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How does the long-term trend of peak oil affect us, in terms of short-term events?

30 August 2008

Summary:  Peak oil is a long-term trend.  It affects us in the now through the episodic release of information, and our reactions to this information.  How well we manage this OODA loop will have a big impact on America’s economy over the next two decades.

Pat Lang (Colonel, US Army, retired) generously posted my article of 26 August about his views – “Colonel Lang shows us why the 21st century might prove difficult – even painful – for America” –  at his site, Sic Semper Tyrannis.  This sparked one of the vigorous and interesting debates typical of his site.  This post lifts out one question and my reply.

Question by Cieran, who writes at his blog “Cieran’s The Big Picture

I have one question, implicit in my earlier post, namely “how does peak oil operate in fast time, i.e., over periods measured in days or weeks instead of years or decades?”

The only way I can see for physical extraction processes to operate in fast time is in response to transient hazards, e.g., the hurricanes approaching the Gulf Coast can cause near-term fluctuations in production for specific reservoirs, and in this case the effect on global supplies would be mediated by the cumulative production in other unaffected regions.

It’s clear that peak oil operates on secular time scales (the various case studies in the Hirsch report document this very well), and it’s highly likely that the rate at which peak oil causes crude prices to increase with time will itself increase with time, so that its effect on price-time curves is to induce positive first and second derivatives (i.e., upward trends that increase in magnitude with time).

I can even see how some singularities might occur in the price-time curve as oil supplies run out, but that’s clearly not happening today.

So what kind of coupling mechanism do you see (besides the obvious one of market psychology, as Taleb has written so eloquently about in The Black Swan) that permits the secular physical response of peak oil to drive the near-term market oscillations that Colonel Lang (and his army of correspondents) has been discussing here?

Without such a coupling mechanism, some of your assertions about these SST posts risk becoming unsupportable, hence the question.  Thanks in advance for your consideration.

Fabius Maximus replies

Cieran – That is a complex and difficult question, and illustrates my earlier point about the length of articles necessary to answer questions in this field.  My newest post discusses a more simple peak oil question, takes 2300 words to do so (although a better writer could do it in less!), and relies on links for evidence (which I could increase 2x or 3x and still be insufficient).

Little research is being done about peak oil, so that many vital questions today can be answered only by guesses.  Like yours about the nature of the peaking process, this should be the subject of a multi-disciplinary team doing extensive modeling.

Since there is no literature to lean upon, think of this as a crayon sketch.

What is peak oil?

Peak oil is a multi-year transition of energy sources.  The connecting link between this long-term trend and short-term events (e.g., market prices) is information.  Think of it in term of the late John Boyd’s (Colonel, USAF) OODA loop (see Wikipedia, or this powerpoint).  We Observe changes, slowly Orient ourselves to changing circumstances, make Decisions, and then Act.

This process works slowly, as information drips out.  Geological peaking of fields has usually been recognized only after the fact. (e.g., the US 48 states, UK North Sea).  Political peaking, which it appears the King Abdullah announced in April, may be more slowly recognized.

Peak oil seen in our mind’s eye

The speed of this process is driven not just by flow of information, but by the crowd psychology by which insights and emotions spread.  This is more granular, often with discontinuous changes.

There are other factors.  To mention just two…

(1)  The amount and quality of information flow.  In energy, tiny and poor.  Does anyone here know the source of the Saudi production numbers that you see in the media and reports?  Of information about consumption and inventories of emerging nations?

(2)  The size and skill of the relevant institutions.  With respect to energy, we have only tiny funding to collect and analyze information.  Hence our reliance on inspired guessing by experts.  As David Halberstan said in The Best and the Brightest:

The elephant was great and powerful, but preferred to be blind.

Please share your comments by posting below (brief and relevant, please), or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information about Peak Oil

Crude Awakening: Behind the Surge in Oil Prices“, Federal Reserve Bank of Dallas, May 2008 (3.2 meg PDF) — The best analysis I have seen of what is driving up oil prices.

Here are some of my posts about Peak Oil.

  1. When will global oil production peak? Here is the answer!, 1 November 2008
  2. Links to articles and presentations of some A-team energy experts, 11 November 2008
  3. The most dangerous form of Peak Oil, 8 April 2008
  4. The three forms of Peak Oil (let’s hope for the benign form), 23 April 2008
  5. The world changed last week, with no headlines to mark the news, 25 April 2008
  6. Peak Oil Doomsters debunked, end of civilization called off, 8 May 2008
  7. When the King of Saudi Arabia talks about oil, we should listen, 2 July 2008
  8. The secret cause of high oil prices, 6 August 2008

Here is an archive of all my articles about Peak Oil.

Here are other resources to learn more about Peak Oil.

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3 Comments leave one →
  1. Nicholas Weaver permalink
    30 August 2008 1:32 pm

    One thing that I personally believes happens (well, has happed) is moving from a demand-constrained to a supply-constrained regigm in the supply/demand curve.

    When demand-constrained, with plenty of extra production, wild swings in supply or demand create very little fluxuation in price.

    When supply-constrained, any small fuxuation in supply or demand or both can create wild swings in price, both up AND down (but not back down to the demand constrained price).

    The relative lack of hording in the recent price shock, combined with significant demand-destruction and talk of turning supply to maximum, makes one suspicious we are in a supply-constrained regigm.

    One of the REALLY bad things about supply constrained, relatively inelastic markets is you can get non-collusive market manipulation, where single players can benefit just themselves by withholding supply: creating an incentive for Fabius Maximum’s worst-case worry: political peak oil.
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    Fabius Maximus replies: Nicely said! The coming global recession will temporarily restore surplus capacity, easing the supply crunch. This gives us valuable time. We can squander it — allowing low prices to halt development of unconventional and alternative resources — or use this gift of time to better prepare. It’s like God giving us an IQ test.

  2. 1 September 2008 11:38 pm

    “Peak Oil” — about the half-way point of oil production.
    Looking at:
    http://www.oilcrisis.com/summary.htm
    ” Quite simply,
    Ultimate = Cumulative Production + Reserves + Undiscovered

    …Many estimates been have made of the world Ultimate for oil, a recent example being the 1995 USGS global survey. The value they published was 2275 Billion Barrels (or Giga – barrels, Gb). …

    The conclusions reached in Dr. Campbell’s study are ominous: He arrives at a figure of 1750 Gb for the global ultimate.”

    Here’s the huge problem with Peak Oil — the ‘value’ of oil by consumers has been going up, so the price they are willing to pay has been going up, and the ‘peak oil’ is dependent on the price.

    Wiki says: “Hubbert’s Peak was achieved in the continental US in the early 1970s. Oil production peaked at 10.2 million barrels a day. Since then, it has been in a gradual decline.”

    Despite the US having long ago passed its own ‘peak oil’, I claim it likely that there will be a new peak driven by much, much higher prices — perhaps $100/bbl, perhaps $150, perhaps $200 (in 2008 avg USD prices). At some price it make sense to use bio-fuels.

    Peak Oil falsification question: how many bbl a day of production does the US have to produce (in what year) before its production demonstrates that the ‘Peak Oil’ fear of running out is not the issue to worry about?

    (I haven’t read, and don’t think I need to, read the debunking of Peak Oil … but now I might.)
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    Fabius Maximus replies: I am not clear what you are saying, but will attempt a reply.

    “At some price it make sense to use bio-fuels.”

    There are many studies of biofuels potential. NONE suggest that biofuels can replace more than a tiny fraction of current oil production (they are now arpox 1%, from memory). We still need food to eat. Production of biofuels from non-food sources (e.g., algae and switchgrass) are still in the lab. Perhaps they will become commercially feasible in the next decade or so (like DVD players); perhaps not (like fusion).

    “how many bbl a day of production does the US have to produce (in what year) before its production demonstrates that the ‘Peak Oil’ fear of running out is not the issue to worry about?”

    Substantially reversing the decline in the “lower 48″ or Alaska would be a small but significant start. Probably not possible, by most studies. Peaking of a field is seldom feasible to reverse.

    For more information on peaking see Peaking of World Production: an Overview, 23 October 2006. Esp graphs on slides 7 and 17.

    For studies about these matters you mention, see the FM reference library on Peak Oil.

  3. LastReplay permalink
    3 November 2008 1:31 pm

    just a simple question: economics & global markets are 1 thing, but the day to day life is another!

    I’m European, what would the calculation or prediction in time come to before I could not afford to buy food although I have “the guarantied job” that pays at an average of 2500 €uros per month net.

    You have to understand that I can’t afford to drive a car nor fill it up now, never mind about in 10 years time.

    Where is the time trend and when will I have to start growing food to survive. 5 years? 10 years? 30 years? …… Answer pls. no matter how far fetched it is, but answer in years!
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    Fabius Maximus replies: I believe “never” is the answer. The impact of energy costs on food is grossly overstated, and the most of the alternative energy sources can be easily developed.

    The wild card for food prices is, IMO, weather — not energy. A cold cycle would reduce food production at a time most stockpiles are at or near 50-year lows.

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