[Graeme]

Peak Oil for Economists

A few quick thoughts on Jim Hamilton's new magnum opus. The paper is essentially a summation of Jim's current thinking on the evidence that peak oil is near enough to care about and that it's likely to be quite economically disruptive. It is thoroughly researched, superbly argued, and very clearly written, as one would expect from this author. I hope and expect that it will be quite influential in getting economists to take the whole subject more seriously.

earlywarn

[Graeme]

Peak oil is about price, not supply

But peak oil as it turns out isn’t about supply but rather demand. It is a concept rooted more in economics than geology. It doesn’t matter if there are billions of barrels of oil waiting to be tapped from oil sands or oil shales if the prices to extract them are beyond our economies’ capacity to pay.

The peak in our oil consumption will be determined by our ability to pay ever rising prices for the fuel, not by the ability of those same prices to drive new sources of supply.

The energy industry’s task is not simply to find new fuel sources but to find new supplies of oil our economies can afford to burn. While the energy industry has an impressive record on the first count, it has a much less impressive track record on the second.

It has taken successively higher prices to get that extra barrel of oil out of the ground. The price of Brent oil, the benchmark used for most of the oil traded on world markets today, has traded in triple digit range since the beginning of this year.

theglobeandmail

[The Practician]

The Issue is only "economic" in nature if that's the way you insist on looking at it.

[babystrangeloop]

Oil Prices, Exhaustible Resources, and Economic Growth* (PDF, 63 pages, 6.8 MB)
James D. Hamilton
Department of Economics
University of California, San Diego

... The historical record surely dictates that we take seriously the possibility that the world could soon reach a point from which a continuous decline in the annual flow rate of production could not be avoided, and inquire whether the transition to a pricing path consistent with that reality could prove to be a fairly jarring event. ...

... What we do know is that, for whatever reason, Saudi Arabia produced 600,000 fewer barrels each day in 2010 than it did in 2005, and with growing Saudi consumption of their own oil, the drop in exports from Saudi Arabia has been even more dramatic. ...

... If a peaking of global production does result in further big increases in the price of oil, it is quite possible that the expenditure share would increase significantly from where it is now, in which case even a frictionless neoclassical model would conclude that the economic consequences of reduced energy use would have to be significant. ...

... Coping with a final peak in world oil production could look pretty similar to what we observed as the economy adapted to the production plateau encountered over 2005-2009. That experience appeared to have much in common with previous historical episodes that resulted from temporary geopolitical conflict, being associated with significant declines in employment and output. If the future decades look like the last 5 years, we are in for a rough time. ...

[evilgenius]

Is the thesis that economics comes into play because a shrinking economy (shrinking presumably from a hard geological feedback loop) cannot pay for higher and higher extraction cost based oil? If this is so what does everybody think about the situation of various economies, such as the Chinese who have a more advantageous position both in terms of investment capital to spend on resources (for the time being) and the seeming political ability to marshal their society around a singular stance when it comes to energy usage. In the West the only counterpart would seem to be rationing, whereas the Chinese can use political leverage. Also, the oil producing economies, especially the patronage modeled ones, don't seem to be in a very good position at all. When the subsidies go their people turn out onto the streets. They would never be able to ration so that they could sell more. It looks like a lose - lose proposition for those patronage governments, unless you consider the impact of war on the general mindset of the people.

[Pops]

I don't get it, It's always been about the price, price driven higher by supply that can't meet demand.

It's never been about running out overnight. Consumers outbid overnight maybe, but even when the supply is half what it is today someone will have oil because they can afford to pay the price. It might be that the price is only $2/bbl and only half as many people will be able to afford $2 but it will still be about price.

All these articles about "peak demand" make me laugh, as if being unemployed and unable to afford unleaded for a Sunday drive to the lake to ski is some refutation of the limits to growth -

"Ha Ha! See we told you the population would stabilize! Now that a billion people a year are starving to death it proves there is no such thing as over-population! Nya-Nya!"

[ralfy]

Might be helpful:

"On the cusp of collapse: Complexity, energy & the globalised economy"

http://www.energybulletin.net/stories/2 ... ed-economy

[The Practician]

Oil is now difficult to produce with a low eroei. The cost of production (with a few exception--primarily exporting nations and Chinidia) is higher than the cost of operating modern industrial retail economies and advanced infrastructure. Thus breakdown of financial systems. World prices vacillate everywhere chaotically or simultaneously. The usual supply/demand/price equation has gotten very confusing. Demand destruction bounces around the world and problems cascade across borders.

Yes, pstarr, yes, but unless you define the real, physically unavoidable issue of EROEI with the abstract symbols of economics ($), economists can't understand it!