The Economist on Oil

[jducoeur]

For those interested in the oil-price mess, I commend this article from this week's Economist, which is an admirably calm viewpoint on the subject.

The main point of the article is to debunk the theories going around that there is something Weird and Interesting going on. On the one hand, they address the question of "peak oil" -- the notion that the world has reached its maximum oil production, and will now taper off quickly. To that, they make the point that there's good reason to believe that there's still a lot of oil out there: it's just becoming more expensive and politically difficult to explore and drill new sites. It's not that the oil isn't there; it's that we aren't working together to get at it. (Of course, there are all sorts of reasons for that, some of them arguably good ones. The point is that we're probably *not* running out of oil yet.)

OTOH, they pop the notion that there's a speculative bubble driving the price rise. While there *is* a good deal of speculation, it's still just a drop in the bucket (as it were) of the total oil market. And since it's physically difficult to hoard oil, the speculation shouldn't be able to affect prices as directly as most bubbles do.

Instead, they argue that the problem is one familiar to any first-semester economics student: supply vs. demand. They've been very finely balanced in recent years, which means that little shocks can produce strong effects. Worse, since both demand and supply are relatively inelastic (that is, they don't respond quickly to changes in price), prices tend to rise much more aggressively than they would in an elastic market that can alter supply and demand quickly.

They do point out that there is likely light at the end of the tunnel: oil supply and demand do *eventually* tend to alter in response to price. Indeed, it's already begun to happen -- consumption in the developed world is already down a modest but non-trivial amount. But the developing world's demand is likely to keep rising for the foreseeable future, and it takes a fair while for new supplies to come on line. So while prices are likely to level off and fall in the long run, high prices will probably be with us for some while yet, and there's not a lot that governments can do about that -- it's just a matter of harsh economic reality. The world wants more oil than it's producing, so prices rise until that equation balances.

BTW, for those who (like me) have a gut instinct that high oil prices *must* be at least a good thing for the environment, since they will drive consumption down, the leader article in the same issue dashes a bit of cold water on that. As they point out, the high oil prices are making it economically feasible to refine from things like tar sands, which are even worse from an environmental perspective than burning oil...

Comments

[aneirin-awenyd.livejournal.com]

Yes, yes, yes. Good points.

I feel compelled to point out that "peak oil" does not in any way imply that the oil is going to run out soon. (I.e., "quickly" isn't part of the definition, as far as I understand it). It simply means that we (those on our planet) can no longer increase our demand and expect it to be met. (This alone is stressful enough for people to contemplate). I am one of those who believes we've hit the peak and we're already beyond it. The world as we know it is not going to grind to an instant halt, but demand must decrease. Either it will happen because people are voluntarily conscientious and searching for alternatives in advance of a future time when production really gets low, or it will happen because the prices will go up which will force demand down, but if demand surpasses supply, the effect is fairly predictable, as you pointed out.

I read recently that Mexico has already admitted to the U.S. that they cannot fill our oil order for the current year. I think it's good that people are already talking about getting creative where energy and fuel are concerned. It will be interesting to see how it plays out over our lifetime.

[alexx-kay.livejournal.com]

"I feel compelled to point out that "peak oil" does not in any way imply that the oil is going to run out soon. (I.e., "quickly" isn't part of the definition, as far as I understand it)."

And I, in turn, feel compelled to point out that, official definition or not, the popular consciousness has absorbed the faulty idea of "all oil will be gone soon".

(It bugs me that some SF writers are winning awards for stories in which they posit a near future where there is no oil. One of the worst offenders seems to think it plausible that soon, all storable energy will be in the form of *springs*.)

[corwyn-ap.livejournal.com]

And I, in turn, feel compelled to point out that, official definition or not, the popular consciousness has absorbed the faulty idea of "all oil will be gone soon".


To which I feel compelled to point out that, debunking the idea that 'all oil will be gone soon' does nothing to debunk the idea of peak oil, which mistake the original makes.

[alexx-kay.livejournal.com]

Which original? I've lost track of possible referents.

[corwyn-ap.livejournal.com]

Nano-springs? What is the purported energy density?

[alexx-kay.livejournal.com]

Not remotely nano; big ol' machined steel. I really doubt that the author would recognize the phrase "energy density".

[eclecticmagpie.livejournal.com]

Cool! The forge has plenty of springs stashed in the high-carbon steel bin. We're set, as long as we don't run out of coal as well as oil.

[learnedax.livejournal.com]

an admirably calm viewpoint on the subject

Well, that's the great thing about The Economist...

[laurion]

Agreed. I don't have the time to read the print version, but I have added their podcast feed and am enjoying the larger perspective it brings.

[jducoeur]

I've been reading the print version since my father bought me a subscription in college. It's obscenely expensive, but well worth it. I'm forced by lack of time to just skim much of it, but I've found that at least paying some attention to it is essential for me to feel well-informed...

[bess.livejournal.com]

I also believe that we have passed peak oil. What we're seeing now is the end of the age of cheap, easily available energy, and the future is going to look very very different than it looks now. I think one of the key parts is going to be relocalization and probably more organic farming and using human labor rather than oil to produce food.

[hudebnik.livejournal.com]

I don't think it matters whether we "have passed peak oil" yet: it suffices to know that there is a finite amount of it, which we've all known intellectually (but perhaps not faced) for decades. Once you accept that, it follows mathematically that demand WILL decrease, one way or another: either it decreases voluntarily and soon, or it decreases involuntarily as availability shrinks and prices rise.

In fact, you can write a simple formula for it: if the oil we burned last year is (say) 1% of the remaining world reserves, then we'd better reduce consumption (by whatever means) by 1% in the coming year. If we do this every single year, supply and demand will decline together, prices won't rise dramatically, and we'll reach zero remaining oil infinitely far in the future. If we stay ahead of this goal every single year, prices will fall and we'll reach an asymptote with some oil left. If we fall behind this goal consistently, supply will fall faster than demand, prices will keep rising, and we'll reach zero remaining oil at a finite time in the future... a time I don't want to live to see. (Yes, I know, the rising prices in themselves help to reduce consumption. But I'm not talking about why consumption decreases, only how much consumption decreases: if, for whatever reason, it doesn't at least match the fraction of remaining oil we just used, we're in trouble.)

BTW, for those who (like me) have a gut instinct that high oil prices *must* be at least a good thing for the environment, since they will drive consumption down, the leader article in the same issue dashes a bit of cold water on that. As they point out, the high oil prices are making it economically feasible to refine from things like tar sands, which are even worse from an environmental perspective than burning oil...


True, high producer prices lead to using sources like tar sand that weren't economically viable before, so the environment would be better off with low producer prices. But high consumer prices, for whatever reason, will still lead to conservation and efficiency. The environment is best off when consumer prices (for oil or any non-renewable resource) are significantly higher than producer prices, i.e. there's a tax in between, which is exactly what the article suggests. And it's the exact opposite of what the politicians are calling for in the run-up to the U.S. election....

[jducoeur]

Oh, sure. Indeed, my fading respect for John McCain took another blow when he started pushing for a gas-tax holiday, which is *totally* irresponsible...

[osewalrus.livejournal.com]

We also have a refining bottleneck. Crude oil does not come out of the ground in useable form. It must be processed. And refineries are very expensive to build.

As a consequence, you need a serious rise in demand to make it profitable to build a new refinery rather than simply raise the price of refining. Even then, it takes time to put the new refinery on line.

This is not helped by the fact that refineries are, by and large, vertically integrated with oil producers. The consequence is an incentive to use the monopolist efficiency equation for determining when to put new capacity on line.

And the war?

[metageek.livejournal.com]

It's good, but I'm somewhat surprised to see a discussion of oil supply and demand with no mention of the Iraq War.

Re: And the war?

[jducoeur]

I think that, from this viewpoint, Iraq isn't a central component of the problem. It's certainly an element, in that it's lessening supply, but it's just one of a number of factors. My read of the economics is that, had Iraq not happened, we probably would have still had the same crisis, just a couple of years later. (That is, demand would still have exceeded supply, just slightly later...)

Re: And the war?

[metageek.livejournal.com]

I'll buy that, but the article should say so. Not a major failing, just odd.