Sunday, April 04, 2010

Faith-based economics in two graphs

It took a French newspaper to unearth information put out by the U. S. government more than one year ago that provides a worrisome projection for world oil supplies from an agency that for years said such supplies would be no problem for the foreseeable future. Glen Sweetnam of the U. S. Energy Information Administration acknowledged in an interview that total liquid fuel supplies could actually fall between 2011 and 2015 "if the investment [in new capacity] is not there."

While this report has been circulating on peak oil sites in the last week, it is a graph which accompanied Sweetnam's 2009 presentation (PDF) which I found particularly illustrative. (See below.) It reveals in stark relief the dangers of running the world using the ideas of what I call faith-based economics.

Let me back up for moment. I use the term faith-based economics to refer to the pathology we currently call neoclassical economics. The Encyclopedia of Earth does a very nice job of explaining the origins of neoclassical economics and why it is complete nonsense to rank it among the sciences. So if it is not science, then what shall we call it? I suggest that it is a religion because its basic precepts are not subject to verification; and so, like a religion the tenets must simply be taken on faith. This wouldn't be so serious were it not for the fact that neoclassical economics as a system of thinking dominates policymaking and academic thought across the globe. And, it parades as a science that can help us determine optimal economic policies.

In 2007 the neoclassically inclined thinkers at the U. S. Federal Reserve forecast that the world might experience a slowdown in growth and said that the subprime loan problem was well-contained. Readers will recall that in order for something to be a science, it must be able to make accurate, verifiable predictions. We can verify that assurances of a limited credit problem and a soft landing were dead wrong. And, it's not clear, in my view, that anyone can consistently make accurate predictions about the direction of anything so complicated as the world economy--lucky guesses, yes, but consistently accurate predictions, no.

It is an often rehearsed claim among neoclassical economists that market forces will allow society to extract whatever it needs from the biosphere. The EIA was once explicit in its concurrence with this view. In its 1998 Annual Energy Outlook (PDF) it details a series of adjustments to its forecast for oil supply and then explains: "These adjustments to the USGS and MMS estimates are based on nontechnical considerations that support domestic supply growth to the levels necessary to meet projected demand levels." Here's the translation: The projected supply growth was fudged to meet projected demand growth. The magic of the marketplace is supposed to make resources we don't know about or cannot currently extract appear.

Now, let's look at a graph from a 2006 release from Cambridge Energy Research Associates (CERA), the archcornucopians of the energy consulting business.

The impression the graph gives to the uninformed observer is that we--that means some humans somewhere on this planet--know exactly where all the oil supply depicted will come from. The truth is more unsettling. Much of what is included in this graph has not yet been discovered or has no demonstrated technology which can extract or produce it economically.

Now to the graph that so aptly demonstrates the gulf between what neoclassically inclined thinkers (like those at CERA) tell us and what we actually know.

Sweetnam's graph shows us what EIA currently recognizes as known sources of oil that we have the technology to extract. It then shows us the gap between that and what we think we will need. It rather charitably calls this gap "unidentified projects." I would call these faith-based projects. I have no doubt the oil industry will identify new projects in the future and successfully develop many of them. What I have less faith in is that these "unidentified" projects will be sufficient not only to overcome the relentless depletion of existing wells, but also to cause a substantial increase in the rate of production.

Sweetnam's graph--the first of its kind from EIA--shows us exactly how much faith it takes to practice faith-based economics. To be a true believer one has to wager the entire future of our oil-dependent civilization.


Anonymous said...

good article - as always.

mattbg said...

Do people really generally try to suggest that economics IS a hard science?

In universities, it usually falls under the "social science" category where other pseudo-sciences like psychology and sociology reside.

Anonymous said...

Well done, Kurt.
Interestingly, the IEA's idea how to fill the gap seems to rely mainly on boosting the oil production within the US territory. This is shown a few pages later on the document of your graph #2 and also is my conclusion from the meeting transcript (

So no wonder that 0bama now resumes the good old drill-approach in the US.
However paradoxically the IEA discussed oil reserves in all regions of the world in detail - except for the "promising" reserves in its own country:

"Mr. González-Pier: Where is the extra production in the U.S. coming from?
Mr. Sweetnam: So then U.S…extra production is coming from…
Mr. González-Pier: Non-conventional.
Mr. Sweetnam: … the deepwater (Gulf of Mexico) and also from enhanced oil recovery. And then biofuels because this is sort of total liquids. So it’s those three components.
Mr. Knapp: And maybe a little oil shale.
Mr. Sweetnam: Yes, right,…
Mr. Knapp: The deepwater is rich in liquids.
Mr. Mohamedi: Can I make a comment on Iraq?..."

sofistek said...

That CERA graph is remarkable, for another reason. The run up to the peak is fairly smooth. There are a few wiggles early on and then the uncertainty on details kicks in so the graph is more or less smooth up to around 2030. There are some ripples, which is a little surprising, given that there are unlikely to be any confirmed development projects beyond about 10 years out. However, when we get to the undulating plateau, suddenly, CERA appear to have found a crystal clear crystal ball, that gives them detailed, year by year production figures for world oil. Look at the precise data points in the graph. No smooth curves, showing general beliefs, but specific yearly variations, some quite large.

Clearly, this is the work of someone in touch with another power.

metamind said...

The "peak oil" phenomenon is a "constructed perception" designed to support unrealistic pricing of oil.

Remember the people who told us we had to be worried about a "mushroom cloud" from Saddam Hussein's WMD program? That was a "constructed perception" as well. They operate on the premise that "perception is reality."

The truth is a many splendored thing. There is an abundance of oil in the Earth. There is over a trillion barrels under the sea. Think about it logically for a moment. Why would all the oil be under land masses which exist today? The land masses move over millions of years.

For those who say that it is too difficult to get to undersea oil, simply ask yourself "How hard have we tried?" Then compare the cost of "cheap oil" today in terms of extraction costs with what we are actually paying for refined products. Don't pay attention to the supposed "futures price" of oil. That's another constructed perception. The actual cost of extraction is usually less than ten dollars per barrel.

But the issue isn't really about the cost of oil or the availability of oil. We need to focus on alternative energy sources rather than the availability or cost of oil. Oil is a dirty polluting fuel. We need to develop a 100-year plan to get completely off of it. To the extent that we are talking about this we are wasting our time and energy on an irrelevant issue.

Global pollution is the right focus. Overconsumption is the right focus. Overpopulation is the right focus. War is the the right focus ( How much oil is wasted on the military? ) Conservation is the right purpose. REDUCING our consumption levels is the right purpose. Consuming less and sharing more is the right purpose.

Be wary of anyone who tells you that "peak oil" is something we should focus on. Ask them to explain how the pricing of oil is manipulated for the purpose of political agenda and profit motives.

Steve Moyer

sofistek said...

What? I thought that most of the big oil plays these days were under the sea. Many big plays of the past were also under the sea (North Sea oil, Cantarell). The famous (or infamous, as it was discovered 6 years ago, with no development to date) Jack discovery is ultra deep water, and there are others.

This isn't anything new. It's still going to get harder to replace production declines, and more expensive.

mattbg said...

"Iraq is now trying to recover its glory, with plans to quadruple production or more. This could transform the global oil industry [...] Over the next seven years Iraq intends to go from producing 2.5m barrels per day to 12m b/d, a target that exceeds Saudi Arabia’s current output by more than 30%. To this end, Iraq has signed ten deals with most of the world’s top oil companies. Some got down to work this month."


Kurt Cobb said...

There are so many things I agree with Steve Moyer on that I hate to disagree with him at all. But he is simply uninformed when it comes to the oil industry. Costs for developing and lifting new offshore deepwater oil are probably running in the $50 to $60 range. As for whether there are a trillion barrels of oil under the sea, no one really knows. But the key question, as I keep saying again and again, is not the size of the resource, but the rate of extraction. That will be the true indicator of whether the so-called "easy oil" is gone. Yes, there is a lot of oil, but at what rate will we be able to get it out? Modern civilization depends entirely for its stability on the continuous input of energy based on the rate of production, not some hypothetically large resource.

I only wish Moyer were right about the price manipulation practiced by the industry. If he were, then we could force the industry to set the price at a level that would encourage alternative energy and allow a smooth transition away from fossil fuels. Back when Texas was the world's swing producer, the state of Texas essentially regulated the world price. Then, when Saudi Arabia had huge surplus capacity, it would regulate world prices. But I no longer believe there is enough surplus capacity for anyone to effectively regulate the price of crude oil. Hence, the wild swings we are seeing.

Evert Wesker said...

I used a graph very similar to the second in my weblog some weeks ago.

It implies that until 2030 6 Saudi Arabia's have to be found and taken into production ...

Then I think: If you dress a pig in a batman suit and mount a Pratt & Whittney on top of it, it can fly and more over, win a dogfight against an F-15 ...

Mazzel & broge / kind regards, Evert

jimvj said...

In the pdf by Sweetnam, pages 9 & 19 show the US production increasing by about 1.7Mbpd between 2007 and 2015 and by another 2.7Mbpd between 2015 and 2030. Thus the US is predicted to increase liquids production by about 4.7Mbpd betwee 2007 and 2030!!

Does that seem realistic?
Where will that new production come from?

jimvj said...

Ooops, that should be:
"pages 9 & 10"

Weaseldog said...

The oil under land masses, moves with the land masses. the oil is locked inside the land mass itself.

The land masses themselves, float over the mantle, which is molten rock. Oil doesn't exist inside of molten rock. It's impossible to heat it to such temperatures without it breaking down and forming new compounds in reactions with the molten rock.

As to trillions of barrels of oil, I assume you're referring to sweet crude. There is no evidence that you're right. In fact there is no evidence at that there is trillions of barrels of recoverable oil in any form, in deep waters. It could be true. But just as accurately I could proclaim that there are trillions of undetectable oil faeries refilling our oil fields. i just made that up, just as proclamations that there is trillions of barrels of recoverable oil in deep waters is just a fantastic invention. BTW, there's an invisible undetectable unicorn looking over your shoulder.

Prove me wrong...

The "peak oil" phenomenon is a "constructed perception" designed to support unrealistic pricing of oil.

If Peak Oil is false then there will be no year of maximum production. Every year, production would increase, for all eternity. The oil in the Earth would have to be infinite and therefore exceed the mass and the volume of the universe itself.

In order to disprove Peak Oil, one needs to prove that the oil in the Earth is of infinite mass and volume. And explain why the Earth doesn't collapse into a singularity.

Metamind can you provide evidence that the oil in the Earth is of infinite mass and volume? Does it perhaps exist in an alternate space time continuum? Is this how you prove that there will be no year of peak production and that production will grow to infinity?