About “Peak Oil”

Back during the summer gas crisis, I mentioned that peak oil was an irrelevent concept because at high gasoline prices, the cost of substitutes approach the cost of gasoline. That is, the higher oil prices go, the relatively cheaper substitues appears, to the point that a rising price of oil increases the effective supply of products just-as-good as gasoline.

Further, some of the rise in oil prices may have been speculation by oil producing countries. As Paul Krugman points out, the higher oil prices go, the more incentives oil-producing countries have not to pump oil.

Venezuela’s ouptut slumped 25% in the run-up to the oil crisis, by the way.

The cratering of oil prices may be a product not only of lower prices themselves (which increase incentives to pump oil), but also rising spending in oil-rich countries. Gulf Cooperation Council states need oil at about $50/barrel to pay for government spending, and a fall in oil prices naturally encourages them to either pump more or to cut back on spending.

We have a deeply warped energy market, and a heavily subsidized transportation market. Those who argue to let ‘the market’ decide our energy policy are short-changing our futures to save some money in the present.

My thanks to Calculated Risk for the excellent piece on oil that provided some of the links for this post, and to Coming Anarchy for a hilarious ad noting how oil has been running out for 30 years.

2 thoughts on “About “Peak Oil””

  1. Your perspective is very close to the typical economists perspective, and is dangerous and completely wrong. It ignores some fundamental realities of the physics of attempting to replace fossil fuels.
    While you are certainly correct about the market mechanisms that would fix the problem if it was easy to fix, it is not. In fact it is impossible to replace the energy that our modern life style requires. It is certainly true that if the market stays in place long enough, and the cost of energy gets high enough, the market will fix it. The problem is the actual point that occurs is near a stone age life style, and the market that is used to the continuous availability of cheap energy is collapsing years before the point that “alternates” become more profitable than fossil fuel.
    Please recalculate the cost of your “substitutes” being very careful to not include any hidden energy costs in the initial terms. You can ONLY calculate the feasibility of a substitute by doing all the math in energy and then multiply by the cost of energy to yield profitability. The economists way of calculating it is incorrect because it uses money throughout the calculations. This does not work because in order to be profitable, you must create energy rather than sink it, and as energy costs rise profitability is reduced rather than increased. It is easy to recalculate the business plans of many of the “alternate” energy business plans such as ethanol and shale, and understand why they all going bankrupt. It is because the higher that energy prices go, the more they lose, instead of the other way around.

  2. Dan,

    Thank you for your comments.

    Oil is a high-cost energy product that (so uneconomical it is rarely if ever used in power plants), but has the advantage of being ‘burned on the go.’

    Ethanol is in a similar situation. It may or may not be energy-positive. I really don’t care about that. The benefit of ethanol is that it allows us to reduce the amount of wealth we are transferring to countries like Russia [1].

    The energy source of the future may be coal. [2] I would be fine with that.

    [1] http://www.tdaxp.com/archive/2008/08/09/in-europe-at-least-global-warming.html
    [2] http://cominganarchy.com/2008/12/08/global-trends-part-6-energy-reality-check/

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