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An urban legend to comfort America: crash programs will solve Peak Oil
Fabius Maximus
This is the second post in a series examining “urban legends” about energy that comfort Americans. Here we discuss the first of four comforting myths about unconventional and alternative energy sources. These are excuses for not doing the hard work of gathering information, analysis, planning, and executing programs necessary to prepare for the multi-decade transition through peak oil to the next era (whatever that will be). These four myths are:
I. We’ll run crash programs for adaptation just as we mobilized for WWII.
II. Demand creates supply, by raising prices.
II. Oil is Oil, even if it is not oil.
IV. Demand creates supply, from new technology.
Unfortunately, we can rely on none of these. Certainly they are not substitutes for intense research and planning, which is how they are used today. As I have described at length in previous posts, we know astonishingly little about our available energy resources, consumption patterns, and alternatives. Nor has the available information been collected, analyzed, and used for models and simulations – the foundation of good planning. News reports said that the resent satellite interception cost $125 million; one-tenth of that could fund a multi-disciplinary project that would help plan a sound future for America’s energy supply. Instead we rely on inspired guessing.
Side note: what is our source of information about the monthly volume of Saudi Arabia’s oil exports? Please place your answers in the comments.
I. We’ll run successful crash programs to beat Peak Oil just as we mobilized for WWII
The massive mobilzation during WWII has important differences from crash programs to prepare America for face Peak Oil. Crash programs are probably necessary, but are no panacea.
1. The economics differ; today’s mobilization might make things worse – unlike WWII.
2. There may less potential innovation available.
3. The causes of innovation are mysterious, and cannot be relied upon.
To sum this up, we turn to one of great rules of history: past performance is no guarantee of future success.
(5 September 2008)
Random Oil
Jerry Taylor and Peter Van Doren, Forbes
Oil prices seem to be in free-fall. After averaging a staggering $137 a barrel over the first week of July, they were down to $109 a barrel over the final week of August.
Where are prices going next? Who knows? Bearish talk about bubbles bursting and bullish talk about peak oil disguise the fact that the future direction of oil prices is unknown and unknowable. Neither investors nor politicians ought to be betting the economic house on any particular vision of “our energy future.”
The fundamental reason for the difficulty associated with forecasting future oil prices is the fact that both demand and supply are relatively inelastic over the short term.
… If the best predictor of future prices is present price, how then do we account for the extreme volatility in the record? Simple: Present price may be the best predictor, but it is a lousy predictor nonetheless. Hamilton finds that the standard deviation in oil prices from quarter-to-quarter was 15.28%. Hence, if we start a quarter with $115 oil, prices in the next quarter could average between $85 and $156 per barrel. In a year, they could range between $62 and $212. In four years, they might be anywhere between $34 and $391!
Of course, if oil prices were to rise–or decline–to the upper or lower boundary of our “random walk,” market analysts and policy pundits would likely wet their pants over “the end of the oil age” (in the case of the former) or the end of OPEC (in the case of the latter). While trends in those cases would be perfectly consistent with either narrative, they would also be perfectly consistent with a random walk … and no real trend.
There is an insatiable market demand for oil price forecasts and an equally insatiable political demand for mega-explanations about oil prices. But unless the oil market changes pretty radically, neither demand can be met by well-informed oil market analysts.
Jerry Taylor and Peter Van Doren are senior fellows at the Cato Institute in Washington, D.C.
(4 September 2008)
Random Walk makes a lot of sense in the short term. I’m not suprised by the recent spike in oil prices and the subsequent drop. In the medium- and long-term however, there are underlying realities that one is foolish to ignore.
A few talented investors do pay attention to long-term trends and have better results than index funds (which are based on Random Walk Theory) – Warren Buffer, John Rogers, etc. Random Walk shouldn’t be an excuse for not thinking. -BA
Is oil going back under $100 a barrel? Not if Opec can help it
Nils Pratley, The Guardian,
· Producers’ cartel is ready to flex its collective muscle to keep prices high
· Group that rose in the 70s but unravelled in the 90s is influential once more
… The 13 members of the cartel meet in Vienna next week and Iran and Venezuela have made their position clear. “Oil supply must be well proportioned with demand, and control over Opec’s excess oil supply is an issue that must be discussed,” said Gholam Hossein Nozari, Iran’s oil minister, this week. Translation: he doesn’t want to see the price fall below $100.
To many in the west, the stance will seem outrageous.
… A decade ago, the west’s view of Opec was different. The organisation, having enjoyed its heyday in the 1970s, was regarded as a spent force. Its summits in hotels in Vienna and Geneva were dismissed as squabbles over who had been cheating on quotas by over-producing – usually Venezuela or Nigeria. After 25 years of trying to control the oil market, Opec seemed doomed – damned by internal indiscipline and the success of the west in finding alternative supplies of oil.
… For consumers in the west, it’s hard to find a reason to be cheerful in that forecast – expect either high energy prices or global recession. The shock isn’t over.
(6 September 2008)
Related from the Guardian: Key to the cartel: Opec’s leading figures: Ali al-Naimi (Saudi Arabia), Gholam Hossein Nozari (Iran), Rafael Ramirez (Venezuela).
