Wednesday, June 27, 2012

Peak Oil Extrapolations

The economists blog, Econbrowser, is one of the few economic-focused sites that will also spend a fair amount of time talking about peak oil.

The general discussion is about which forecasting methods have proven to be the most effective (not many), but the final point is a good one.

Simply saying that there is more money and technology to invest in a problem does not guarantee better results.

Peak Oil and Price Incentives
James Hamilton, Econbrowser, 13 June 2012
The IMF model predicts that growth in demand will put continual upward pressure on price, with the inflation-adjusted price of oil headed for $180/barrel by the end of the decade. According to their estimates, those price increases would be sufficient to keep global production increasing at about the same reduced rate we have seen since 2004.
My view is that the IMF researchers' approach is clearly better than the simple Hubbert-Deffeyes linearization, but may still be subject to some of the other problems documented by Boyce (2012), as well as the familiar challenges of statistically distinguishing supply and demand effects. Notwithstanding, the IMF research should help raise awareness of an issue that remains under appreciated by many economists, which is that we will eventually reach a point, and may have already, at which quite significant increases in price and improvements in technology can produce only modest increases in production, or may be insufficient to prevent outright declines in annual crude oil production levels. For those still in doubt about that possibility, I would again call attention to Pennsylvania, the place where the oil industry began in 1859. The price of oil today is 5 times as high in real terms as it was in 1891, and of course there have been tremendous technological advances in the century since then. But the state produced 8 times as much oil in 1891 as it does today.

We like to think that the reason we enjoy our high standards of living is because we have been so clever at figuring out how to use the world's available resources. But we should not dismiss the possibility that there may also have been a nontrivial contribution of simply having been quite lucky to have found an incredibly valuable raw material that for a century and a half or so was relatively easy to obtain. Optimists may expect the next century and a half to look like the last. Benes and coauthors are suggesting that instead we should perhaps expect the next decade be our last within this paradigm, and that perhaps we are going to reset back to energy level usuages more similar to the 17th century. 

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