[dohboi]

jeffvail over at TOD has just come out with this interesting piece on geopolitical feedback loops to PO. Basically, it muddies the distinction between above and below ground factors in oil price and availability.

Geopolitical feedbacks to PO

"The peak and gradual decline in world oil production is beginning to spawn a set of geopolitical positive-feedback-loops that seem likely to exacerbate depletion and accelerate the effective rate of decline of world oil production. Rather than isolated incidents, these geopolitical feedback loops are the direct result of geological peaking in oil production. Unlike geologically driven peaking, however, the effective rate of decline caused by geopolitical feedback loops has the potential to continually accelerate."

This fits well with speculations I have posted here and elsewhere, though jeffvail states them with greater clarity and precision.

It is particularly timely as we see resource wars ratchet to a new level with Russia's invasion of Georgia.

[Twilight]

Great piece. ELM and above-ground factors in Mexico are definitely something to watch. That is going to be a whole textbook compared to Nigeria's chapter due to immediate proximity to a developed nation. There will be much better reporting out of there than most similarly afflicted places.

[TheDude]

+1. Jeff writes great pieces, really knows his stuff and I hope for another article from him focusing on Mexico sometime. Like Twilight says, imagine if Nigeria were next door to the UK. OK, some might say Turkey or Algeria are already there, you get the point!

[yesplease]

Beyond a few percent difference, the cost takes off to the point where alternatives become too viable for consumers, be them business, governments, or individuals, who seek to insulate themselves from fuel cost increases. If geopolitical trouble keeps too much oil off the market people will shift to alternatives on a large scale, which is bad for profit from oil on the long run. In order to remain viable the price of oil has to stay close to alternatives, or else people will just migrate away from it.

[TheDude]

You're assuming declining oil supply wouldn't impact ability to invest in the first place, whether on a personal or national level. This certainly wasn't the case in the 70s. The current economic meltdown doesn't lend much hope for massive investment, either. With tightening credit how much chance will a local government have to invest in renewable power, for instance? And with declining oil prices people will just go back to driving more, until another supply shortfall fires the price back up/impacts the markets/rush to commodities/energy prices go through roof again/economy takes another hit. Rinse and repeat.

OPEC has been terrified of the prospect of a rush to alternatives forever. Or in some cases, they considered it a noble goal to be encouraged: the Shah favored a $16/bbl price during the 1973 embargo because he had it on good word from an authority that this was where oil shale would become economic, thus stretching out the conventional oil, which would be used for better purposes than burning it up in cars or power plants. That sure didn't pan out, did it? And at 10x the price kerogen is still the oil of the future - and always will be, from the looks of things.

Like others, I believe OPEC are less worried now about their product becoming as useless in the future as spermacelli.

[yesplease]

Not exactly. I'm assuming that long run people will adjust to higher oil prices just like they did before, and in the short run GDP will drop/flat-line then increase, just like it did before.

Short run during the late seventies/similar price run ups the nation went from vehicles that average ~12mpg to many smaller offerings that could easily average ~30-50mpg while US GDP stayed flat or declined. Some of these cars are around today, so clearly there was the capital needed for investment. The only significant impact on investment is when the consumer does not change their level of consumption, diverting a proportional amount of wealth away from other economic sectors to keep pace with rising fuel costs. Clearly the consumer has reached the point where that isn't the case, and consumption has consistently dropped for the first time in decades. The shift in spending is even reflected in used car prices, with econoboxes that would've been lucky to go for a few hundred before the oil price run up appreciating several hundred percent, possibly into the thousands (percent) in extreme cases.

Attitudes and consumption changes, it simply takes time, and initially, just like it did last time, GDP takes a hit while consumers adjust. Even on the new vehicle front there are plenty new fuel efficient vehicles to reflect demand in that market. Aptera currently makes the cheapest (long run) new enclosed vehicle and has an entire years worth of pre-orders unless they ramp up production somehow, Toyota's supposedly set to come out w/ three new versions of the Prius, one of which may be a plug-in, Honda's supposedly coming out w/ a lower cost hybrid, which are all besides the point since most manufacturers offer relatively low cost (~$12-15k) vehicles that can easily see ~35-45mpg if driven conservatively.

For the people who can afford new vehicles, they'll have less capital, but will also tend to spend the same or less on a more fuel efficient vehicle. People who can't afford new vehicles will instead buy more fuel efficient used vehicles. More will take mass transit, and so on. In terms of renewables it tends to be cheaper to invest in them long run for everyone but the fossil fuel supplier and friends, but change takes time and current industries have plenty of leverage. I figure the price can't climb much about ~$200-300/bbl w/o alternatives looking too good to pass up. Even w/ oil prices at a hundred EVs in countries with much higher taxation look like slam dunks, and I wouldn't go so far as to assume that the oil producing countries aren't watching what happens.