Saturday, November 24, 2007

Oil peak and trough hysteria

The rhetoric on Peak Oil is so desperately disingenuous it is hard to know where to start. First, the possibility of the oil price breaking the $100 barrier is taken to indicate that the arrival of Peak Oil is imminent. Given that there is currently a cartel among the major oil producing countries the oil price doesn't tell you anything significant about possible production. The oil price is the result of demand interacting with the cartel's chosen supply, which bears no resemblance to total possible supply.

Once OPEC is consigned to irrelevance by depleting supplies and rising demand all that will mean is that oil is one more scarce resource. Peak oil is no more threatening than that. As supply dwindles and the price rises a genuine incentive to use oil efficiently and look for substitutes will be created. If you're worried that this process will be challenging, which it might be, the last thing you would want to do is intervene to try and make us confront this challenge now. Keep the price as low as you can, as long as you can. Don't put green taxes in place. That way we will face the greatest challenges from declining oil stocks when we have more technological substitutes in place and, as a result, using less oil is less expensive. In fact, the best policy for Britain would be to take advantage of an expected high price and slash rates now on North Sea oil so that more is discovered there and we have a larger domestic supply going foward.

What's really ironic, though, is that the faster we expect oil stocks to diminish, the more credibility we attach to those expecting Peak Oil to arrive sooner rather than later, the less seriously we should take global warming. After all, if oil stocks are going to diminish faster than we expect then the world will have to stop using fossil fuels sooner rather than later. There will be an economic imperative, that the market will reflect without any government intervention at all, to cut fossil fuel use. There's no need to accept a massive expansion of state power if the job of increasing the price of using oil-derivative powered plains, trains and automobiles will be done by declining oil reserves anyway. We can avoid the waste and incompetence that has so far been associated with attempts to use the power of the state to control fossil fuel use.

$100 oil isn't really anything to do with Peak Oil or any other natural shortage of supply but the result of faster than expected demand growth, thanks to a strong world economy, that OPEC is unwilling to balance out. Oil stocks will decline but this will just make oil one more scarce resource. Markets are very good at making efficient use of scarce resources and human ingenuity, when put to good use by a free-market economy, is great at finding substitutes. We'll be fine.

3 comments:

Simon Tay said...

It's not a hysteria and I don't invest in stocks.

Do read http://sgenergycrisis.blogspot.com/2007/11/oil-officials-see-limit-looming-on.html in my blog and see if you can understand the implication.

Burma got a protest started because of rising oil prices and cost of living due to the higher demand of oil.

OPEC are now joining the Non-Opec as a bunch of declining oil fields...don't over estimate their "reserve" and it's not that they are "unwilling" to balance the demand with more supply because they simply CANNOT!

The science behind it is relatively simple but what in abundance right now is sour oil which is hard to refine and lot's of non-conventional oil. All these are not so popular oil and need more sophisticated and expensive infrastructure and process to "produce" the oil.

If you investigate the rest of the non-conventional oil...like tar sands, oil shale, hydrogen, ethanol and other non-efficient fuel...you will realize that we are in for a very very expensive transportation, agriculture, trade and cost of living.

Palm oil is one of those which is involve in food are getting popular as alternative fuel...which will create inflation in food.

fertilizers (natural gas) and pesticides (oil based) are costly and hence any "grown" fuel will always more expensive then OIL!

We need to start to learn how to survive without oil...which is hard!!

Go research on oil by products...and what's around you are the result of cheap oil...I can assure you...we won't be in the same kind of lifestyle in 3 to 5 years time.

Lou Grinzo said...

Also, please see my latest energy presentation, The Oil Crunch:

http://www.grinzo.com/energy/downloads/theoilcrunch09x20x2007.pdf

Matthew Sinclair said...

Simon,

I've read your comment and honestly don't see how you've contradicted what I've said. You're arguing past me. Do you disagree with my points about the policy implications of declining oil reserves?

The only point I can really see tackling my analysis is the idea that OPEC is already irrelevant. I don't think that stands up to scrutiny. They still tightly control supply. That is clearly determining the price still.

Matt