Sunday, April 16, 2006

The Shape of Things To Come

If you knew you were going to lose your job within the next five years, you might just go looking for another one today, not waiting to see exactly when you would be let go. But, if your job were very lucrative, and all you knew was that after five years your pay could be reduced each year, you might want to weigh that against the uncertain prospects of getting a new job that may or may not match your old one.

The second situation is roughly analogous to what we face with the coming peak in world oil production. We know the peak will occur--some say it already has--but we don't know exactly when. We know that supplies will plateau or decline, but we can't know how long the plateau will last (if there is one), nor how steep any decline might be. Alternative fuels are now being developed and competing for a future share of the energy market, but no particular fuel has emerged as the answer to oil decline and, perhaps just as important, to global warming concerns.

With respect to oil peak, each combination of dates and decline curves suggests a different response. An imminent peak followed by a sharp decline--the worst possible combination--would demand immediate emergency conservation measures and massive investment in renewable energy research and deployment. A late peak followed by a long plateau suggests that we have more time to think through our response and gradually work toward solutions. Something in-between may call for a rapid implementation of conservation programs and a quick decision to back certain oil replacements based on the best available knowledge, but without the benefit of a long trial period in the marketplace.

All three scenarios are on offer in the peak oil literature. Energy consultant Robert Hirsch's study of decline curves from oil-producing countries around the world suggests sharply declining oil supplies after the peak. Combine that with predictions of an imminent peak, and you get the first scenario above. Daniel Yergin, the ever-optimistic president of Cambridge Energy Research Associates, predicts not a peak but an "undulating plateau" for several decades beginning sometime after 2030 or 2040.

Douglas Reynolds, a resource economist at the University of Alaska-Fairbanks, believes a peak will occur sometime before 2015, but that it will take the form of a long, gradual curve--more like the bottom of a saucer than the peak of a mountain. Reynolds believes political factors as much as geological limits will cause this type of peak.

The permutations of these scenarios are many, and the available evidence doesn't tell us definitively which one to expect. Henry Groppe, an oil forecaster with a remarkable record, believes we are at peak, but will face at least a decade-long plateau in the production of liquid hydrocarbons as growing volumes of natural gas liquids and condensates make up for declining oil production. This scenario offers some hope that an immediate peak does not spell the end of civilization as we know it, though it certainly portends much hardship, especially for the poor. On the other hand, a peak which comes 25 years hence may not seem that threatening today. But, if it is followed by a steep decline in oil supplies, it means we had better start making and implementing plans now to get ready. For why this is so, read Robert Hirsch's report on mitigating the effects of peak oil prepared for the U. S. Department of Energy. Hirsch says that in order to avoid huge economic dislocations, the world would need to begin a crash problem to identify and deploy alternative liquid fuels at least 20 years in advance of any peak.

As for Groppe, he has 90 percent of his equity assets in energy; he puts his money where his mouth is. But, such investment stances can also create reinforcing loops in the minds of those who are committed to a particular view. Naturally, investment managers invest based on their research findings. But afterwards they may look for evidence to reinforce those decisions and downplay evidence that contradicts their initial research.

Groppe may be immune to this. But, we should be careful to parse the thinking behind various ideas about the date of the peak and the shape of the decline curve. Do the predictions we cling to come from our deepest fears, our greatest hopes, our ideological predilections or possibly even our investment portfolios? Or, are we trying to see the world as it is, adjusting our thinking and actions to unfolding events rather than preconceived notions?

All of us like to see our predictions vindicated. But we should let neither a hatred of the current globalized, corporate-dominated economic system nor an unthinking devotion to the free-market creed that is its handmaiden guide us in evaluating remaining oil and other finite energy supplies. When the stakes are this high--namely, the future of human civilization--we ought to focus on careful observations, flexible thinking and, most of all, humility.

That doesn't mean we shouldn't prepare for the future based on what we know and believe. When facing great uncertainty and large possible consequences, thorough preparation is the wise course. In fact, being ready early ought to be considered a virtue rather than a failure to predict the future correctly. Under the circumstances the last thing we need is a swaggering certainty in our pronouncements. That's the one thing of which I would have thought the world had enough.

(For my recent discussions of uncertainty, risk and probability, see Can a Wall Street Maverick Tell Us Something About Our Ecological Future? and What if Daniel Yergin is Wrong?)

6 comments:

Anonymous said...

Hello Mr. Cobb. Just wanted to say thank you for a most eloquent article. Found your link from P.O com, which I check almost daily...I've been looking for articles & posts to help present oil depletion to more casual friends and co-workers, & your site appears well articulated. Will comment more later.

Anonymous said...

Excellent! Just wanted to make sure I wasn't wasting valuable typing time... Anyway, let me first say that as a new visitor to your site...(It's late where I am & I've put in my 4th 12hr shift today, but I'll check it out later.) I'm pretty sure I'm familiar with most of the major links, and I look forward to reviewing your previous posts.
The important thing is to not get discouraged in your attempts to make others peak oil aware. (When you stumble across something that you feel should be screamed from the rooftops, only to find years later, despite trying to disprove it from every available source yourself, that it is barely being mentioned, let alone thoughtfully considered, by most "MSM", a person might start to worry.) Don't.
I tell people peak oil is a theory the way evolution is a theory. Although many variables exist, the basic premise is pretty much established fact. You can chose how serious a concern this is, but you dismiss this knowledge at your own peril. Then the question becomes..."now what?"

Anonymous said...

Peak oil is a fantastic time for humanity to realize what we are actually doing here on Earth. At present, our motto is 'consumption for consumtions sake' aka 'shop till you drop'.
I have recently discovered the true crisis of humanity - population overshoot. It has happened now prepare for the die-off. This will be combined with economic collapse of fiat currencies around the world (worthless paper that they are) to completely devastate our 'civilisation'. The currency collapse will happen sooner than you think (see www.dollarcollapse.com). Just dont make any plant to have kids OK.

Anonymous said...

So, it seems, Karl Marx was right all along about the future collapse of capitalism.

smiley said...

re: collapse of capitalism, only in the sense that it will be increasingly replaced by fascism. "Not here," you say. "Never in America."


I saw a good article today - first one I've seen - on 'peak gold' implying that oil isn't the only commodity resource facing a hyperbolic price curve.

try this link about copper prices at daily kos. And this is the story about peak gold. I found it on google news.

>>anonymous says [...]"now what?" The only practical answer is to invest wisely now, before the global oil peak is on everyone's lips. It won't be long- Kenneth Deffeyes thinks we're already past it. He's called the global peak as passing on Thanksgiving day, 2005.

If you invest well today, maybe you'll be able to afford the guns, ammunition, and private security force you'll need to protect your loved ones from the violent mob of hungry and impoverished american youth who will realize at some point in the next 10 or 15 years that we've ruined their futures for them.

If the peak oil trend does indeed extend into other commodities, the only place to have your investment dollar is in mutual funds or ETF's designed to track raw materials, or in companies that extract and market raw material commodities. See PSPFX for a good raw materials fund, and USO for a brand new ETF designed to track the price of crude oil futures. If you don't like managed security instruments, you can always try to mirror the oil service sector index by investing in its constituent companies.

Surprise, one of those constituents is Halliburton. What do you think about fascism now?

smiley said...

Kurt wrote: Under the circumstances the last thing we need is a swaggering certainty in our pronouncements. That's the one thing of which I would have thought the world had enough.

Yes, but there is a certain value in calling a spade a spade. It will only get more expensive to extract crude oil from the ground and supply it to the world's markets- that's a fact. China's demand for oil to use as a transportation and agricultural fuel will increase until there is a viable alternative to the gasoline-powered internal combustion engine being produced in high enough volume to meet demand- that's a fact.

After 3-mile Island happened, the US stopped building new nuclear reactors. That's a fact. As a result, the Euro zone in general is 30 years ahead of the US in reactor science and electric power production capabilities. Countries like South Africa are now buying reactor technology from countries like France. China has licensed pebble bed technology from the Germans, and plans to build 30 new plants by the year 2020.

Yes, it would be nice if the US had a coherent energy policy, to say nothing of a coherent foreign policy, to help prepare us for the emerging trends dictated by these facts. Conquering the middle east to steal all the remaining oil is short-sighted- it doesn't solve the China demand problem and it doesn't help us transition any faster to a post-petroleum economy.

Denying the facts will get us nowhere. Pity that denying the facts seems to have been the basis for our government for the past 5 years.