Slope? or cliff? 2

When you read a headline that says The end of oil is closer than you think you get a bit concerned. Especially when there is a sub head which reads:

Oil production could peak next year... Just kiss your lifestyle goodbye

But it starts to seem irresponsible for The Guardian to pose the issue that way when the article itself offers a very different perspective:

"Don't worry about oil running out; it won't for very many years," the Oxford PhD told the bankers in a message that he will repeat to businessmen, academics and investment analysts at a conference in Edinburgh next week. "The issue is the long downward slope that opens on the other side of peak production. Oil and gas dominate our lives, and their decline will change the world in radical and unpredictable ways," he says.

I accept that we wil hit peak oil in the next few decades or so -- the consensus of informed opinion certainly seems to think so. (Or at least that's the impression one gets.) And rising prices will certainly change things, though I don't see why in "radical and unpredictable ways." In fact it seems somewhat predictable. As prices rise people will seek substitutions in the form of more efficient vehicles & processes etc etc and/or more efficient locations (cities & close-in suburbs, temperate climates etc). There are a range of adjustments and I guess, to be fair, many we can't see so the specifics are "unpredictable," just as the rise of the desktop computer or IPod was unpredictable. Some may in fact be "radical" but I see a coming rhetorical wave of  "the coming new age of feudalism" etc etc (Yes I really did hear that in a no surprise Jim Kunstler interview) and such talk is a bit premature and I think counter-productive. Listen for yourself at Jim Kunstler on The Long Emergency

Again, as John Quiggin notes:

Still, the evidence is against the idea that higher energy prices would bring the economy to a grinding halt. Rather, the response so far seems to be a textbook case of orderly adjustment, as people gradually shift away from gas-guzzling vehicles, look again at energy saving options and so on. So far the response has been small, but over time (if supply declines and prices stay high) more substantial responses can be expected.

Yes, there will be changes and many may be welcome. Some not. But the great danger, as I see it, will be political attempts to either hasten or delay the adjustments which people faced with rising oil prices will take on their own. My sense is that the greatest danger will be hurried and immature political action.  The world economy is so vast and with so many billions of actors that it seems to me that key public policy should be to make energy accurately priced  and with as little manipulation of supply or demand as possible. We want the "peak oil" price signals to penetrate the market as easily.

Now where does that leave me on such thing as energy-consumption standards for cars, appliances, buildings etc etc? Well frankly a bit confused. Do I think that there is a key role for such political interfernce with demand? Well yes. Definitely. Maybe the resolution has something to do with how far ahead those changes are ahead of global energy prices? I mean, why require too far ahead of the "natural"pressure which rising prices will provide? The reality is that we have a managed economy right now and so the question is mostly a matter of degree: how heavy? or light a hand? I don't know for sure and I guess I am not alone, as this is the nub of the energy debate.

But what I do know I am just enough of an old 60's hippie optimist to believe that our world is awash in love and energy and that somehow, amidst this benificence we will muddle (and better) our way through.

Comments

[Brian Miller]

A very well-written essay, David. Kudos!

[christopher Brandow]

I think that the radical changes come due the fact that the supply-demand curve for oil is very steep leading to extremely large changes in prices when supply starts to falter even a little bit.

At peak production, the economy will still want to grow at its current 2-3%, requiring approximately that much growth in energy production, but the increased oil supply will not be available. Do this for 5 years in a row, and you can see where the concern lies.

The best analogy that I have heard recently is that it is like our body. Mine contains ~150 lbs of water. But if I fall short by only 15 lbs of water, I am in serious trouble.

I am hopeful that we can transition and make up a couple of percent with alternative energy solutions, but every day wasted makes that harder to accomplish.

[clew]

I expect a sharp spike to start not in the amount of oil drilled, but in popular expectations about how much oil there will be. If we mostly-all started assuming now that oil will gradually get rarer, and that we'd better gradually get more efficient, we'd probably be fine, of course. But the same thing would have been true of, e.g., the US savings rate, and instead we're barrelling along towards what will probably not be a soft landing.

I think much of our energy-use now is based on a kind of romantic, unexamined assumption that post-WWII conditions are normal and eternal. Even if there is a great sustainable-hedonism future within reach, I think people will get frightened and irrational because the shock of giving up one's unexamined assumptions is so disorienting.

[David Sucher]

I am somewhat confused about how highr energy prices inhibit growth. What they also do, I think, is channel the economic activity into different areas. I think that there is just as much economic growth in re-forming the economy as in not i.e. insulating a house must have a return on investment in order for it to make sense. Higher energy prices simply bring down the spot on the curve where it make sense to insulate.

The transformation of our physical infrastructure to make it more efficient will take a lot of effort -- that effort is economic activity. In fact, it seems to me that "doing more with less" -- the Bucky Fuller way of looking at the transformation which we are now undergoing -- makes us richer.

In the short run, certain activities which make sense with gas at $2.50/gallon may not make any sense with gas at $5/gallon, though since my theory is that our major substitution will be to use cars which by lighter weight & more efficient engines will double the mileage, I can't really think of any such actvities off hand. That is, I still think people will drive on long-cross country camping trips etc etc.

I wish someone would explain the economics of trans-oceanic shipping. Oil is now (so I understand) is a very minor factor in the cost of shipping goods. It is vastly outweighed (so I understand) by the capital cost of the ships themselves and by the value of the cargoes they contain. So that's why it make sense for cargo containers to be run at + 40 knots! Imagine the savings in oil if they are run at 20 knots -- offset of course by the fewer # trips per year plus the latrger amount of inventory which society must have in the form of goods in transshipment. I don't know how it all shakes out.

No doubt cheap oil has been an essential ingredient in the "takeoff" (in Wal Rostow terms) into prosperity of the last 150 years. But now that we are at a higher level and with access to other sources of energy and powerful computational methods, I wonder if we are indeed so linked to oil to sustain prosperity.

Oil essential for takeoff? Yes.
Oil essential for sustained prosperity? I don't think so; I hope not.

[David Sucher]

I agree with you entirely, Clew. There is a danger in over-reaction by people who are (understandably) scared. And out of those rational fears can arise irrational political action.

[Christopher Brandow]

I share your hope that high energy prices will merely shift economic activity, but I am not sure that it is likely. i am no economist, so I certainly could not quantify this. But I am just thinking about personal transportation. As the cost of gas goes up, more people will be using public transportation, which I think is great. However, to the degree this becomes widespread, fewer people are buying cars, gas, maintenance on that car. Owning a car is a associated with expenses of ~$5,000 per year, most of that is going to some form of economic activity. Using public transportation is much less.

The counterargument, is that my money will go somewhere, but in a vague way that I am not certain I could accurately defend, I am not sure that is the case.

[clew]

I think you're going to have to defend that vague argument, Christopher - it doesn't seem to make any sense at all to me. It would make it senseless for me to save any money anywhere in my life if what I saved couldn't be directed to some other economic activity.

If we can all get around on $2000 of transit instead of $5000 of cars, we'll spend $3000 on insulating our houses or building townhouses or something.

The economic problem I think people are afraid of is that oil will get so expensive that the transport the economy needs will be literally unaffordable; in your example, that traveling by bus now costs $5500 a year, and traveling by car would cost $10K, and we have to shift money to transport that is now devoted to other production/consumption.

[David Sucher]

One policy which should be adopted -- and John Kerry was 100% wrong on this one -- is to avoid influencing the price of gas at the pump by such things as opening up the oil reserves. Ideal is slow steady price increases (or decreases). It is the rapidity with which oil may go up (or down) in price that provides the greatest danger. Leave the reserves in the ground in case we have to fight a war and use up everyone else's oil until then.

As to Chris' remark -- "...supply-demand curve for oil is very steep leading to extremely large changes in prices when supply starts to falter even a little bit." Is that true?

[Dave Roberts]

What a peculiar argument. You're worried about "interference" in the energy market somehow disturbing natural adjustments?

As if the energy markets are somehow currently natural, just a reflection of rational market actors. Ha. The government heavily subsidizes oil, gas, coal, and nuclear, and if the Energy Bill that just passed through the House makes it through the Senate, those subsidies will rise even more.

But raising fuel efficiency standards for cars is "interference"? I don't follow.

[David Sucher]

Dave Roberts.
Who is assuming that the current situation reflects any sort of accurate market pricing? I don't think you'll find that in what I wrote. I certainly did not mean to suggest that our rat's nest of subsidies and cross-subsidies provide a "true cost." But I am saying that that's where we should be aiming.

[Dave Roberts]

Well, I guess I don't get it then.

You say, "But the great danger, as I see it, will be political attempts to either hasten or delay the adjustments which people faced with rising oil prices will take on their own."

But the current market is heavily weighted toward the very sources of energy that are projected to start running out soon. So aren't we, in fact, already artificially delaying people's adjustments toward other energy sources?

And if that's true, why would you be concerned about such incredibly mild counter-balance measures as raising vehicle fuel efficiency standards? We're not even talking about "leaning forward," to use a Rumsfeldism. We're talking about getting incrementally closer to standing up straight, because right now we're leaning over so far backwards we're about to fall on our asses. Hm... perhaps I pushed that metaphor too far.

[christopher Brandow]

I thought about it more last night, and I think that the example I gave probably is not the right one. Again, I think I lack the expertise to make this argument really well or soundly, but here goes again.

It seems to me that ultimately all wealth comes from "making stuff". That is agriculture and manufacturing. Both of those things are very energy intensive. If the energy part of the equation becomes expensive then those items become more expensive. So people will either do without or make their own. I think that at a fundamental level, cheap energy multiplies our efforts and is therefore the source of great economic activity. Think about how much more food a farmer can grow with enormous farm equipment running on a ton of energy than he can by hand. energy prices rising high enough will make it harder to run that equipment.

angrybear.blogspot.com had some good posts on the steepness of the supply and demand curve, though I think it may have been for real estate in the specific posts.

a good resource for some of the peak oil stuff is the oildrum.blogspot.com. they are much more knowledgeable than I am certainly.

Chris

[ChrisS]

As to Chris' remark -- "...supply-demand curve for oil is very steep leading to extremely large changes in prices when supply starts to falter even a little bit." Is that true?

In as much as energy prices are a lot less elastic as people would believe. Over the short run, no they're not. Oil prices have doubled in the last two years and the CPI has increased 3.1% in the last year. No one has shifted their energy purchases to cold fusion or 15,000 square miles of solar panels in the desert; oil is still relatively affordable. People have been muddling along, and here and there you see things like Priuses flying out of showrooms and Hummers and Fordzillas not.

Over the long run, yes, the market forces will direct to another competitively priced energy source. The key word is "competitively" because most likely, there won't be an energy source as cheap as oil for a very long time. Energy will become much more expensive than we are accustomed to. And for people like this husband & wife I heard about on the radio this morning that commute from Brattleboro, VT to Boston and NYC, they're not going to be able to smoothly transition to more sensible housing.

Imagine what will happen when over the course of two or three years the suburbs contract and everyone wants to move closer to the city. Pricing will shoot up in one area and those left in the suburbs won't be able to sell their houses to break even. Urban areas barely provide enough affordable housing as it is. This is, of course, conjecture, but someone ought to do a detailed study on this.

[David Sucher]

I am no energy expert but the experience of the City of Seattle is that at least as far as electrical energy, demand is/can be in fact elastic and will respond to both prices and political conservation efforts. That is historical fact so far I remember.