Any discussion about peak oil and oil prices over ...

2010-07-04T17:34:46.329-05:00

Any discussion about peak oil and oil prices over the next decade must include an attempt to quantify emerging economy demand as an important driver at the margin. Here is a simple thought experiment using Chinese demand to give some idea of the magnitude of the supply issues we face:
- China moves from 3 bbls/person/year to the South Korean per capita consumption level of 17 bbls/person/year
- Transition takes 30 years
- No peak in global production

In next 10 years we must find 44 million BOPD. If you superimpose peak production on top of this demand profile using the following parameters oil prices would increase approximately 250% in real terms over next 10 years:
- Oil demand elasticity of -0.3
- Current production 84 million BOPD, current price US$ 80
- Peak production 100 million BOPD
- Post peak decline rate of 3-4%

If you want to try the model for yourself using your own assumptions it can be found at Petrocapita Income Trust:
www.petrocapita.com/index.php?option=com_content&view=article&id=128&Itemid=86

sorry, but the point of peak oil isn't "running ou...

2007-06-20T00:03:00.000-05:00

sorry, but the point of peak oil isn't "running out of oil," the way you run out of oil if you keep driving and forget to fill your gas tank. The world will probably never "run out" of oil in that sense. Peak oil happens when demand continues to increase while production declines. Because virtually EVERYTHING in our economy depends on oil, this causes increased prices and shortages, enough to lead to a worldwide economic depression or worse. Oil does not actually RUN OUT, mind you, but supply VS demand makes it prohibitively expensive to run a modern economy on it.

Unfortunately, it is possible that retooling the entire world economy to NOT be dependent on oil may take longer than we have once we begin to have problems with oil supply. If we have 10 years before oil prices are due to throw the country into double-digit inflation and it will take 15-20 years to switch over to a different energy source, then waiting for demand to CREATE supply equates to waiting for civilization as we know it to end.

It's also a matter of output for input. Oil runs the equipment you use to drill for oil. For instance, if drilling oil wells in Saudi Arabia costs 1 barrel of oil in energy to extract 30 barrels of oil, that's a pretty good deal, energy profit-wise. The Canadian oil sands cost about 1 barrel to extract 1.5 barrels. Since energy fuels the economy, THINK WHAT THAT WOULD DO TO THE ECONOMY. It would be like having a 70% tax on everything. Think how fast oil reserves start going when it costs almost the amount of oil you are extracting to extract it. Shale oil is even harder to extract. Trying to get oil from 6 miles under the ocean, also far more expensive in oil to get the oil.

Since IT WILL TAKE ENERGY to switch to any ingenious solution to the problem, you'll be in a bit of a hole attempting to switch over to it (whatever it might be) once the energy supply is already drying up. Would you rather be desperately building nuclear power plants while gas still costs around 3 bucks and inflation is single-digit, or would you like to wait until the entire economy is going into a major depression and fuel is prohibitively expensive or only sporadically available? Dump trucks and cranes run on GAS, y'know. So, ultimately, do the factories that might make alternate-energy dump trucks and cranes, if such a technology becomes feasable.

Think of it as if you're in the desert. You have a canteen full of water. You have a way of digging shallow holes for water that has worked so far, but all holes of that depth are working much less efficiently now. Digging at that depth yeilds SOME water, but not enough to make good on the sweat you lose from digging the holes. You can start digging a much deeper hole to get water, but again, you will sweat and need to drink water to survive. If you wait TOO long, and drink too much from your canteen prior to starting the work, you could end up with not enough water in your canteen to survive to finish the job of digging deeper for more water. You can still extract water from the shallower holes, some water IS there, but you will still die because you have to sweat a prohibitive amount of water to work on digging it up. Humanity probably won't die as a whole, but we could lose the civilization we now enjoy, along with many individuals.

This is simple logical stuff, like the characters in Atlas Shrugged explaining rationally what has to be done to keep an industrial civilization going, and people refuse to give it a hard look, refuse to take action or make decisions. "human ingenuity will save us," sounds frighteningly like the looters telling Dagny or Readen, "YOU'LL think of something to get us out of this." If EVERYTHING YOU DO is fueled by one product, even attempts to switch away from that product, and supply goes down while demand goes up, what happens? What is the unavoidable, logical conclusion, eh? Barring someone pulling desktop cold fusion out of their ass, what can just-in-time ingenuity do for us?

Merely finding fuel 6 miles beneath the ocean, or embedded in shale or sand does not automatically guarantee that you will be able to extract that fuel at a COST OF FUEL equal to what you paid before. Hence, the problem.

Thanks Rohan. I like to say "oil is created by hum...

2007-01-27T16:41:00.000-05:00

Thanks Rohan. I like to say "oil is created by human ingenuity". When we run out of that, or it's shut down, that's when we'll run out of oil.

Comments on Rohan's Rants: Peak Oil

Any discussion about peak oil and oil prices over ...

sorry, but the point of peak oil isn't "running ou...

Thanks Rohan. I like to say "oil is created by hum...