Home > Economics - General > The Great Oil Fallacy

The Great Oil Fallacy

November 27th, 2012

That’s the headline for a piece I published in The National Interest last week. Opening paras

Among the unchallenged verities of U.S. politics, the most universally accepted is that of the crucial strategic and economic significance of oil, and particularly Middle Eastern oil. On the right, the need for oil is seen as justifying an expanded and assertive military posture, as well as the removal of restrictions on domestic drilling. On the left, U.S. foreign-policy is seen through the prism of “War for Oil,” while the specter of Peak Oil threatens to bring the whole system down in ruins.
The prosaic reality is that oil is a commodity much like any other. As with every major commodity, oil markets have some special features that affect supply, demand and prices. But oil is no more special or critical than coal, gas or metals—let alone food.

This piece expands on my earlier argument that the US has no national interest at stake in the Middle East, just a set of mutually inconsistent sectional interests and policy agendas. I don’t talk about climate change explicitly, but we’ll never have a sensible debate about climate change until oil is demystified.

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  1. Newtownian
    November 27th, 2012 at 17:56 | #1

    Thanks John. I absolutely agree oil is a commodity and ‘Peak Oil’ is problematic. Any reader of history should know its technically possible to manufacture oil from coal, gas, methane hydrates etc. in response to market demand and we hence arent about to run out.

    But oil (and other forms of commodity energy) is still special and different from metals and food in our economy in that it cant be recycled in the normal way we understand this concept. Further:
    1. The prices of many (I’d suggest most if not all) other commodities are ultimately a function of the price of energy – two illustrative examples being nitrogen fertilisers and aluminium which are essentially crystalized energy.
    2. Many commodities are or will become more pricey especially in to extract as the quality of orebodies decreases.
    3. The dream of reuse is possible to a degree but itself will require still more energy inputs.

    Which makes you wonder if we cheered on by progrowth economists are creating a red queens race – running faster and faster just to stand still http://en.wikipedia.org/wiki/Red_Queen%27s_race

    Certainly efficiencies can be made and we have a lot of fat/waste in our system – like big cars and 4WDs. But ultimately energy price sets a minimum for everything else and the trajectory is toward higher costs as entropy plays its part (do economists understand thermodynamics I often wonder ).

    Thus oil/energy still seems special because it has been the (nominally) cheapest energy available for years, we havent found a cheaper alternative and now oil is getting more expensive rather than less impacting on the economy to a degree that may not be counterable. A further worry is the unit price of energy is in effect increasing while we are simultaneously trying to come to terms with the ‘real’ environmental price of both energy and oil. The carbon tax is of course a starting point but it doesnt yet incorporate the costs to future generations.

    Could I ask if you might speak as well to this issue of the cost and availability and impacts of cheap v. increasingly expensive energy?

  2. Geoff Andrews
    November 27th, 2012 at 18:01 | #2

    Before commenting, watch “History of Oil” by Robert Newman (http://www.youtube.com/watch?v=2DCwafIntj0). Be entertained and informed for 45 minutes.

  3. iain
    November 27th, 2012 at 19:09 | #3

    How do you explain sustained oil price increases over the past 10 years (with the exception of the GFC dip) in the face of continual year on year increasing demand, with little compensating supply side increase? (including little in the way of confidence building substitute supply)?

    Is red lining at 84-86 mbpd what economics would predict?

    I guess we just wait and see if economics can always over ride geological limitations. The historical link between oil consumption and GDP growth is pretty conclusive, more so than for “any other commodity”. I guess it may also depend on whether you see energy as the most important factor within a society.

  4. Ikonoclast
    November 27th, 2012 at 20:05 | #4

    I am a bit conflicted on this issue. On the one hand, the claim that oil is just a commodity like any other commodity makes sense in some ways. On the other hand, the idea that other forms of energy can easily substitute for or replace oil without economic shocks or an energy shortage or bottleneck is something that I am dubious about.

    First, I don’t like to regard oil separately from natural gas or coal. They are all fossil fuels and they are all practicably, chemically convertible into each other albeit at an energy cost (except for conversion of the others into coal which would be both tricky and nonsensicle). Thus we should really talk about peak fossil fuels not peak oil. The main reason peak oil is not a problem is because (a) we have not yet hit peak liquids (oil and gas) and (b) we have not yet hit peak coal.

    The real crunch will come when we hit peak fossils. However, if we burn all these fossils our climate is wrecked anyway. If we add methane clathrates to the mix… well, welcome to Venus Mark 2 with surface temperatures of 300 to 500 degrees C.

    Therefore, we have to transition away from ALL fossils before using much more of any of them. I would say we have 25 years to reduce all fossil fuel use to zero globally or the climate is wrecked (6 degrees of warming or more will be built in.)

    So, can anyone demonstrate that economically and energetically we can transition to 100% renewables in 25 years? Second, if it is even possible is it actually probable that globally we will do that?

  5. Chris Warren
    November 27th, 2012 at 23:34 | #5

    It’s time to recognize that in the second decade of the 21st century, oil is just one commodity among many in an economy that is mainly driven by services and information.

    Hmmm … but haven’t we learnt by now, that humanity is better off if it rejects seeing these things as econ-rat “commodities”?.

    In fact an economy is mainly driven by goods, services, debt, degrees of monopoly, information and (nb) politics.

    In our modern era humanity cannot get what it needs through commodity mechanisms. This only suits middle and upper strata.

  6. Mel
    November 28th, 2012 at 00:43 | #6

    Iraq War oil conspiracy theorist, Dan, where are you? Don’t be shy, come set the unbelievers straight …

  7. Ikonoclast
    November 28th, 2012 at 05:30 | #7

    Global CO2 emissions in 2011 have again reached a new record of 34 billion tons. As a comparison, in 1990 the world was just 22.7 billion tonnes of carbon dioxide.

    “If the current trend continues, the global CO2 emissions increase by 2020 by 20 percent to more than 40 billion tonnes of CO2,” – IWR Director Dr. Norbert Allnoch.

    It is peak fossil use that matters not peak oil. This is true both for thermoeconomic issues and climate change issues. It seems to me that just about everybody has their head in the sand on this issue. If we burn all our fossil fuel endowment then global civilization is finished due to catastrophic climate change. If we fail to change over to 100% renewables within a reasonable “survival timeframe window” (probably about 25 years now) we will encounter severe climate change and a likely die-off of about 50% of the world population.

    So the key questions are;

    (1) Can the world economy be moved to 100% renewable energy within 25 years?
    (2) Is it technically feasible?
    (3) Is it economically feasible?
    (4) Is it politically (and geopolitically) feasible?

    At a wild guess I would say the chances of all these conditions being met are about 1 in a 100.

  8. rog
    November 28th, 2012 at 06:32 | #8

    Siegel writes that short term price movements are not consistent with long term trend

    Overall, real (inflation-adjusted) commodity prices have been in a downward trend for more than two centuries. The history of capitalism has been described (by Charles Gave, of GaveKal) as the history of falling real commodity prices.  The latest uptrend, covering roughly a decade, could be the end of the history of capitalism or it could be among the largest of many fluctuations that have occurred within the context of that steady decline without constituting a reversal of it.  If world population growth were accelerating, I might entertain the possibility that falling real prices (although not capitalism itself) are coming to an end.  With population stabilizing almost everywhere, however, the long-term downtrend in real commodity prices, including energy, is likely to continue. 

    http://advisorperspectives.com/newsletters12/48-critique3.php

  9. rog
    November 28th, 2012 at 06:45 | #9

    Evidence that $oil runs counter to all other commodities ie as demand increases $oil increases whereas as with non oil commodities increase demand sees a fall in price. Decreasing demand should see an easing in price.

    http://www.un.org/esa/desa/papers/2012/wp110_2012.pdf

  10. John Quiggin
    November 28th, 2012 at 07:50 | #10

    @Ikonoklast Your assessment is broadly correct, though I’d say we probably have 35 years, which makes quite a big difference. My answers to your questions
    (1) Is a summary of 2-4
    (2) Difficult but feasible with current technology, easy with attainable improvements in grid design, storage, electric vehicle technology
    (3) Yes, and at very modest cost
    (4) Less than 50-50

    So, my odds are much more favorable than yours, but still not very encouraging.

  11. Ikonoclast
    November 28th, 2012 at 08:20 | #11

    @John Quiggin

    Yes, I probably give a 1 in 100 chance on my pessimistic days. I hope I am wrong in doing that.

    The issue of technical feasibility re changeover to renewable energy encompasses several issues.

    1. Will renewable energy give adequate EROEI to run a modern civilisation? Here, I now part with the peak oil doomsters who say no. I say “Yes!” I think it’s pretty clear we can get 10:1 energy return with solar and up to 20:1 with wind. These ratios are still improving.

    2. Can the changeover (say in 35 years) be funded both energetically and economically? The answer economically is yes I think. I have seen numbers from Prof. J.Q., from Zero Emissions Australia and from my own further research and personal back of the envelope calculations that indicate it is quite economically feasible. The energetic funding should be fine too but I suspect that it might depend partly on transferring a considerable portion of remaining “implicit” fossil fuel burning from wastage in private autos to investing that energy in renewable energy infrastructure.

    Don’t forget renewable energy needs a large energy investment up front with delayed energy pay back times of up to 5 years per installation. Still, one wonders how does this compare with up front energy investment pay off times for say coal power stations?

    What I am saying is that a good portion of our remaining fossil fuel use must be used to bootstrap us up into a renewable energy economy. One can imagine that a pure renewable energy path historically speaking (bypassing fossils and nuclear) would have taken a very long time to bootstrap itself up to modern wind turbines and solar energy “farms” if it could have achieved it at all.

    (3.) Fossil fuels give that intense boost to put us over the threshold where large scale renewable is self-sustaining. Let’s hope we don’t continue to squander the “booster fuel” in the wrong way. Never forgetting that we can’t really afford to use all the booster fuel due to climate change danger which is the 3rd issue.

  12. Katz
    November 28th, 2012 at 08:40 | #12

    It’s time to recognize that in the second decade of the 21st century, oil is just one commodity among many in an economy that is mainly driven by services and information.

    Ikonoclast’s observation that we need to stop thinking about peak oil and start thinking about peak fossil is correct.

    Substitutes for oil are rapidly coming on line. Oil is now like many other commodities for which there exist economic substitutes.

    But all those substitutes are carbon-based.

    And the ineluctable fact is that in terms of calorific value to mass fossil fuel is much higher than any other source of energy.

    The lower profile of oil may break the nexus between energy and Middle Eastern geopolitics. However, energy geopolitics will simply generate new arenas of conflict.

    Let us not forget that some years ago a Russian submarine dropped a plaque at the North Pole, claiming it in the name of Russia.

  13. ts
    November 28th, 2012 at 09:15 | #13

    US oil production is set to surpass Saudi Arabia by 2020 and become a net exporter according to the International Energy Agency.

  14. quokka
    November 28th, 2012 at 10:54 | #14

    Katz :
    And the ineluctable fact is that in terms of calorific value to mass fossil fuel is much higher than any other source of energy.

    Not just wrong, but wildly wrong.

  15. November 28th, 2012 at 11:18 | #15

    @ts

    Apart from the many debunkings of the IEA available (eg: ‘theoildrum’), it was “North America” not “US” – ie: Canada = ‘tar sands’ (really bitumen). The IEA is an embarrassment.

    The most important oversight in the IEA report is price. The ‘tight’ oil such as Bakken and Eagle Ford are only economic to produce around $90/barrel. Leaving aside climate change “Game Over”, at a sufficiently high price there is a huge amount of expensive/dirty/difficult ‘oil’ in place.

    I don’t pretend to be an economist but Steve Keen seems to have looked at the question of the relationship between energy and economy (I think this was in ‘businessspectator’):

    “..the proper foundation for a “Theory of Value”.

    Econophysicists are taking us back to that foundation now, with the most well thought out work to date being done by Robert Ayres and his colleagues. Their empirically derived model, which treats energy as the key source of production and labour and capital as adjuncts to the exploitation of free energy, adds energy as an additional independent input to production. They call it an “energy-dependent Cobb–Douglas function”.

    Whereas Solow’s model (which has labour and capital as independent inputs, but not energy) misses over half the actual growth, Ayres’s model’s fit to the observed growth in economic output in the US from 1960-2999 has an R-squared of 0.999.”

  16. Hermit
    November 28th, 2012 at 11:37 | #16

    It should be pointed out that while liquid fuels have narrowly achieved an all time volume peak of 91.3 million barrels per day, we probably passed peak net energy from liquid fuels several years ago. Note the global economic slowdown started around 2008. Production of corn ethanol, tar sands, deep water oil, shale oil produced by fracking and gas-to-liquids each consume a large chunk of the output energy as input. Some of these fuels will be uncompetitive with crude oil less than $80 per barrel.

    When liquid fuels hit an undeniable volume decline it’s hard to see how things could get better. Iraq is getting back to pre-war output but it’s of minor help. The IEA assumes that increased shale oil in the US will coincide with reduced demand. Does that mean recession?

    I also wonder if irrefutable Peak Oil could do more for emissions than all the carbon taxes you can think of. Not only will vehicle miles decline, both business and recreational, but coal digging will get more expensive. Remote coal like Clive and Gina’s new mines requires huge amounts of diesel to excavate and shift to customers.

    Those who think wind and solar can lead us out of this dilemma somehow envisage electric farm tractors and grocery delivery trucks putting food on the table. I don’t see it.

  17. Greg vP
    November 28th, 2012 at 11:46 | #17

    Ikonoclast :
    …If we fail to change over to 100% renewables within a reasonable “survival timeframe window” (probably about 25 years now) we will encounter severe climate change and a likely die-off of about 50% of the world population.

    Do you have a source for this die-off figure, Ikonoclast? I’ve been trying to find some quantified assessments of climate change impacts, but they’re not exactly carpeting the internet’s floor.

    I watched a youtube of a presentation by Kevin Anderson, former director of the Tyndall Centre. He says–and, I see, the World Bank now agrees–we’re on course for 4 degrees of climate change by 2100. (Which is a way-point on the way to 7 degrees ultimately.) There’s no way we can stay under 2 degrees, and it’s unlikely we’ll stay under 3. So as of November 2012, 4 degrees above baseline looks the most likely.

    Anderson is quoted all over the internets as saying that there is a widespread belief that 4 degrees of warming will cause “up to a billion deaths”.

    That sounds horrific, but how bad is it really? A steady-state population of 8 billion, with an average lifespan of 80 years, has 80 million deaths per year. Ah, you say: the important thing is premature death. Well, a billion premature deaths in a century is an average of 10 million a year: about the same as we can expect from ischaemic heart disease, high blood pressure (strokes), and traffic deaths in a population of that size, that is slightly more affluent than we are (globally).

    And the “up to” qualifier is important. Sure, we might get additional premature deaths due to climate change at the rate of 10 million a year initially. But won’t we adapt? Strengthen our buildings and infrastructure, modify farming practices, use and re-use water more efficiently? We don’t need any new technologies to be able to cope with a four degree world, as far as I can tell. Or even a great deal of investment, over and above that which would already occur.

    It seems to me that if there is a population impact from climate change, it will mostly show up in foregone births. But it will be tough disentangling the effect of climate change from those of urbanization and rising affluence.

    Anyway, I hope you can point me in the direction of some accessible quantified research that backs up the general talk of 50% population losses and threats to civilization.

  18. quokka
    November 28th, 2012 at 11:49 | #18

    Megan :
    The most important oversight in the IEA report is price. The ‘tight’ oil such as Bakken and Eagle Ford are only economic to produce around $90/barrel.

    So? ICE oil futures are now trading at $109.8/barrel. There is also the possibility that technological advances will reduce production costs for unconventional oil. The unprecedented current investment in oil and gas exploration and production (over $1 trillion in 2012 alone) suggests that hopes of peak putting the brakes on the climate problem in the next decade look more like wishful thinking than anything else.

  19. Greg vP
    November 28th, 2012 at 11:52 | #19

    @Greg vP
    correction: not 80 million, but 100 million deaths per year, i.e., 10 billion per century.

  20. bill
    November 28th, 2012 at 12:07 | #20

    That Robert Newman ‘History of Oil’ clip is very entertaining – but do yourself a favour: watch the properly formatted, properly uploaded, properly lip-synched version, eh?

  21. November 28th, 2012 at 12:16 | #21

    @quokka

    The $1 trillion looks a lot like the ‘Red Queen’ mentioned above.

    Unfortunately, I don’t share any hopes of peak oil having much impact at all on CC. My guess is that most PO ‘doomers’ also don’t hold that hope. We’re probably going to get a perfect storm of PO/CC/financial collapse all together.

  22. Greg vP
    November 28th, 2012 at 13:26 | #22

    @bill
    Yes, quite funny. I wish I’d waited, although there was a certain quantum of humour in reflecting on the danger posed to Hollywood by amateur videographers…

  23. Ikonoclast
    November 28th, 2012 at 13:37 | #23

    @Greg vP

    I can claim no authority for my 50% die-off figure for 4 degrees C of global warming. However, the consensus seems to be that 6 degrees will be catastrophic with mass extinctions and even the extinction of homo sapiens being canvassed by a number of scientists. Given that, it seems a fair guess to me that if 6 degrees will do just about all of us in then 4 degrees could knock of half of us pretty easily.

    People often envisage gradual changes with climate change; gradual heating, gradual increase in droughts and floods etc. However, a rapid change of even 2 to 4 degrees is quite likely to take the climate past various tipping points and severely destabilise it. Instead of a smooth change there could be a shift to a very chaotic climate state before the climate attains some sort of new equilbrium. The new equilibrium if attained would be far less livable than now but the chaotic transition state before the new equilibrium could be even worse. It’s anyone’s guess how long achaotic transition state could last. It coould be anything from 100 to 1,000 to 10,000 years.

    “The past 10,000 years are anomalous in the history of our planet. This period during which civilization developed, was marked by weather more consistent and equable than any similar time span of the past 100 millennia.” – Wallace Broecker Scientific American Nov 95.

    Thus we are forcing the climate out of this fortuitous holocene climate benignity which enabled civilization to develop. As Broecker implies, our climate once forced out of this phase is likely to become much less consistent and equable.

  24. Greg vP
    November 28th, 2012 at 13:52 | #24

    ts :
    US oil production is set to surpass Saudi Arabia by 2020 and become a net exporter according to the International Energy Agency.

    This idea, if it takes hold in policy circles, may do more for world peace than just about anything else. With luck, the US will scale back its interference in Latin American and Middle Eastern politics…hmm, maybe not.

    (Of course the idea is predicated on the assumption that multiple-reservoir-contact wells employing multi-stage fracking won’t be drilled in Arabia – the technology somehow stops working at the US border. But we’ll just ignore that.)

  25. MG42
    November 28th, 2012 at 14:17 | #25

    ts :
    US oil production is set to surpass Saudi Arabia by 2020 and become a net exporter according to the International Energy Agency.

    When Australia/Norway do well from extractive industries: “LOL. It’s a resources boom. Doesn’t count.”
    When the US does well from extractive industries: “The victory of capitalism over socialism, of hard work over handouts, free markets versus slavery….”

  26. Greg vP
    November 28th, 2012 at 15:15 | #26

    @Ikonoclast
    Thanks for the reply, Ikonoclast.

    The effects of climate change will be disastrous for natural ecosystems. That is, they would have been, if we hadn’t trashed them all already. What we’re doing by burning all that oil and coal so quickly is really just screwing closed the coffin lid a little sooner.

    But as long as we have a modern technological civilization, humans should be able to cope with the effects, with only the same level of damage as that we freely inflict on ourselves–as far as I can tell. And it’s hard to see how we lose that civilization. Remember Adam Smith’s advice: “there is a lot of ruin in a great nation”. In a global civilization there’s even more.

    (Yes, we’ll probably have to abandon some regions, and we’ll certainly have to shift away from the coast, but we can do that easily. We rebuild our infrastructure every thirty to fifty years anyway. The lessons of Sandy vs. New York are being taken. Finally!)

    There are certainly long-run dangers. IMHO, the biggest of these is loss of topsoil due to drying, a general increase in wind speeds, and a great increase in the severity of the worst floods and dust storms. Over time the cumulative effect of increasing the rate of topsoil loss might be very awkward. We’ll need to do something about that.

    Non-linearities in the response to climate forcing are certainly possible, even likely. And they will cause spikes in the death rate. But how big will those spikes be? Surely we can put some bounds on the numbers, but it seems as though no one has tried. When I try four degrees in a back-of-the-envelope exercise, I get excess deaths in the region of 12 million in a bad year (which matches the “up to a billion” quote). I’d like to see what I’m missing and doing wrong, though.

    Non-linearities are possible, but I haven’t come across reports of hyperkinetic chaos showing up in climate models (along the lines of the movie “The Day After Tomorrow”). Yes, the South Asian Monsoon becomes erratic, the intensity of the worst storms and droughts increases, the Amazon becomes savannah, etc., etc. Things change far too fast for ecosystems to adapt. But too fast for machine-wielding humans? That I haven’t heard.

    Things get over-hyped in the media. The Great American Drought of 2012, for instance, has reduced global food supply by no more than five percent; likewise the Great Russian Heatwave and Pakistani Floods of 2010. No more than five percent. (One doesn’t see many counterbalancing reports about this year’s glut of rice in India.)

    We can easily cope (and we will cope) with much worse than five percent losses, simply by bringing Asia up to European and Australian levels of productivity and water efficiency, and building multi-year grain storage. And Africa is more or less untapped in terms of harvest potential – from a cursory look, it should be possible to increase harvests there ten-fold with only minor investment, certainly less than $1 trillion. We can diversify our “growing region portfolio”, and make the existing investments more resilient.

    It’s hard to see how we starve, or die of heat or dehydration or disease, or die of drowning, or from lack of energy, or from resource exhaustion (with the noted exception of topsoil), in civilization-threatening numbers. What’s left? Only self-inflicted wounds (i.e. war–bringing us back to oil, the stupidest ‘reason’ for war), or loss of the desire to reproduce.

  27. November 28th, 2012 at 15:38 | #27

    “…with the noted exception of topsoil…”

    Great! If the productive capacity of the world’s arable lands declines by, say, 50% due to this one alone – we’re looking pretty dicey. I think the idea is not that we all simultaneously drown or fry or starve etc.., but rather that lots of increasingly bad (different) types of things happen more frequently.

    Floods wipe out homes and crops in one place, fires and droughts wipe out homes and crops in another place, disease vectors grow all over the place, fish stocks plummet etc.. with sufficient magnitude to cause big problems, including a lot more deaths than normal.

  28. Ikonoclast
    November 28th, 2012 at 16:04 | #28

    I guess we are just speculating really. However, I see global food and fresh water shortages as the biggest looming problem.

  29. Ikonoclast
    November 28th, 2012 at 16:14 | #29

    There are so many compounding dangers one does not know where to start in listing them.

    http://www.abc.net.au/news/2012-11-28/un-warns-permafrost-is-melting/4396340

  30. ts
    November 28th, 2012 at 16:18 | #30

    Megan :@ts
    Apart from the many debunkings of the IEA available (eg: ‘theoildrum’), it was “North America” not “US” – ie: Canada = ‘tar sands’ (really bitumen). The IEA is an embarrassment.

    I haven’t read the actual report as it appears to cost EUR120 to purchase, however you appear to be very confident you are correct so I assume you have?

    The article I quote below (emphasis mine) from Bloomberg is incorrect?

    The U.S. will pump 11.1 million barrels of oil a day in 2020 and 10.9 million in 2025, the IEA said. Those figures are 500,000 barrels a day and 100,000 barrels a day higher, respectively, than its forecasts for Saudi Arabia for those years. The desert kingdom is due to become the biggest producer again by 2030, pumping 11.4 million barrels a day versus 10.2 million in the U.S.

  31. John Quiggin
    November 28th, 2012 at 19:59 | #31

    Those who think wind and solar can lead us out of this dilemma somehow envisage electric farm tractors and grocery delivery trucks putting food on the table. I don’t see it.

    Let me Google that for you

    http://www.smithsonianmag.com/science-nature/Forget-the-Volt-Make-Way-for-Electric-Trucks-169807746.html

    http://www.toledoblade.com/Energy/2009/12/09/Farm-tractors-go-electric.html

    Generally speaking, I’d suggest avoiding argument from incredulity

    http://rationalwiki.org/wiki/Argument_from_incredulity

  32. November 28th, 2012 at 20:30 | #32

    “The article I quote below (emphasis mine) from Bloomberg is incorrect?”

    Yes.

    The media is also an embarrassment.

    Almost all those millions of extra daily barrels of “US” oil come from Canada.

  33. quokka
    November 28th, 2012 at 20:52 | #33

    @John Quiggin

    I’m not sure what dilemma you are referring to, but if it’s a question of fuels for ICE propelled heavy transport or agricultural machinery, I can’t see why CNG could not substitute relatively painlessly for petrol or diesel. There may be some reduction in CO2 emissions and improved engine life.

    It doesn’t materially affect the issue of emissions, but it does address “peak oil” which in any case may not be upon us for some time yet.

  34. November 28th, 2012 at 21:49 | #34

    Speaking of the state of our media, how many people in the West know that Russia is the world’s largest producer of oil? They out-produce KSA.

    When you look at all the rubbish in the media and from IEA and CERA etc.. you’d be forgiven for thinking that all “our” ‘oil’ comes from Saudi Arabia.

    In October 2012 Russia produced 10.46 million barrels a day of crude oil. Not “unconventional” oil, but the real thing. That should help put the IEA story into perspective.

    Also, the USA gets most of its oil from non-middle eastern countries as it is. The meme of “middle east + oil + war” is, literally, part of the whole US military industrial complex Eisenhower warned about.

    If you stood at Niagara Falls for 8 hours straight and watched the volume of water going over you would see the rough equivalent (in volume) of the oil that the world burns through every single day.

    Finite, non-renewable, complex hydrocarbons – every day.

  35. November 28th, 2012 at 23:55 | #35

    PS: And as an added bonus! About 98% of the 270 million ‘barrels’ of water going over Niagara Falls every day are melt-water from the last ice age – rather than natural rainfall or seasonal melting snow.

  36. BilB
    November 29th, 2012 at 04:27 | #36

    Further to #21,

    Saab, the truck division, before being bought by the Chinese were developing a 9 litre E100 engine. This ethanol fuelled engine was to power trucks, busses, tractors, and farm machinery. When an engine is built to take full advantage of ethanol’s high octane rating it is as efficient as standard diesel engines.

    Now no one is saying that there is enough ethanol production capacity in the world to do a mono fuel conversion to ethanol from petrol and diesel, whereas the deniers use this argument to attemt to say that bio fuels are a waste of resources as they cannot be a monofuel solution. But ethanol, along with bio diesel, bio mass, solar wind tide wave and geothermal electricity forms part of the renewable energy fuel mosaic that will be our children’s energy future. And that is a future really to live for.

    I think that the full transition to renewable energy will take 60 years, but the bulk of the transition can be achieved in 35 years, less if there was a determined global effort to achieve the transition. Fossil fuels will be being used still in 200 years, but only in the most extreme or remote places.

    One thing that is finally being appreciated universally is that solar energy is not only distributed energy generation (conversion), it is also distributed investment. In other words the process of conversion to renewable energy will be bourne by every one individually, and each person/household will get the benefits of that investment directly. And that direct return translates into an increase in each person’s standard of living when compared to the present and the near future fossil fuel (including nuclear) energy situation.

    But what amazes me about this is that I am yet to see any economist take this understanding and rethink future economic outcomes based on this future reality. Distributed electricity generation where it provides all of family electricity consumption, water heating, airconditioning, and the powering of the family vehicles, will by 2020 amount to a 20% improvement in the standard of living, not to mention quality of living. Furthermore it also amounts to economic growth without resource consumption once the renewables energy transition has been completed.

    Quite some years ago I was negative to the view that the market was the solution to the fossil fuel dilema. But with the knowledge that I now hold of how the future will shape up I see that, whereas the market is hopelessly inefficient as a strategioc performer, once pointed in the right direction the market is very efficient at driving a transition from older to newer technologies. One only has to look at the impact of the iPhone concept along with all of its downstream consequences to see that this is true. The iPone was impossible until a number of key technologies were developed, but once those technology elements became a reality along with the correct degree of creative thinking, the iPone solution was inevitable. It took nearly 20 years from the first attempts by apple to pull off the hand held computer solution ( I know this because I spent a lot of money on their very first releases) but persistence prevailed and the market did the rest.

    The very same path is certain for renewable energies. At the moment there is a tsunami of technological change heading our way. Once sufficient solutions (solar conversion compounding, batteries technologies, control systems, smart transmission systems, etc) have stabilised into an economically manufacturable amalgamation, rapid transition will begin. In preparation for that change the Carbon Pricing device is setting the stage by raising the market cost of BAU competitive energy solutions, bringing the forward the transition commencement time. Once the conversion to renewables is well under way the Carbon Price will no longer be necessary as the economics of the distributed energy model far exceed that of BAU the fossil fuel model.

  37. rog
    November 29th, 2012 at 04:35 | #37

    This says it all, imagine Syd/Mel with two driver reviver stops and $0 fuel cost.

    http://www.businessweek.com/articles/2012-09-25/tesla-fires-up-solar-powered-charging-stations

  38. BilB
    November 29th, 2012 at 04:51 | #38

    And here is a little further reading, courtesy of The Oil Drum links, that seems to be relevent (haven’t read it yet)….

    http://www.peakprosperity.com/blog/80037/new-future-energy-policy

  39. Greg vP
    November 29th, 2012 at 05:24 | #39

    BilB :
    One thing that is finally being appreciated universally is that solar energy is not only distributed energy generation (conversion), it is also distributed investment. In other words the process of conversion to renewable energy will be bourne by every one individually, and each person/household will get the benefits of that investment directly. And that direct return translates into an increase in each person’s standard of living when compared to the present and the near future fossil fuel (including nuclear) energy situation.
    But what amazes me about this is that I am yet to see any economist take this understanding and rethink future economic outcomes based on this future reality. Distributed electricity generation where it provides all of family electricity consumption, water heating, airconditioning, and the powering of the family vehicles, will by 2020 amount to a 20% improvement in the standard of living, not to mention quality of living. Furthermore it also amounts to economic growth without resource consumption once the renewables energy transition has been completed.

    On the contrary, Bilb, economists have thought about this, at least cursorily, and the picture is not so rosy. There are a few drawbacks.

    First, the payback period is several years. If a household invests in solar in its current house, it is “trapped” in that house until the investment has paid off, unless the remainder of the investment can be capitalised when the owners sell. But as things are, even when there is a premium, the buyers discount the value of the system because they don’t know what it does or what condition it is in.

    Economists tend to be fans of the idea of people being able to go where the jobs are, when the jobs are there. So they don’t like things that pin people in place.

    More importantly, investment is a function of income and follows a Pareto-type distribution. Most households do very little investment; the bulk of it is done by a minority of mainly older households. It’s not very reasonable to say that young adults with low incomes and young (expensive!) children should have to make a lump-sum investment in solar on top of everything else they need.

    Distributed power generation sounds attractive–power to the people, and all that–but it turns out that centralised generation with distribution almost always works out cheaper (large investors borrow more cheaply), as well as being better maintained and therefore more reliable (as seen by individual households). And there are the benefits of cost smoothing and pay-as-you-go. The costs of repairs and maintenance are shared as a continual small charge, rather than being a bolt from the blue when a tree falls on your PV system, or you have to replace $10k of batteries all at once.

    The effect of promoting and subsidising household-level distributed solar has been to take the tax money of poor people and give it to relatively affluent people. But hey, that’s just consistent with the drift of policy over the last three decades…

  40. rog
    November 29th, 2012 at 05:33 | #40

    According to Tesla the rapid charging stations will be powered by solar, which will neuter the argument that they are swapping oil for coal as primary energy source.

    http://www.technewsworld.com/story/76251.html

  41. Hermit
    November 29th, 2012 at 05:51 | #41

    According to Peak Oil Australia in 2011 we produced just 36% of the oil output of year 2000. That is a dramatic decline exposing us to billions more in escalating import costs. Some suggest heavy vehicles switch to compressed or liquefied natural gas CNG or LNG. However a rapid shift to gas as a transport fuel could cause a price shock to the current industrial customers for gas. Suppose the diesel rebate was fully withdrawn and truckers had to pay say $1.40 per litre of diesel. That’s for 35 MJ of energy which is 4c per MJ or $40 per GJ. Industrial gas is about $5 per GJ.

    There’s still the question of excise, costs of compression or liquefaction and engine conversion. The point remains that the transport industry is prepared to pay a number of times the unit price for energy that the stationary sector is. The resulting price shock (at least double you’d think) from transport demand could be too steep for power stations, food processors, households and other non-transport gas users.

    There’s been some talk of a national domestic reservation policy for gas like the 15% in WA. Perhaps we’ll need two interventions
    1) setting aside some gas from export
    2) setting aside some non-export gas from transport.
    In other words keeping the gas price artificially low for some users.

  42. Newtownian
    November 29th, 2012 at 06:03 | #42

    @Greg vP

    “Distributed power generation sounds attractive–power to the people, and all that–but it turns out that centralised generation with distribution almost always works out cheaper (large investors borrow more cheaply), as well as being better maintained and therefore more reliable (as seen by individual households). And there are the benefits of cost smoothing and pay-as-you-go. ”

    Technically true but there are a couple of complications here. The first is the price gouging by the distribution companies like the 46 c kWh peak in NSW v. generating cost around 6 to 8 kWh. This is making home generation and storage increasingly attractive with oncoming price hikes. The fun time will be around 2016 when the subsidies are removed.

    Another important issue if personal preference/perception. An illustrative albiet slightly different example is rainwater tanks which dont make much sense in terms of conventional economic analysis (at least before recent price hikes to pay for desalination). But there was still a lot of interest and uptake probably because of the personal satisfaction gained. Maybe this says there is more to people’s personal selection of energy source than price alone.

    Conversely there is the solar thermal hot water situation – very cheap energy – but which has quite low uptake still. My point here is that response to commodity availability isnt fully rational in both directions.

  43. Greg vP
    November 29th, 2012 at 06:16 | #43

    Ikonoclast :
    I guess we are just speculating really. However, I see global food and fresh water shortages as the biggest looming problem.

    I used to think so too, Ikonoclast. I recommend reading Kay McDonald’s blog “Big Picture Agriculture” for a while, and reviewing the Wikipedia articles for Maize, Rice, and Wheat–especially the “heat maps” of production and the discussion of yields in Asia versus those in Europe and the USA. There is so much unused potential in food production, it’s ridiculous.

    We could triple food production and shrink the area of land used, without any GE nonsense, through a sub-trillion investment in farmer education, banking regulation and anti-corruption measures (so farmers can borrow to invest, and keep the benefits of investment), eliminating regulations prescribing what farmers are to grow and the price they sell at, and (finally) irrigation and transport improvements. Don’t listen to the hype about “food crisis” and “must have GE now now now”: it’s rubbish. All we need is what worked in England and Australia.

    Food production and distribution are seriously inefficient, so there’s plenty of “buffer” against the effects of climate change. Why are they so bad? Because of politics. There are a lot of things wrong, but I’ll just give you the top problem.

    If you’re worried about food security, persuade the EU to get rid of its farm subsidies. As well as distributing food production more widely across the globe, that would help the poorest people in the poorest countries to start to make a living–two virtues for the price of one. No, wait, it’s three: the subsidies come out of taxes, so this is another case of money being taken from (relatively) poor people and given to rich landowners and large corporations. Stopping that would be good.

    Water security is also a function of income. If a farmer has a decent income, she can invest in rainwater detention and piped irrigation. She can also hire others to work on her farm, so they can then afford clean water to drink. (Life is different in poor countries.) A country whose citizens have higher incomes can build more effective water cleaning and management systems (pace JQ and the Murray-Darling mess).

    Once again, the EU’s and the USA’s farm subsidies are the biggest evils here. The world got rid of CFCs in the Montreal Protocol. Can it get rid of the EU’s Agricultural Policy?

  44. John Quiggin
    November 29th, 2012 at 06:17 | #44

    billions more in escalating import costs

    Well yes, but since the Australian economy produces a billion dollars every four hours, you need a lot of billions before you have a noticeable impact on anything. Putting some actual numbers down, Aust imported $15 billion worth of oil in 2010
    http://www.indexmundi.com/australia/oil_imports.html
    and exported $10 billion
    http://www.indexmundi.com/australia/oil_exports.html

    The gap of $5 billion is about 0.3 per cent of national income.

  45. Ikonoclast
    November 29th, 2012 at 06:55 | #45

    On the original topic, Prof. J.Q. is certainly correct to say, “So, if the multi-trillion dollar Iraq war really was a “war for oil,” it was exceptionally ill-advised.”

    Economically it makes no sense to prosecute a $3 Trillion war to secure Iraqi oil imports… which oil could have been purchased from Iraq or elsewhere by open trade in any case. $3 Trillion would have purchased a lot of renewable energy transition.

  46. Newtownian
    November 29th, 2012 at 07:00 | #46

    @rog

    “This says it all, imagine Syd/Mel with two driver reviver stops and $0 fuel cost.

    http://www.businessweek.com/articles/2012-09-25/tesla-fires-up-solar-powered-charging-stations

    This looks more like moonshine than sunshine.

    Cynicism aside it doesnt consider the bigger exergy and emergy issues http://en.wikipedia.org/wiki/Emergy http://en.wikipedia.org/wiki/Exergy which dont seem to be getting recognition here by name even though much of the discussion is implicitly about environmental economics and these concept.

    What I have been hoping to see is something along the lines of this extreme but illustrative analysis Bardi, U., 2010. Extracting Minerals from Seawater: An Energy Analysis. Sustainability 2, 980-992. (open access journal) whose bottom line is it takes more energy to extract uranium from seawater than you would ever get out. – an excellent example of the Red Queens Race.

    Or this more nuanced assessment Steen, B., Borg, G., 2002. An estimation of the cost of sustainable production of metal concentrates from the earth’s crust. Ecological Economics 42, 401-413. which starts to quantify the horrific impacts of Herman Kahn’s proposal for mining bedrock in search of commodities – which we currently avoid by virtue of high grade ores and cheap energy especially oil still being available.

  47. Greg vP
    November 29th, 2012 at 07:02 | #47

    @Newtownian
    Complications: agreed. Notice how they arise from forcing the market model onto a situation where it doesn’t really fit.

    Preferences/rationality: I have no problem with choice, but I do object when governments force poor people to pay to enable richer people to indulge their whims.

  48. BilB
    November 29th, 2012 at 07:05 | #48

    GregVP #39,

    Greg, your comment is riddled with false assumptions.

    The assumption that a person who has fitted solar to a house and then decides to relocate is trapped in their present house is false because a) the person can move and take the loss along with all of the other losses that one incurs in the course of moving. b) You make the assumption that there are no houses on the market with solar fitted in the location to which the person is moving. This is almost certainly false for a number of reasons not the least of which is that solar is more common in houses of a certain price range and/or servicing income level, so equivalence is more probable than not.

    The assumption that solar is unaffordable and will continue to be indefinitely is false because a) solar system costs are declining steadily while their efficiency is increasing with better technology in all of panels, inverters, and storage. b) As fossil based energy costs rise the investment times reduce because the cost of a system is ultimately paid from the ….offset costs….. ie the savings made through having the system When wall charged electri vehicles are included in this package then those offset costs take in the family’s petrol bill. This feature loops back to demonstrate that people are not trapped in their house as the cost of the system represents a zero extra outlay. In fact many installations represent a line item on the consumers electricity bill which for those lucky enough to be on the FIT gravy train is often zero for the whole bill.

    Trees falling on rooves, destroying a complete solar array in the process?? Please. Have you got any probability figures on that? A very very small part of 1% is most likely.

    Big investors borrow more effectively? You’re over looking the fact that the benefit to the “big investor” is a function of their yield (selling price less costs) 6 cents per unit less costs. The benefit to the householder is a function of their buying price 25 cents per unit less finance servicing costs.

    In my assessment of distributed solar I assume absolutely no government involvement at all. ie no “tax money of poor people and give it to relatively affluent people”, at all. The upcoming distributed solar energy systems will be fully viable on the offset costs alone, and have repayment times under 6 years in most cases. Furthermore they will have indefinite life spans with only minor periodic maintenance.

    If you are one of the economists that has given this subject “cursory attention” then I suggest that you do the work again as I do not see that you understand the economic model at all.

  49. Greg vP
    November 29th, 2012 at 08:18 | #49

    @BilB
    Bilb, it doesn’t matter whether the assumption is true or false.

    The Sunk Cost Fallacy is a fallacy, but it affects people’s behaviour anyway. When house prices fall, some houses are withdrawn from the market. When asked why, the owners say that they will wait until they can make their money back. No-one has suggested they’re lying about their motivation. The same behaviour is observed for other sunk costs: people wait until they make at least a nominal profit.

    People are more rational when it comes to benefits: they won’t pay for them if they don’t believe the claims made for them. Even if two houses have PV, a family moving from one to the other will be dubious of claims about the health of the batteries and the performance of the system in the second house: after all, they don’t know how well the sellers looked after the system.

    In your model, PV systems are miraculously reliable machines and everyone knows this. In reality, they’re not and they don’t. The systems have major ongoing costs, and accidents do happen to them. It is easy to insure the capital cost of a PV system, but not so easy to insure the cost of negotiating for its replacement and the time spent without its services. And there are other risks; among them, the fire hazard from a twenty-year-old PV system, installed by an average installer in an average suburban house and having received average inattention, is presently unknown. People are rightly chary of claims made about PV.

    Meanwhile, distributed PV drives up overhead costs for distribution and per-unit generation costs, so poor people pay anyway.

    (Off topic: I like PV. I wish these problems did not exist. But the invisible pink unicorn hasn’t answered my prayers.)

    The appropriate investor for natural monopolies is a government. Properly run governments look for a social return on investment, not so much a financial one. (This view is unfashionable these days, I freely admit.)

    If we must have private investment, I don’t see why households should not share some of the benefit they derive from a safe, reliable electricity service. Trying to keep the whole pie means someone is going to go hungry.

  50. Ikonoclast
    November 29th, 2012 at 08:44 | #50

    @Greg vP

    “It is easy to insure the capital cost of a PV system, but not so easy to insure the cost of negotiating for its replacement and the time spent without its services.”

    It certainly is easy to insure a PV system. When I asked my house insurer they said. “Is it (the system) bolted onto the house?” I said, “Yes of course.” Reply was, “Then it’s covered by your existing policy. Just reveiw your total insured value and ensure you are satisfied with that.”

    As for storm damage, a storm which extensively damages solar panels or associated equipment is, in most cases, going to cause other extensive damage to the house. In that case it’s a general claim and no more onerous to make as a claim just because solar equipment is involved.

    As for moving, the only real loss is the loss of the solar subsidy IF your selling price and buying price are both for houses with equivalent systems and both are similarly discounted in the market with respect to the attached solar systems. Moving houses entails all sorts of costs and benefits. People weigh up these costs and benefits as best they can. People are certainly not totally rational, perfect calculating agents who can fully assess all economic utility to the nth degree. There are too many uncertainties and too many problems of complex, combinatorial mathematics for that to happen. Not to mention emotive factors… oops, I mentioned it.

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