner that economists sometimes do, and conclude that the timing of the peak production will be determined by “above the ground” factors such as cost of production, oil prices and political constraints on access to resources rather than “below the ground” geological factors.

Note that the economist views I’ve cited from time to time – from CERA/Yergin to James Smith and now Pierre-Noël Giraud at CERNA and colleagues from EDF-R&D in France – are not denying that petroleum is an exhaustible resource nor that production will peak.  But, and speaking just for myself now, I am denying that the date of the peak is particularly significant and that sometime shortly after the peak we will face any kind of significant social strife, economic collapse, or other major drama. I’m stuck in a “business as usual” pose, because I expect business as usual.

More specifically, I expect over time petroleum will become expensive relative to other energy sources, and we will substitute away from petroleum and toward alternatives as that happens.  Of course it is already true in niches – there is a reason we don’t have kerosene lamps in our homes anymore and remote flashing roadside signs are solar powered – and the niches will grow as alternatives begin to make more sense.  Eventually, petroleum will become the niche fuel in an energy economy mostly running on other sources.  I don’t expect the social trauma associated with this transition to be any more wrenching than the shift from wood to coal or coal to oil.

If you think I am wrong, I’m willing to be educated.  But note that it will take quite of bit of educating to get me to drop economist habits of thought, so the simpler way to convert me to another way of thinking about peak oil is to point to an analysis with a reasonable economic foundation. I encourage commenters to direct me to their favorite such analysis.

NOTE: Here is the authors’ abstract for the paper, “Hubbert’s Oil Peak Revisited by a Simulation Model“:

As conventional oil reserves are declining, the debate on the oil production peak has become a burning issue. An increasing number of papers refer to Hubbert’s peak oil theory to forecast the date of the production peak, both at regional and world levels. However, in our views, this theory lacks microeconomic foundations. Notably, it does not assume that exploration and production decisions in the oil industry depend on market prices. In an attempt to overcome these shortcomings, we have built an adaptative model, accounting for the behavior of one agent, standing for the competitive exploration-production industry, subjected to incomplete but improving information on the remaining reserves.

Our work yields challenging results on the reasons for an Hubbert type peak oil, lying mainly “above the ground”, both at regional and world levels, and on the shape of the production and marginal cost trajectories.

 

Michael Giberson's picture

Thank Michael for the Post!

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Bill Woods's picture
Bill Woods on November 16, 2010

We have NO <physical> replacement for oil.

Ethanol, other biofuels, coal-to-liquid, methane to methanol, etc. Unconventional oil from oil sand, oil shale, etc. We do have physical replacements; the question is whether they’re economic replacements.

Geoffrey Styles's picture
Geoffrey Styles on November 16, 2010

Indigoboy,

You should consider the possibility that Michael has views at least as well-informed as yours, rather than dissing an entire profession for failing to “get it” re Peak Oil.  I haven’t met many people, economists or otherwise, who fundamentally reject the idea that there’s a limit to how much oil the earth’s crust can yield up, or how rapidly.  However, it’s still possible for someone deeply informed on the topic to retain a healthy skepticism concerning claims of an imminent peak in oil production.  In my case that view is based on an entire career in the energy industry (much of it in the oil business), deep study of the peak oil issue long before it became blog fodder, and starting with a Chem.E. degree from a tough school.  The question that no one can answer for you is timing, because it is affected by every change in technology and oil prices and by constantly shifting geopolitics.  It’s also complicated by a renewed emphasis on energy efficiency, particularly in transportation–the main and most indispensable use of oil–arising from concerns about energy security and climate change.  This has given rise to a complementary view of Peak Demand, which might or might not occur before a true, geological peak in oil supplies. 

So my advice is to look for more nuance in this issue, because there is plenty to be found on a field littered with expired time-certain predictions of a peak.

Geoffrey Styles's picture
Geoffrey Styles on November 16, 2010

Boyd,

Do you see an inconsistently between an IEA suggestion of 2006 as the peak of conventional oil production when the same agency reports that OPEC has nearly 6 million barrels per day of spare production capacity standing by, most of it conventional oil and among the cheapest in the world to produce?  That suggests that current production would be several million bpd higher than currently, if the demand were there to absorb it. 

Michael McGee's picture
Michael McGee on November 19, 2010

Directionally, I think you are correct in pointing out that market signals (external to individual market participants) are not about to cause a precipitous decline in fossil  fuel usage, at least not in the forseeable future.   The financial cost of fossil fuel energy production (oil especially) will get higher and substitution  will occur, although somewhat incrementally.   

If a sea change shift is to occur, from fossil fuel energy (not just oil) to clean eneregy, the shift is more likely to be triggered by a large scale shift in the inner perceptions held by market participants.  I’m not talking of a higher cost for carbon like $100 or $200 per tonne, but a recognition that the industrial-scale liberation of carbon from the earth’s crust and forests is toxic and deadly (in short geologic time frames) for human civilization and many species who rely on a stable climate and the fruits of the earth (which are diminishing).  I’m talking about internal changes where more of us see “carbon” as an energy option that is wrong.  The use of fossil fuels is wrong in the way that the keeping of slaves is wrong.  For those  who see fossil fuel usage as a practice to stop as soon as possible, it is possible to find ways to stop our direct buying of fossil fuels to run our homes and vehicles. 
In my head, I think of fossil fuels as planetary poison.  The price of using them goes beyond anything that can be priced in dollars or Euros or Rupees or some other human currency.   The price is so great that I decided to never again buy a new car that has an internal combustion engine or any furnace the runs on fossil  fuels.  I’m on track to substantively end the direct purchase of fossil fuels in my home and vehicles.   Regardless of the monetary cost of the  gas and oil I now use, I should be able to live without direct fossil fuel purchases by the end of 2013. 

Whether  or not we are speaking about measurable financial costs, the price or value lives in the minds of market participants.  If market participants continue to follow market pricing signals, more  than other types  of signals, I would expect that we’ll collectively keep adding fuel to the global warming fire.  Future generations will pay, perhaps in numbers that are forced to diminish.  When enough market participants also see the impacts of carbon usage that defy any type of conventional price tag, and when enough  of us start to use our energy dollars, we will advance a clean energy economy far faster than economic models predict.  We can’t escape economic and financial realities, but we can, as a collective, be more conscious and deliberate in our choices.  That will make all the difference. 

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