Where are the arguments that deal with the scarcity/conservation/price relationship

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obamagasm's picture
obamagasm
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Where are the arguments that deal with the scarcity/conservation/price relationship

Howdy y'all. newbie here.

One standard economic challenge to resource depletion concerns involves how the price rises as supplies decrease, creating incentives to innovate efficiency and availability. It is so standard, I am guessing you have addressed it, but 30 minutes into the site, I have not found it. I also do not have a good counter to it. Could you help a brotha out?

Here is the issue as I understand it. As price increases, previous prohibitively expensive extraction becomes viable --> more supply from "dead" wells. Doesn't solve the issue, but means - higher prices --> more supply. This means we don't run out, prices just get steadily higher. This slows down the "peak" curve. I have been told that we have seen just this pattern with many resources that were thought to become scarce.

Of course, this doesn't really touch the main argument, which is that rising prices given supply/demand, tied with a fiat currency and increasing projected deficits are going to turn the world as we know it upside down. What it suggests is 1) it will not be as dramatic a shift as this site suggests, 2) exports will not drop to zero, just become more expensive.

As an example: the fact that this basic economic process is not explicitly addressed in these videos is a severe credibility issue for this site IMO. (For example - If I had a bunch of money to bet - I would be it ALL that Mexico will continue exporting oil to the US in 2012, 2013, 2014, etc. i.e., that the declaration that it will stop in 2011 is naive to the point of ludicrous, and throws doubt on the credibility of the rest of the site.

AND, I assume you have answers for this - where are they?

--

examples

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1a) Oil is X dollars a barrel, let's say $60. All the oil fields whose "peak" has been passed and that cost more than $60 a barrel to extract are abandoned - no profit potential.

1b) Oil goes to $100 a barrel. Now, those oil fields that can produce at $60 barrel become viable, up to the point where extraction reaches $100 barrel, at which point they are abandoned.

1c) Oil goes to $150 a barrel...

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Similarly,

2a) Energy efficient technologies are created, but many of them are simply not cost efficient at $60 a barrel oil. Price goes to $100, and all of the technologies that are efficient between $60 and $100 a barrel become viable, increasing efficiency and decreasing demand. However, the increasing cost of oil raises faster (in development time and speed) than efficiency, so the price goest to $150, making more expensive efficiency tech more affordable... The higher the price of oil, the more incentives to develop efficient technology, again changing the demand curve.

2b) Ditto for alternative energy tech. Solar is currently doubling in cost-efficiency every two years. 20 years, 10 doublings puts it at more than total energy usage (or maybe 8 doublings, or 12 or 14...)

2c) Consumers buy suv's when oil is $60 per gallon because the value they perceive from the big car outweighs cost of gas. Gas goes to $100 and the incentives for consumers change. Now, a certain percentage of suv owners decide "screw this" I want a more fuel efficient vehicle, and I'm not going to drive as much. This reduces demand for oil and increases demand for more fuel efficient technology - driving the two trends above.

Of course, the lag between technology creation and implementation means the prices will certainly raise. However, the more they raise, the more capital will be invested in implementing the technology. This fundamentally changes the "peak" curve. That is the point of this argument.

Since you say that peak oil is "a well described process," but without this factor as an integral part of your "equation," it is like every other Malthusian prediction whose extrapolation failed because it didn't account for it.

Sorry I didn't take the time to find your answers to this. I did give it a pretty good try. :-)

Keep up the good work.

 

 

 

 

obamagasm's picture
obamagasm
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Re: Scarcity/conservation/price relationship

Funny, I was trying to be efficient, because I didn't think it needed to be said, but on review I think I left two points unaddressed that would predictably be brought up.

1) EROEI falls under this same logic, because the efficiency of energy increase makes future extraction at lower levels "afforable/profitable" just like the $ price that reflects the underlying reality. Hence, saying "that's why i shifted from price to EROEI" doesn't address the argument, just obfuscates it.

2) If this trend of conservation/scarcity/price is included as suggested, and the "dramatic" shifts predicted become, not a cliff face but an asymptotic slope, then people will not A) be equally impacted in a way that creates political solidarity to make "sweeping changes" to the economic/regulatory climate, and B) the financial incentives will lead to corruption/innovative ways to get around the regulations for the richest and most powerful lobbyists, making the regulations virtual monopoly guarantees to the most power-full.

These points become important becuase they shift the focus/feasability of the 3rd part of your suggestions.

AND, what a great job you did! My hat's off to ya!

 

Ron Shimshock's picture
Ron Shimshock
Status: Bronze Member (Offline)
Joined: Aug 27 2008
Posts: 35
Re: Where are the arguments that deal with the ...
obamagasm wrote:

Here is the issue as I understand it. As price increases, previous prohibitively expensive extraction becomes viable --> more supply from "dead" wells. Doesn't solve the issue, but means - higher prices --> more supply. This means we don't run out, prices just get steadily higher. This slows down the "peak" curve. I have been told that we have seen just this pattern with many resources that were thought to become scarce.

Thanks for taking the time to write such a detailed question as a first post.  I certainly don't consider myself an expert in this, and I am sure there are others on the site that can add further context.  However I think there is one big assumption being made.  I have bolded the text above -- where you say, "prices just get steadily higher."  As we have seen from the past couple of years, it will most likely not be a steady increase in prices, but rather a constant whipsaw effect where prices shoot higher, economic and consumer spending are cut back, oil prices drop, then the cycle starts again... each time where the oil supply drops further.

Chris has previously addressed this in one of his Martenson Reports, Oil - The Coming Supply Crunch (Part I).  You won't be able to read the entire report unless you are an enrolled member, but he mentions in the Executive Summary the idea of the "undulating plateau."  I believe there are some other people on the site that have discussed this as well.  It is the idea that for new technologies and exploration to have success, they need investment.  Investment is only viable above a particular price of oil... I believe that number is something like $75/barrel.  Oil was $150 a barrel in 2008, and then $30 in 2009.  With this price shift, investment dried up.  Lots of new oil and natural gas exploration has stopped, and alternative energy companies have received less venture capital funding.

The other aspect of your post that I think Chris covers very well in the videos is the expectation that some alternative technology solution will meet all of our current and future energy needs.  While we can all hold out hope for some silver bullet, the reality is no alternative energy has come even remotely close to the energy density of hydrocarbons.  You'll see often on this site reference to EROEI, or Energy Returned on Energy Invested.  Oil and oil derivatives have an EROEI that is amazingly better than anything else.  Never in the history of the planet have we come across an energy source which is as plentiful, efficient, and high energy as oil.

Ron

Ron Shimshock's picture
Ron Shimshock
Status: Bronze Member (Offline)
Joined: Aug 27 2008
Posts: 35
Re: Where are the arguments that deal with the ...

Also I wanted to mention there is a second part to the Martenson Report I referenced in the previous post... it is here:
http://www.peakprosperity.com/martensonreport/oil-coming-supply-crunch-part-ii

And here is one of the posts I was thinking about regarding the "Magic Price Band":
http://www.peakprosperity.com/forum/have-you-bought-your-last-car/18381

Bill MacGregor's picture
Bill MacGregor
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Joined: Jan 29 2009
Posts: 28
Re: Where are the arguments that deal with the ...

I suggest that you consider a number of other factors as well.

1. Time - to open new wells, develop new technologies etc. The point about the drop in investment is that the supply investment releases may simply not come on stream quickly enough the restrictions in supply that will cause societal dislocation. Similarly, the time-lag for alternatives to gear up and supply because they are now price competitive is a factor.

2. International politics -a currently exporting country could decide to restrict exports of its reserves in order to protect its own future for pragmatic or political reasons. Hence, there are factors that will come into play to restrict supply that are not free market supply and demand.

Regards

Bill 

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