Home > Economics - General > Two weeks behind the Zeitgeist

Two weeks behind the Zeitgeist

August 6th, 2007

I’ve been following the Peak Oil debate with a mildly sceptical eye for some time, and it struck me a while ago that despite high prices, global oil output hadn’t grown much, but hadn’t declined either. I came up with the innovative description of our current position as “Plateau Oil“. If I had bothered with Google, I would have noticed that the International Energy Agency had offered the same description two weeks earlier. And if I’d thought about for more than a couple of seconds, I would have realised that the supply of topographical metaphors is so limited as to make this a forced move (We Australians use “Tableland” to describe the same landform and there’s also “mesa”, but Mesa Oil is taken, and “Tableland Oil” sounds silly)

Anyway, why are we (apparently) observing Plateau Oil and what does it mean?

The standard economic theory of exhaustible resources says that, on average, the price of an exhaustible resource should rise at a rate equal to the owner’s marginal time discount rate. With constant prices, producers would prefer immediate sales (bringing the current price down and the future price up) and if prices were rising fast and expected to continue doing so, producers would reduce sales bringing about an immediate increase in prices and lowering the expected rate of increase in the future. This theory isn’t always applicable, but something like oil, where most of the major discoveries have apparently already been made, seems like a good case.

Applying this model it seems reasonable to project price increases of 5-10 per cent a year into the future. In the long run, this should more than offset growth in demand arising from population and income growth, so consumption of oil should gradually decline over time, just as Peak Oil theory says it should. But right now, thanks particularly to China, demand growth is strong enough to counterbalance the large price increases we’ve seen in the past five years or so.

There is no reason to be particularly alarmed about a gradually rising price for oil. As I’ve said before, our main problem with carbon-based fuels is too much not too little. And a gradual decline in oil consumption over the next few decades is not going to cause any real problems.

Of course, on a long enough timespan, the history of aggregate oil consumption is going to look like a sharp spike, rising from zero to current levels over 150 years, and then declining to zero again in the future. But the scale that matters to us is the rate at which we turn over our capital stock of motor vehicles and other oil-using capital, and this is measured in decades, not centuries.

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  1. August 6th, 2007 at 21:53 | #1

    As I’ve said before, our main problem with carbon-based fuels is too much not too little.

    Unless we turn to greenhouse intensive unconventional oil, such as oil sands, coal-to-liquids, shale etc. We could end up producing less oil but producing more greenhouse gases. In fact, given the enormous inertia of the current transportation infrastructure bases around liquid fuels I would say this is the most likely path. You think not? Look what happened desal.

  2. August 6th, 2007 at 21:55 | #2

    That should have read:

    In fact, given the enormous inertia of the current transportation infrastructure based around liquid fuels I would say this is the most likely path. You think not? Look what happened with desal.

    My kingdom for an edit button!

  3. Hermit
    August 6th, 2007 at 22:26 | #3

    I think there are several reasons the time output curve may not be flat for long even if a ‘plateau’ was physically achievable. Whole segments of the market may drop out; for example some African countries can no longer afford to generate electricity with diesel. While producers may want to set price increases to their discount rate, cash flow needs may dictate a continuing fire sale; for example Saudi Arabia has a youthful population and declining per capita revenues. That discount rate will increase if there is a sudden sense of impending depletion..the conjecture of ‘Westexas’ Jeffery Brown. Thirdly there are general negative income feedbacks; for example reduced or more expensive travel means hospitality industry layoffs. Then there is the move to aggressively electrify transport via light rail and plug-in hybrid cars. All of which makes oil sales hard to predict. My gut feeling is that a 1970s style crisis will occur within the next decade with unpleasantries like petrol rationing on the table.

  4. August 6th, 2007 at 23:41 | #4

    Does this mean that Wahibism is about to hit the tablelands? That would be one Zeitgeist to be pleased about. Every cloud has a silver lining.

  5. August 7th, 2007 at 07:36 | #5

    JQ – “There is no reason to be particularly alarmed about a gradually rising price for oil. As I’ve said before, our main problem with carbon-based fuels is too much not too little. And a gradual decline in oil consumption over the next few decades is not going to cause any real problems.”

    That entirely depends on the replacements. Is there an economic theory that describes exhaustable critical resources? The problem with oil is that it is not just any resource. We have built our entire western society around it. It permeates into every single thing that we do.

    If we pick the wrong substitute, and none of the replacements are direct drop in replacements for crude oil, then there is a chance that our society as we know it now could falter because the substitute does not work in the long run.

    It is all very well to let the market pick the winner however if it picks the short term easy one, like ethanol, that later down the track proves unsustainable and the supply collapses along with our food production we are basically stuffed.

  6. August 7th, 2007 at 09:27 | #6

    Ender wrote:

    It is all very well to let the market pick the winner however if it picks the short term easy one, like ethanol, that later down the track proves unsustainable and the supply collapses along with our food production we are basically stuffed.

    As long as there is proper accounting of carbon emissions, a carbon tax and/or an emissions trading scheme, and transportation is part of that scheme, the market won’t ‘choose’ greenhouse intensive alternatives.

    The problem is, in the face of rising petrol prices no politician will include transport in any kind of carbon accounting. More likely, politicians will slash fuel taxes to ‘relieve pressure on working families’ or somesuch nonsense, which is precisely the wrong thing to do.

    Furthermore, if transport emissions are not accounted for politicians will choose the easiest option to replace liquid fuels, which in Australia’s case is probably coal to liquids.

    Again, look what happened with desal. Despite all the enquiries into alternatives such as recycling, the politicians (in 3 states now, or is it 4?) decided to burn more coal and go with desal. Once the politicians realise you can make petrol from coal, there will be no stopping them!

  7. August 7th, 2007 at 10:34 | #7

    I’ve been following the Peak Oil debate with a mildly sceptical eye for some time

    John,

    You frequently distance yourself from AGW skepticism but now you reveal that you are to some extent a Peak Oil skeptic. I would have thought that the fundamental systems being modelled in the case of oil resources are much better understood than the systems that drive climates. Our ability to model oil resources is also tempered by past predictive experience in multiple domains.

    Can you please articulate the basis for your Peak Oil skepticism and why it does not translate naturally into skepticism in other areas of complex physical system modelling and prediction such as AGW? Or are you just a Peak Oil denialist trying to cover his tracks?

    Regards,
    Terje.

  8. August 7th, 2007 at 10:45 | #8

    It is all very well to let the market pick the winner however if it picks the short term easy one, like ethanol, that later down the track proves unsustainable and the supply collapses along with our food production we are basically stuffed.

    Ender,

    The generally offered alternative to letting commodity/financial/consumer markets pick the winners seems to be to let political markets pick the winners. Do you really have huge confidence that political markets are better at this sort of thing? That voters can aggregate the relevant information and appoint leaders that have the right stuff in every portfolio area to do a better job of deciding the future? What are the references in life that give you such confidence in political markets because I am unable to fathom such conviction myself. In particular the policy set that voters may choose from are subject to significant product bundling. We can’t easily choose a little bit of John Howard, a smidgen of Kevin Rudd, three shakes of Bob Brown and a quart of John Humphreys simmered but not stirred.

    Regards,
    Terje.

  9. August 7th, 2007 at 10:47 | #9

    Terje,

  10. August 7th, 2007 at 11:03 | #10

    I would have thought that the fundamental systems being modelled in the case of oil resources are much better understood than the systems that drive climates.

    I have to agree. It would seem to me its an absolute certainty that crude oil production (and eventually all hydrocarbon production) must peak, its the timing of that peak that’s questionable. OTOH, there is a chance (IMO a small chance) that AGW could be completely wrong.

    I would suggest that JQ’s peak oil skepticism has more to do with the cultural acceptability of the concept. Peak oil is still very much a fringe belief, unlike AGW which has earned mainstream acceptibilty in recent years, and is almost universally accepted by the left.

    Also, academia has been mysteriously silent on peak oil, which is bizarre considerding the potential consequences of an imminent peak. At a guess I’d say the number of academic papers on climate change would outnumber those on oil depletion by 100 to 1.

  11. August 7th, 2007 at 13:38 | #11

    OTOH, there is a chance (IMO a small chance) that AGW could be completely wrong.

    I personally doubt that there is much chance at all that the AGW theory is completely wrong. However I do think that there is a modest chance that our understanding of climate systems is wrong in ways that prove to be significant. Modelling oil reserves seems totally trivial by comparison, especially given that we have a substantial track record with such oil forcasting.

  12. August 7th, 2007 at 13:41 | #12

    Terje – “Do you really have huge confidence that political markets are better at this sort of thing?”

    No I do not have any confidence in really anything. Why do you have such confidence in the markets? After all they got us into this mess in the first place. They gave us the technical inferior VHS over Betamax etc.

    I think a hybrid approach will possibly work better. Governments with advice from ‘independent’ consultants might be able to pick a couple of technologies that are the best candidates and the market can do the rest.

    The consequences of getting it wrong are too awful to contemplate.

  13. August 7th, 2007 at 14:01 | #13

    Ender,

    VHS and Beta don’t represent substantial different technical alternatives and given that either option was just a holding pattern until DVDs came along the decision was hardly important. The market merely decided that one standard made sence and replacing all the Beta machines and media was simpler or cheaper than replacing the installed base of VHS. Capitalism does not represent a static destination but rather a dynamic process. No doubt neither Beta or VHS was the best that was techically possible at the time. So we can imagine that VHS actually beat hundreds of hypothetical alternatives for reasons that are more pragmatic than technological prejudice. I certainly don’t think a government edict that VHS be banned as a format would have delivered better outcomes. It would have sent a dire signal to investors and innovators.

    I don’t see how some random selection of politicians and consultants can get a better outcome than the market. Of course if you let me appoint my prefered politicians and consultants I may be prepared to delude myself also for a while, but thats hardly the point.

    Regards,
    Terje.

  14. August 7th, 2007 at 14:10 | #14

    P.S. I do think markets get things wrong. For instance I’m not paid nearly enough.

    However in terms of selecting a framework in which society sorts information and makes decisions about resourse allocation markets outcomes seem hard to improve on without creating significant undesirable externalities. For instance banning VHS would have discouraged investment. Markets are already imperfect due to externalities and another layer of the same seems quite unwise.

  15. August 7th, 2007 at 14:28 | #15

    I’m with Terje on this one. Its not the market mechanism that’s at fault here, its the rules under which the market operates that’s the problem. If carbon emission were properly accounted and properly priced I have no doubt the market would produce a good outcome.

    Unfortunately the people who make the rules for the market (the politicians) lack courage and vision. Its not oil that’s our most crucial shortage, its politicians with courage!

  16. jquiggin
    August 7th, 2007 at 14:53 | #16

    Oil depletion is well understood, which is why there is little written about it. Of course, there’s no contradiction in my positions on AGW and Peak Oil. In both cases I broadly accept the mainstream analysis, which means I’m sceptical about fringe positions. I’m a lot louder about AGW delusionism because it is based on deliberate deception (including self-deception), whereas what is written about Peak Oil reflects an honest misunderstanding of the (un)importance of oil as a resource.

  17. August 7th, 2007 at 15:02 | #17

    Carbon emissions are certainly an externality. Free speech also has externalities. In general I think it is better to suffer such externalities than to suffer the corrective policy prescription. I’m inclined to recall the ultimately fruitless and destructive remedies proposed by the Kings wise men in the childrens story book called “The King, The Mice and the Cheese”. Sometimes the cure works but is still worse.

  18. August 7th, 2007 at 15:37 | #18

    carbonsink – “Its not the market mechanism that’s at fault here, its the rules under which the market operates that’s the problem. If carbon emission were properly accounted and properly priced I have no doubt the market would produce a good outcome.”

    If you are going let a government set the rules then this is a method of selecting the technologies that the government likes the best. A pure market solution would be no rules at all – may the best technology win. Setting rules that favour one technology over another is in effect picking one.

    Terje – VHS vs BETA is a trivial example of where the market picked an inferior product. Beta was used as the broadcast medium until the introduction of digital which proved its superiority. The problem to me is can we afford another stuff up?

  19. August 7th, 2007 at 15:54 | #19

    If you are going let a government set the rules then this is a method of selecting the technologies that the government likes the best. A pure market solution would be no rules at all – may the best technology win. Setting rules that favour one technology over another is in effect picking one.

    By “rules” I meant putting a high price on carbon. Of course, governments could also lower the price of carbon by cutting fuel taxes and subsidising fossil fuel industry (which the Howard government has done) and the market will deliver poor outcomes.

    whereas what is written about Peak Oil reflects an honest misunderstanding of the (un)importance of oil as a resource.

    Well count me in. I honestly misunderstand the unimportance of oil. Guilty as charged.

    I guess we’ll all find out how unimportant oil is in the coming decades.

  20. August 7th, 2007 at 17:24 | #20

    Making a distinction between:-

    a) honest misunderstanding
    b) deliberate self-deception

    must be a tricky undertaking. You are obviously a supreme judge of character if you can so readily tell the difference.

  21. August 7th, 2007 at 17:34 | #21

    Terje – VHS vs BETA is a trivial example of where the market picked an inferior product.

    Inferior by what measure? Surely there is more to any given tape based video technology than picture quality. For instance the early Beta tapes could only record 1 hour whilst VHS could record 3 hours. Clearly VHS offered superior utility in this regard.

    In any case both standards improved through competition for market dominance and by the end of that process both standards were better.

    Any conclusion that the market got it wrong is very speculative. It assumes that market outcomes are static events not dynamic processes and that the static outcome at some specific point in time defines success or failure. The specific point in time seems to be defined according to prejudice and calling it a market stuff up seems quite biased.

  22. August 7th, 2007 at 20:29 | #22

    Five reasons why oil is important:

    1. 95% of transportation is dependent on oil and unlike electricty generation there is no alternative already in widespread use, and none on the horizon
    2. Oil is very energy dense, is suitable for rapid refuelling, and is easily transported and distributed unlike most alternatives
    3. Oil has (until very recently) been extracted from the earth for very little cost in terms of energy, money and greenhouse emissions
    4. Oil is the product of hundreds of millions of years of accumulated solar energy, a process that cannot be repeated
    5. The oil embargoes of the 1970s caused enormous economic upheaval and these were not due to any fundamental geological constraints

    Now I know that energy and oil are declining in importance as a percentage of GDP. I know that scarcity will drive prices higher, which will drive conservation, investment in alternatives, and a gradual transition new energy sources. I know that the stone age didn’t end because we ran out of stones. I know all that, but I still can’t figure out what we’re going to use when oil production can’t meet demand.

    I’m a techie engineering type. I need to know how things work. I find the economists refrain of “have faith, the market will provide” thoroughly unconvincing.

  23. August 7th, 2007 at 20:51 | #23

    Carbonsink,

    The most obvious answer is that we will do less optional driving. If petrol goes up to $10 per litre we will easily see massive reductions in road trips. I doubt the price will go anywhere near that level in the forseeable future but there is always a price where demand will contract sufficiently to match any orderly decline in output. We may also shift production closer to consumers and avoid long distance cargo haulage. Or else our ships will use sails or burn coal. There are loads of ways to mitigate oil consumption. We will buy smaller cars or more efficient ones. And we will mix ethanol with our petrol. And down the track we will figure out how to use hydrogen as a fuel or invent batteries that make plug-in hybrid electric vehicles viable. However the party is not over yet so just take it easy for now. There is widescale scope for adjustment.

    Regards,
    Terje.

  24. August 7th, 2007 at 21:27 | #24

    Terje,

    I can make fewer road trips, but I can’t eat less food (well not much less :) ) and virtually all the food we consume has massive oil inputs. In Australia we are fortunate and can eat more locally grown food (provided the Murray-Darling doesn’t completely dry up) but that is not the case in many parts of the world.

    When you say “We may also shift production closer to consumers and avoid long distance cargo haulage”, you are basically saying we will reverse the great economic trend of the last 100 years, namely globalisation. Was the end of globalisation a consequence of peak oil that you had considered?

    As for the alternatives, they all have serious flaws, but the most fundamental problem is poor energy return. We have built a civilisation based on the stupendous energy return from black goo that gushes out of the ground essentially for free. Nothing else has that energy return of oil except perhaps uranium, but that doesn’t come in a convenient liquid form that can power your car.

    Hydrogen is no alternative at all. It is an incredibly difficult substance to manage. Its expensive to compress, its bulky even when compressed, it leaks out of everything, not to mention that its highly explosive. These problems could be overcome (at great expense) but the real problem with hydrogen is it uses more energy to produce it than it provides. There are no hydrogen mines or wells. You can’t just suck it out of the air. You have to invest large amounts of energy to make the stuff, only to get less energy back!

    I’m not suggesting we are about to return to pre-industrial society, but we are hopelessly unprepared, and given the visionless leadership at the moment, the transition is unlikely to be orderly.

  25. August 7th, 2007 at 21:33 | #25

    Terje – there is no question that we will come up with alternatives to oil however as has been explained again and again oil is special. It is as carbonsink says a dense room temperature liquid that can produce a transport fuel that has an energy density of 9000Wh per kilogram. The best battery we have does 300W per kg. Hydrogen, methane and all the alternatives do not come anywhere near oil in convenience or energy density.

    The problem is not what we do in 30years but what we do today! It is all vary well to say that we will do less driving however what does that mean? Does that mean I do not take my daughter to the doctor when she is beginning to get sick because I cannot afford the fuel? Do I wait until it is desperate so I can justify the expense? On a rainy night do I get those antibiotics? Will the grocery shelf be filled when I go there to buy food – will the farmer be able to afford to send goods to the grocery store?

    Changing will take time. It is no comfort to me today that a hydrogen car will be available in 20 years time. We can shift production closer to consumption however that takes time and still more transport. What happens to bunker fuel? The artery of globalisation, that no-one thinks about, is shipping. Right at the moment they use the dregs that no-one else wants called bunker fuel. However with light sweet crude getting scarce and pricey refineries are installing upgraders like mad to use heavy sour crude. In the near future bunker fuel will be start to be used in refineries and shipping will have to compete in an increasingly tight market increasing shipping costs. As we have moved all our factories to China how are we going to get the products when it costs as much to ship it as it does to buy it?

    Yes there are subsitutes however why do the new electric cars have to out-accelerate the IC cars to be accepted? What is it with us that we have to have a fast car to be free? The main question is can we change fast enough to match the loss of oil. Unless the market gets a wriggle on there will be a large gap between where oil is very tight or non-existent and the alternatives are not ready or not deployed widely enough. There is a chance in that gap period our economy could falter.

  26. August 8th, 2007 at 08:53 | #26

    Ender,

    By weight the energy density of Hydrogen is higher than petrol. Not as simple to handle I’ll grant you. In terms of production there is already some promising work being done on bio-hydrogen where specially engineered algae uses sunlight to produce hydrogen.

    The energy density of the supercapacitors being proposed by Eestor are very high. Not as high as petrol but an electric motor converts energy much more efficiently than a combustion engine so a battery does not need to equal the energy density of petrol. The Eestor energy storage technology is still very speculative but the concept of high permitivity dielectric capacitor materials is proven. And we already know we can do a lot with Lithium batteries (but unlike oil they currently are prohibitively expensive).

    Ethanol already powers much of the transport in Brazil. Producing Ethanol does divert land from other uses but in some instances it can be produced from existing biproducts.

    Oil is special and I would never wish to abandon it by choice. However we are innovative little critters and we do have loads of ways to deal with increased oil scarcity as and when it occurs.

    Regards,
    Terje.

  27. August 8th, 2007 at 09:01 | #27

    Carbonsink,

    We were more globalised 100 years ago than we are today. The current globalisation trend today is really just a roll back of the destructive trade barriers erected across the globe from around 1930 onwards.

    A higher oil price would not shut down global trade. It would lead us to rationalise some aspects of it unless we found cheap alternate energy sources. How about wind and coal? How about nuclear powered ships?

    Regards,
    Terje.

  28. jquiggin
    August 8th, 2007 at 09:13 | #28

    “5. The oil embargoes of the 1970s caused enormous economic upheaval and these were not due to any fundamental geological constraints”

    On the contrary, the economic upheaval caused the embargoes. The Bretton Woods system collapsed in 1971-72, and commodity prices of all kinds surged, making possible the oil embargo.

    Undoubtedly oil has some nice properties, and having less of it will cause various kinds of inconvenience. The same is true of every material we use. Water is an obvious example. We could do completely without oil, but not without water.

  29. August 8th, 2007 at 09:14 | #29

    It is as carbonsink says a dense room temperature liquid that can produce a transport fuel that has an energy density of 9000Wh per kilogram. The best battery we have does 300W per kg.

    That means that at present the battery can store only 3% of what petrol can store for a given mass. However a combustion engine is only about 15% efficient and an electric motor is more like 90% efficent. So including those factors the petrol has an overal weight advantage of about 5 to 1. The challenge then is to see how much weight you can carve out of a car by swapping the engine for a motor and how tolerable reduced range really is. It is certainly technically challenging and I don’t expect any revolutionary break through this week, however with time I do expect that we will see progress in these areas. Even if we stuck with petrol and had a break through in fuel cell costs we would get a lot more bang out of the same petrol and we would have a good pathway to hydrogen.

    All of that is mere futurology. As outlined above there are practical immediate measures that can be taken to deal with a rising oil price. Although obviously the best option is that we find more cheap oil.

    Regards,
    Terje.

  30. August 8th, 2007 at 09:22 | #30

    “5. The oil embargoes of the 1970s caused enormous economic upheaval and these were not due to any fundamental geological constraints�

    The petrol queues in the USA did not occur in most other developed nations. The reason the USA suffered so badly was in a large measure because that bastian of freedom called Richard Nixon imposed price controls. A very large part of the economic upheaval was the result of such regulation. They were not fully lifted until Reagan came to power in the early 1980s at which point economic normality began to return.

  31. August 8th, 2007 at 09:47 | #31

    Terje – “All of that is mere futurology. As outlined above there are practical immediate measures that can be taken to deal with a rising oil price. Although obviously the best option is that we find more cheap oil.”

    Look I completely agree with you on electric cars and batteries the problem that I cannot get through is not the fact that substitutes exist but the timing of the substitutes. The timing is the critical part.

    To change the car fleet will take 10 years or more. To change the shipping fleet will take even longer. If we wait until oil is scarce before large scale changes are made then there will exist a time where there is insufficient oil to power society and there are no readily available subsitutes for critical services that make our society happen like shipping. It is all very well to say we can just use wind however it takes 5 to 10 years to design and test a new type of ship and then another 5 years before the new design is widespread enough to make difference. What do we do in the meantime?

    The market cannot ‘see’ the long term problems. It is only concerned with short term things. Governments are entities that should be able to react to longer term threats and direct the market accordingly. If we do not start changing now with a large program while there is plenty of oil we could find ourselves in a very difficult position.

  32. August 8th, 2007 at 10:07 | #32

    The market cannot ’see’ the long term problems. It is only concerned with short term things.

    No this is absolutely flawed thinking. Market participants can and do deal with long term problems. It’s called speculation. If somebody thinks that oil will be terribly scarce in ten years time and that it will cause massive social problems then they will stockpile oil today and seek to make a windfall in the future. The same happens with grain harvests and the stockpiling of food. If there is a significant risk of shortage in the future and the product is not perishable then it will be hoarded in the short term.

    Given what you believe then you should put your money into stockpiles of oil. Morgage your house if necessary. If you are right you will make a massive profit and help mitigate the problem by:-

    1. Ensuring that there is more oil in the future (ie your stockpile).
    2. By rising the price now and stimulating a shift to alternatives.

    It is easy for you to sit back and say that the government should fix it with other peoples money but that means that you just don’t want to deal with the the risk of being wrong. Like so many calls for government intervention it is really a plea for somebody else to assume the risk for you.

    The information about peak oil is largely in the public domain. It seems reasonable to me to allow people to resolve this issue through normal market mechanisms rather than resorting to a solution via political markets. The only unique quality that the latter can add is the power of coersion and I fail to see how coersion adds to the solution discovery process in this instance.

  33. August 8th, 2007 at 11:01 | #33

    On the contrary, the economic upheaval caused the embargoes. The Bretton Woods system collapsed in 1971-72, and commodity prices of all kinds surged, making possible the oil embargo.

    The oil price did not surge in August 1971 (when Nixon pulled out of Bretton Woods) it surged in October 1973 when the embargo began.
    Oil Price Chart

    I don’t discount the fact that the collapse of Bretton Woods (and subsequent depreciation of the U.S. dollar) was partially responsible for the surge in oil prices, but surely the fact that U.S. oil production peaked in 1971 was also a significant factor? Prior to that there was plenty of spare capacity in the U.S., so any attempt by Arab oil-producing countries would have been ineffective. Indeed an attempted embargo in 1967 during the Six Day War was ineffective.

    I might not know much about economics, but the fact that the world’s largest oil-consuming (and at that time oil-producing) nation suddenly hit a production ceiling in 1971 must have some relevance. I’m fairly certain the gap between U.S. oil demand and supply during the 1971-73 period was largely met by imports from the Middle East, but after a quick Google I can’t find the data to support that. Does anyone know?

    Undoubtedly oil has some nice properties, and having less of it will cause various kinds of inconvenience. The same is true of every material we use. Water is an obvious example. We could do completely without oil, but not without water.

    I’m glad you mentioned water, because that is another material with “special qualities”. Water is relatively cheap, its consumption and production represent a tiny proportion of total economic activity, but no-one would seriously suggest that we could do without it?

    We will eventually have to do without oil, but unlike previous energy substitutions (wood-to-coal, coal-to-oil) the next substitution will almost certainly be less convenient, more expensive, and have a poorer energy return. We will be going backwards for the first time in history. Of course, some revolutionary technology could appear from left-field (like car-sized fusion reactors) but that is extraordinarily unlikely in the timeframe required.

  34. mugwump
    August 8th, 2007 at 11:01 | #34

    However a combustion engine is only about 15% efficient and an electric motor is more like 90% efficent.

    20% for combustion engines these days. But if the electric motor’s energy comes from a Carnot cycle, then you have to multiply the 90% motor efficiency by the efficiency of the Carnot cycle (around 40% for most steam-based power stations).

  35. August 8th, 2007 at 11:05 | #35

    Terje – “It is easy for you to sit back and say that the government should fix it with other peoples money but that means that you just don’t want to deal with the the risk of being wrong. Like so many calls for government intervention it is really a plea for somebody else to assume the risk for you.”

    No that is absolutely flawed thinking. The government does have a role to play in regulating and directing markets as all the OH&S laws that are now present in the system that would not be there without government action.

    A market can see no further than a person is willing to speculate. You are basically relying on risk takers to ensure your future. If we need electric cars to be 50% of the car fleet in 20 years time however they are not really economic until 15 years time how is a market going to raise prices sufficiently for an electric car to be ready for the problem?

  36. August 8th, 2007 at 11:16 | #36

    Terje, regarding whether the market cannot ’see’ the long term problems:

    Again, I generally agree with you, although I would suggest that the market (and humanity in general) is rather better at dealing with short-term problems than long-term problems. I don’t believe that politicians (with three year terms) would do much better than the market left to itself. Indeed, interference in the market by politicians (such as Howard freezing the fuel excise) often makes the problem worse.

    However, you might be interested in watching an interview with Dr Robert Hirsch on Four Corners who wrote a report comissioned by the U.S Department of Energy called “Peaking of World Oil Production: Impacts, Mitigation, and Risk Management”. About two minutes into the interview he addresses the point as to whether the market will “solve” peak oil.

    To view the interview go here then click the Hirsch interview link at bottom centre.

  37. August 8th, 2007 at 11:55 | #37

    mugwump: Tesla has a white paper that compares energy efficiency of ICE vs electric cars. Yes I know Tesla has a barrow to push but nonetheless it is interesting reading…
    The 21st Century Electric Car

    The energy cycle (charging and then discharging) of the lithium-ion batteries in the Tesla Roadster is about 86% efficient. This means that for every 100 mega-joules of electricity used to charge such a battery, only 86 megajoules of electricity are available from the battery to power the car’s motor. Thus, the “electrical-outlet-to-wheel� energy efficiency of the Tesla Roadster is 2.53 km/MJ x 86% = 2.18 km/MJ. The most efficient way to produce electricity is with a “combined cycle� natural gas-fired electric generator. (A combined cycle generator combusts the gas in a high-efficiency gas turbine, and uses the waste heat of this turbine to make steam, which turns a second turbine – both turbines turning electric generators.) The best of these generators today is the General Electric “H-System� generator, which is 60% efficient, which means that 40% of the energy content of the natural gas is wasted in generation. Natural gas recovery is 97.5% efficient, and processing is also 97.5% efficient. Electricity is then transported over the electric grid, which has an average efficiency of 92%, giving us a “well-to-electric-outlet� efficiency of 60% x 92% x 97.5% x 97.5% = 52.5%. Taking into account the well-to-electric-outlet efficiency of electricity production and the electrical-outlet-towheel efficiency of the Tesla Roadster, the well-to-wheel energy efficiency of the Tesla Roadster is 2.18 km/MJ x 52.5% = 1.14 km/MJ, or double the efficiency of the Toyota Prius.

  38. August 8th, 2007 at 12:07 | #38

    But if the electric motor’s energy comes from a Carnot cycle, then you have to multiply the 90% motor efficiency by the efficiency of the Carnot cycle

    Mugwump – that would be relevant in any consideration of end to end efficency but it is not relevant in discussing whether battery technology can be light enough to run motor vehicles in a manner that we are accustomed to.

    Batteries weight more than petrol for the equivalent store of energy but within the closed system of a car the energy from a battery that drives an electric motor is more efficient than energy from petrol that drives an internal combustion engine (ICE). Hence where you need 1kg of petrol to drive a given distance in an ICE car you need roughly 5kg of battery to get the same result in an electric car. Even though petrol stores about 30 times as much energy per kg than a battery it’s weight advantage is not as high as crude energy to weight numbers suggests.

    Crude Storage:-

    Petrol = 9000Wh per kg
    Battery = 300Wh per kg

    Effective Storage:-

    Petrol = 1350Wh per kg
    Battery = 270Wh per kg

  39. August 8th, 2007 at 12:10 | #39

    Indeed, interference in the market by politicians (such as Howard freezing the fuel excise) often makes the problem worse.

    Freezing the fuel excise is a mitigation of future government interference. To suggest that a tax cut is an interference in the market is a decidely odd use of terminology.

  40. mugwump
    August 8th, 2007 at 12:16 | #40

    Unfortunately not many power stations are as efficient as the General Electric “H-System� generator.

    Electric cars are definitely more efficient than gas-powered cars, but in practice not as much as most people believe.

    Of course, if the electric car’s power is generated from solar, or wind, or hydro, or geothermal, or wave (any non-Carnot-cycle source), then it is no contest.

  41. mugwump
    August 8th, 2007 at 12:22 | #41

    Terje – right, I was looking at end-to-end efficiency. Electric cars would be utterly infeasible if they had 1/30th the energy to weight ratio of gas.

  42. August 8th, 2007 at 12:32 | #42

    Carbonsink,

    The intiatives suggested by Hirsch in the interview seem to be:-

    1. Improve vehicle fuel efficiency
    2. Use coal to make fuel
    3. Enhanced oil recovery – ie inject CO2 into oil wells
    4. Extract heavy oil (tar sands)
    5. Remote natural gas – ie natural gas in difficult places

    He thinks that government can help by:-

    1. Saying “by gosh we have to do it”
    2. Cushioning the private sector from investment risks.
    3. Use price floors so private companies can have profit certainty.
    4. Shortern approval processes for large scale infrastructure from 4 years to 4 weeks. Presumably he means getting rid of EIS requirments and the like.

    I must say it is not a very compelling list of ways in which government can add value. He seems like a nice fellow that understands the geological constraints but I think he is next to clueless in the economic advice he offers. Perhaps the market really won’t solve this problem in a neat way but none of the recommendations he makes seem to offer any sort of improvement.

    Regards,
    Terje.

  43. August 8th, 2007 at 13:33 | #43

    Freezing the fuel excise is a mitigation of future government interference. To suggest that a tax cut is an interference in the market is a decidely odd use of terminology.

    The fuel excise was frozen at a flat rate per litre not a percentage, and it is no longer indexed. The fuel excise component of the retail price has declined from 38c of 90c/L (42%) in 2001, to 38c of $1.25/L (30%) today.

    Is it good policy to be reducing the percentage tax rate on a diminishing resource, and a resource that is a significant contributor to greenhouse emissions?

    I would call that a significant market distortion, and government interference of the worst kind.

  44. August 8th, 2007 at 13:49 | #44

    Terje, re Hirsch:

    I didn’t say I agreed with Hirsch’s measures, although I do believe the market will need some ‘help’ to solve the problem. My #1 measure would be to put a high price on carbon, and most particularly petroleum products, and remove all the Howard government distortions that encourage us to consume more. Whether you believe an oil peak is imminent or not, we need to do this anyway to mitigate climate change.

    Interestingly, Hirsch is a rare breed that is very concerned about oil supply, but is not the slightest bit concerned about climate change. It is very likely he shares these views with the inner circle of the Bush Administration, although his solutions are slightly less drastic (i.e. invade Iraq).

  45. August 8th, 2007 at 13:52 | #45

    It may be good policy or it may be bad policy. But reducing taxes is a reduction of government intervention. To suggest that reducing taxes is a form of “market distortion” and “government interference” is to debase the language pointlessly.

    You would be a lot clearer if you just said that you thought there should be more tax on oil and stopped trying to mess with the language.

  46. August 8th, 2007 at 13:55 | #46

    mugwump – I summerised the relative efficiencies of electric cars from the Tesla White paper:

    Technology Example Car Fuel CO2 content Efficiency CO2 Emissions
    Electric Tesla Roadster Natural Gas 52.8 g/MJ 1.15 km/MJ 46.1 g/km
    Electric Tesla Roadster Coal (Black) 91.0 g/MJ 0.68 km/MJ 133.8 g/km
    Electric Tesla Roadster Coal (Lignite) 101.0 g/MJ 0.68 km/MJ 148.5 g/km
    Diesel VW Jetta Diesel Crude Oil 73.0 g/MJ 0.48 km/MJ 152.7 g/km
    Gasoline Honda Jazz Crude Oil 73.0 g/MJ 0.41 km/MJ 178.0 g/km
    Gasoline Toyota Camry Crude Oil 73.0 g/MJ 0.28 km/MJ 261.7 g/km

    As you can see an electric car is still twice as efficient as a normal IC car even if you get the electricity from brown coal.

  47. August 8th, 2007 at 13:58 | #47

    My #1 measure would be to put a high price on carbon, and most particularly petroleum products, and remove all the Howard government distortions that encourage us to consume more.

    If your concern is AGW I don’t know why you would put more emphasis on petroleum products given than for a given amount of energy they are lower CO2 emitters than coal.

    If your concern is Peak Oil I fail to see how making oil more expensive (presumably via a tax) is going to help. If we were facing a potential banana shortage whould you propose a banana tax? A selective oil tax is simply going to reduce investment in precisely the place where it is needed (ie in oil production).

  48. Ernestine Gross
    August 8th, 2007 at 15:12 | #48

    Terje, in contrast to oil, bananas are a renewable resource.

    The term ‘renewable’ means reproducable with known technologies within a time frame that is relevant for present and future generations of humans as we know them.

    Regarding your question: “If we were facing a potential banana shortage whould you propose a banana tax?”

    The answer is NO because, in contrast to oil, bananas are a renewable resource.

  49. August 8th, 2007 at 15:50 | #49

    Ernestine – Your qualification regarding bananas is fair enough. However I still don’t see how a tax on oil would fascilitate economic adjustment in a more optimal way than simply allowing prices to rise under natural market dynamics as oil supplies dwindle.

  50. August 8th, 2007 at 17:57 | #50

    Terje wrote:

    But reducing taxes is a reduction of government intervention. To suggest that reducing taxes is a form of “market distortion� and “government interference� is to debase the language pointlessly.

    Its not lower taxes that distort the market, its reducing one tax on one item (namely liquid fuels) and not reducing it on others that is the distortion.

  51. August 8th, 2007 at 19:29 | #51

    Terje wrote:

    If your concern is Peak Oil I fail to see how making oil more expensive (presumably via a tax) is going to help.

    Well … it certainly seems to work in Europe. Europeans use far less oil per capita than Americans or Australians, and the only reason I can think of is the much higher fuel taxes in Europe.

    If we were facing a potential banana shortage whould you propose a banana tax? A selective oil tax is simply going to reduce investment in precisely the place where it is needed (ie in oil production).

    Ahh see there is fallacy. As Ernestine pointed out bananas are renewable resource, oil is not. Lets take oil exploration. Vast amounts of money are currently being invested in oil exploration, yet oil discovery peaked in the mid 1960s. The most oil found in one year was in 1948 (I believe) this is despite huge advances in oil exploration technology since then.

    So it really doesn’t matter how much we invest in oil discovery and exploration its not going to make more oil if its not in the rocks (economists may be shocked to learn this!)

    Our only options are to conserve and develop alternatives. A selective oil tax (where the alternatives are untaxed or lightly taxed) should achieve both those goals.

  52. August 8th, 2007 at 21:58 | #52

    Its not lower taxes that distort the market, its reducing one tax on one item (namely liquid fuels) and not reducing it on others that is the distortion.

    Yes but this is not what happened. If they had said no GST on petrol then you might have a point but they merely reduced fuel taxes. There is no fuel tax on horses or bicycles. So I can’t see how you could call such a decision a market distortion.

  53. August 8th, 2007 at 22:10 | #53

    Well … it certainly seems to work in Europe. Europeans use far less oil per capita than Americans or Australians, and the only reason I can think of is the much higher fuel taxes in Europe.

    Are you sure that it has nothing to do with the fact that Europeans live in concentrated population centres and that Europe is densily populated and invests heavily in public transport. The USA has many more people living outside cities. And Australians typically contend with larger distances in general even within our cities.

    It is obvious that if we tax oil harder then we will use it up slower. However that just brings forward the effective scarcity which is supposed to be the problem we are trying to avoid.

    So it really doesn’t matter how much we invest in oil discovery and exploration its not going to make more oil if its not in the rocks

    Sure. But how do you know it’s not in the rock if you don’t look. Do you have some magic crystal ball that says that there is no oil in the places where we have not looked?

  54. mugwump
    August 8th, 2007 at 22:28 | #54

    Ender, I don’t disagree that the Tesla is about twice as efficient as the average car. But given that it is a super-lightweight sports car – eg no good for family use – the efficiency starts to look a lot less impressive.

    Of course, it is wonderful for salving the conscience of Hollywood celebrities and Al Gore as they commute from their 200,000KWh mansions to their private jets.

  55. August 8th, 2007 at 23:29 | #55

    Terje – “Sure. But how do you know it’s not in the rock if you don’t look. Do you have some magic crystal ball that says that there is no oil in the places where we have not looked?”

    Most if not all the oil that we are using now was created during 2 times in the past when there were vast shallow seas that accumulated organic matter for millions of years that got turned into oil. The places that we find oil now are on the shores of these ancient seas. The places we have not looked are not explored for the very good reason that there is very unlikely that there is oil there.

    The crystal ball in this case is a solid knowledge of how oil formed and when and this gives geologists a pretty good idea of where to look. Apart from the time of formation oil bearing rock has to be just the right porosity and have just the right sort of trapping rock that prevents the oil from seeping away. Finally the organic matter has to be cooked for exactly the right time. Overdone and you get gas – underdone you get oil shale. The vast reserves that we are recklessly exploiting are really quite an unlikely occurence and once it is gone there is no more left.

  56. August 9th, 2007 at 08:16 | #56

    Yes but this is not what happened. If they had said no GST on petrol then you might have a point but they merely reduced fuel taxes.

    Honestly, which bit don’t you understand? If bread was a dollar loaf and we replaced the 10% GST with a 10c a loaf tax, but continued to tax everything else at 10% would that not be favourable tax treatment for bread, given that bread prices must inevitably rise?

    The GST proportion of fuel taxes was relatively small in 2001. Obviously it is growing because it is applied at 10% and not on a cents-per-litre basis, but that just proves my point!

    I’ll spell it out again:
    As petrol prices rise the percentage tax rate is falling. The percentage tax rate on all other items remains the same. How you can not see that as favourable tax treatment for petrol is completely and utterly beyond me.

    I will say no more on the subject.

  57. August 9th, 2007 at 08:22 | #57

    Are you sure that it has nothing to do with the fact that Europeans live in concentrated population centres and that Europe is densily populated and invests heavily in public transport.

    Obviously that is a factor, but its a chicken-and-the-egg argument. I would argue that European cities have developed as they have (post war) as a response to high fuel prices. In other words, the high fuel prices have delivered a favourable outcome whch is much more sustainable cities than the suburban sprawl seen in Australia and the U.S.

    But how do you know it’s not in the rock if you don’t look. Do you have some magic crystal ball that says that there is no oil in the places where we have not looked?

    Mate, oil is ~$75/barrel. They are looking, they’re just not finding any.

  58. August 9th, 2007 at 08:24 | #58

    Actually, I’m not sure whether bread is actually taxed under the fresh-food deal Howard did with the Dems when the GST was introduced … but you get the point (I hope!)

  59. August 9th, 2007 at 09:01 | #59

    Carbonsink,

    I don’t get the point. We have GST on pretty much every consumer good (except fresh food). To give one product a tax break (eg shoes) could arguably be called a market distorting reform because it creates a tax bias in favour of one product. However fuel tax is not broad based. It applies to fuel only. As such it is a market distorting policy (for better or for worse). Reducing fuel tax is hence a reduction in market distortion. You make out that all other products (besides fuel) are still suffering the burden of fuel tax, where in fact fuel has always had fuel tax as and added burden. You may be in favour of high fuel taxes and in favour of distorting markets, but you won’t get away with calling a cut in fuel taxes a “market distorting reform”. At least not on my watch.

    Regards,
    Terje.

  60. August 9th, 2007 at 11:16 | #60

    Ok, can we agree on this:

    The (politically motivated) move to freeze the fuel excise in 2001 has resulted in liquid fuels being taxed more lightly relative to the situation that existed previously? This has most probably resulted in higher fuel consumption than would have otherwise occured, and is dampening the effect of rising oil prices on the prices paid by Australian motorists at the pump.

    Changes to the tax system are all about relativites. Its the change from the pre-existing situation that moves markets. For example, the halving of the CGT and the reduction in company tax rates in 1999 provided a huge incentive for high income earners to capitalise and corporatise their income.

    If you think that reducing the tax on liquid fuels to 10% is a desirable outcome, then fine, that is effectively what is happening at the moment. When petrol is $20/L the 38c fuel excise will be insignificant.

    After all, the purity of the market is more important than the planet eh Terje?

  61. Ernestine Gross
    August 9th, 2007 at 11:39 | #61

    Regarding ‘fuel tax’: I understand there is still no fuel tax on international aviation and, it seems, Koyoto has overlooked this item.

    http://www.globalpolicy.org/socecon/glotax/aviation/index.htm

  62. August 9th, 2007 at 11:54 | #62

    Well you’re obviously bundling several statements into one package and asking if can agree on all of it. I’m happy to agree that taxing fuel more lightly will (all things being equal) lead to greater consumption.

    On whether market purity is more important than the planet I regard that as a loaded and hostile remark. Do you still beat your children frequently? Is your mother less important to you than fuel tax?

    My views about markets reflect a human centred perspective that says it’s not generally my business or your business to use coercion to tell people how to live their lives. I accept fully that liberty must be balanced against genuine arguments about utility, however I generally find the arguments offered to be weak, speculative or biased. Where such arguments are strong, well founded and without a biased agenda then I’m generally receptive. I make no bones about the fact that I believe in liberty and that in an analysis of any policy I place the burden of evidence on those that wish to curtail liberty. And I do that because in the great sweep of things the general body of evidence favours the utility of individual freedom over centralised control by either selfish or benovalent leaders. I certainly do not start out from a position of “how can we screw the planet”. If you infer otherwise I am somewhat saddened because it suggests a lack of faith in the goodwill of others.

  63. August 9th, 2007 at 12:30 | #63

    Ernestine – perhaps I’m being simplistic but I thought that Kyoto called for a cap and trade system not fuel taxes. My understanding is that we could in fact fully abolish all existing fuel taxes and be consistent with Kyoto so long as we implemented a cap and trade mechanism. Of course there are some ways in which such measures are economically equivalent. Not that I advocate cap and trade as better than a tax based pricing mechanism. In fact I think there is some sence in lowering the rate of fuel tax and at the same time broadening it to include coal. If the rate levied related to emissions it could be morphed into a more general carbon tax whilst also reducing some existing market distortion.

    In terms of taxing aviation fuel if it is applied in some nations and not others it may in fact encourage operators to overfuel in some locations and thus burn more fuel due to heavier fuel loads.

  64. Ernestine Gross
    August 9th, 2007 at 13:25 | #64

    Terje, you might be right regarding Kyoto. I am not an expert on the Kyoto protocol (hence the word “seems” in the second part of my sentence). Perhaps someone else can help on this one.

    There are two issues. One is the externality CO2. the other is non-renewable energy (oil).

  65. melanie
    August 9th, 2007 at 18:22 | #65

    JQ, It’s OK we don’t have to talk about ‘Tablelands oil’, we have the Balgowlah Plateau here in Sydney. So it’s officially an Australian word :)

  66. August 9th, 2007 at 18:25 | #66

    Getting back on-topic, Professor Cutler Cleveland from Boston University’s Center for Energy and Environmental Studies has a post up at TOD called Energy Transitions Past and Future.

    I must say I find this stuff much more convincing than ProfQ’s refrain of “its a myth that energy is crucial to the economy” and “have faith, the market will provide”.

    He actually looks at the character of the problem rather than taking the share of GDP that energy currently represents, multiplying by a fudge factor, and concluding it will cost nothing more than a cup of coffee in 2050. He even deals with “quibbles about supply variability” and I’m still waiting for my quibbles to be dealt with!

    Such intermittency means that wind and solar power are really not “dispatchable�—you can’t necessarily start them up when you most need them. Thus, when wind or solar power is first added to a region’s grid, they do not replace an equivalent amount of existing generating capacity—i.e. the thermal generators that already existed will not immediately be shut down. This is measured by capacity credit, which is the reduction of installed power capacity at thermal power stations enabled by the addition of wind or solar power in such a way that the probability of loss of load a peak times is not increased. So, for example, 1000 MW of installed wind power with a capacity credit of 30% can avoid a 300 MW investment in conventional dispatchable power. A recent survey of U.S. utilities reveals capacity credits given to wind power in the range of 3 to 40 percent of rated wind capacity, with many falling in the 20 to 30 percent range. A large geographical spread of wind or solar power is needed to reduce variability, increase predictability and decrease the occurrences of near zero or peak output.

    Quibbles indeed.

  67. August 12th, 2007 at 21:37 | #67

    Carbonsink,

    I’m not a huge fan of wind power or photovoltaics for grid based electricity generation. However I am keenly interested in the proposed alternative energy solutions offered by the likes of Enviromission (Solar Chimney) and Geodynamics (Hot Dry Rock). On paper at least both solutions offer a base load type output with dispatch qualities comparable to coal. And the projected energy cost from both is far more competitive than photovoltaics or wind farming.

    However this is not getting us back onto the peak-oil topic because in the domain of electricity generation coal is the most obvious substituted for oil and it is proven technology. Any real concerns about peak-oil surely relates only to transport, not electricity generation.

    Regards,
    Terje.

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