Thursday, September 22, 2005

Peak Oil

The charming Rhinocritic Hedgehog met up with me on Tuesday night and we checked out a talk on Peak Oil by New College's Richard Heinberg. He's written it up quite nicely here, so I'll just summarize the the main ideas. Discovery of new oil fields is slowing down, and of course, we have a finite supply of oil on the planet. Global demand of oil is only growing--increasingly, growing, in fact, because of the developing economies of China and India. Unless something changes, at some point our ability to pump that oil (i.e. the rate at which we can pump oil out into the market on any given day) is going to fall short of our demands excessively enough to drastically change the price of petroleum. The unfortunate bit is that a) nothing is set to change and b) some people think that "some point" is pretty soon.

So first there's the geophysical/petroleum engineering question of how soon is soon, and I'd like to read more about that and consult with my friendly neighborhood geophysics experts and the scientific literature. What's interesting to me right now, however, are the arguments that assume that soon is, in fact soon, but still don't care. Snarkmarket recently cited* a NYT magazine article by Peter Maas (sadly, now behind the Time Select $50 wall) and its supposed debunkment by Freakonomics Economist Steven Leavitt:

What most of these doomsday scenarios have gotten wrong is the fundamental idea of economics: people respond to incentives. If the price of a good goes up, people demand less of it, the companies that make it figure out how to make more of it, and everyone tries to figure out how to produce substitutes for it. Add to that the march of technological innovation (like the green revolution, birth control, etc.). The end result: markets figure out how to deal with problems of supply and demand.Which is exactly the situation with oil right now. I don't
know much about world oil reserves.
I'm not even necessarily arguing with their facts about how much the output from existing oil fields is going to decline, or that world demand for oil is increasing. But these changes in supply and demand are slow and gradual -- a few percent each year. (emphases mine.)
My sister loves to point out that economists sometimes lose sight of the fact that their fundamental ideas are not as strongly tied to reality as they'd like to believe. "Slow and gradual" is a matter of comparison. If demand is growing much, much faster than supply, then change to society is not really slow. Previously Saurabh--another Rhinocrat--blogged about a documentary Heinberg was in:

I asked why we wouldn't expect the same sort of thing we saw in 1973 to happen again - economic contraction, extreme conservation and a resulting drop in consumption. Of course, this time the drop in consumption comes first, but the dependence should be the same. The film doesn't have a satisfactory answer to this, and I think in general this is why Heinberg and his
ilk have such a hard time being taken seriously. Okay, oil prices will go up. The economy will take a spill. Does it REALLY mean the end of life as we know it?
What Heinberg the documentary-star didn't do such a good job of answering Heinberg the patient lecturer better addressed. Certain kinds of demand--demands which are not substitutable and based on slow-moving technology--are sticky. We don't just burn fuel, we burn a particular few kinds of fuel, in particularly important ways. My friendly neighborhood scientists and engineers tell me that the things like biodiesel and tar oil sands of Canada might more than do the trick. Heinberg presented some numbers on why those won't come online fast enough, but I'm willing to accept that peak oil might not be a problem soon after I've seen all the evidence, but I'm not willing to accept that the reason it can't possibly be a problem is that the market will magically take care of everything. It would be a shame to have to wait for a second Keynes to discover that demand and usage is as sticky as prices were during the great depression. The question is how big the spill, and that's a question we're going to have to ask as much of geophysicists, petroleum-engineers, and operations scientists as of economists.

I was really impressed with Heinberg for patiently staying around to answer lots of questions, even somewhat wacky ones about zero point energy and the like. The evening might have been a lot more distressing were it not for the witty company of Hedgehog, who's even more interesting than you'd expect a burrowing creature to be. Cheers for blogs connecting!

*I swear I kept typing "snited" by mistake right there, which is funny, b/c it's kinda almost the opposite. Pretty snarky sounding, really.