Wednesday, June 10, 2009

Drilling Down

Without getting into a longer post that the topic deserves, I want to clarify the post about peak oil and hopefully respond to some reader comments in the process. I agree with the general concept of peak oil. It's a finite resource, and we may have already passed the inflection point. What I object to is the on/off hysteria that its proponents -- some professionals, but especially casual commenters in the media and blogosphere -- showed during the past year. Do a newspaper or blog search for "peak oil." It was the topic a year ago with oil north of $100. Then: almost total radio silence on the drop to the $30's. Just as annoying was the unwillingness of some to consider the role of monetary policy at the same time the dollar, which has the most immediate impact on the price of oil, was crashing. That relationship has held during the past few months, as oil has doubled in price while the dollar has again gotten crushed -- all against the backdrop of Fed actions that have shared the headlines with sports and entertainment and therefore are impossible to discount or ignore. "We're running out of oil!" makes for a good newspaper article or blog post. "Gas at the pump is more expensive because monetary policy affects the dollar, which generally has an inverse relationship with the price of oil, plus Bernanke gave a dovish speech on inflation" doesn't. And that's exactly how the main policy principals like it.

Those in favor of developing alternative energy -- and since the future path of fiscal and monetary policy is clear, I'm one of them -- should object to the cultural hysteria that surrounds peak oil. That hysteria contributed to massive inflows into the alternative energy sector from both public and private investors. During the past year those investments have been crushed. This is one of the deleterious effects of bad monetary policy: it makes capital planning and investment difficult or impossible. Will potential investors in solar and wind power be as eager with the checkbook the next time oil hits $150?


Anonymous Anonymous said...

Private equity has a long memory. Fool them once....

6/10/2009 4:13 PM  
Anonymous am4 said...

For what it's worth, on Good Morning America today the "economic correspondent" said the increase in oil prices was due to refinery issues and a weaker dollar. Tonight on ABC World News Tonight correspondent Dan Harris said it was due to OPEC cuts in production and "investors" buying oil because they think the economy will sooner improve and the demand for oil will grow.

6/10/2009 6:42 PM  
Anonymous Anonymous said...

Thanks for the clarification.

When I read your original post, I thought "Damn, I thought he was one guy who saw the big picture". I had put you in the same category as otherwise smart people who think Darwinism is all a bunch of baloney.

When the history of our era is written, it will be called the Era of Cheap oil, which influenced everything from population to food supply to transportation, politics, wars, fashion, everything. We've bet the farm on a finite resource. It will run out.

What's waiting for history to record is whether we as a civilization were prepared for that day, whenever it comes.

Doubters might go back and read Jarred Diamond's stuff. One day, the last tree on Easter Island was chopped down. History now asks: what in Hell were they thinking?

6/10/2009 7:21 PM  
Anonymous charles lyell said...

Read James Hamilton's pieces on the subject (he blogs on the site Econobrowser). He has written some papers that argue that the rise in oil prices did in fact have alot to do with the crash of 2008.

"Peak Oil" isn't really about running out of oil, its about oil becoming more expensive to extract -yes, this is to some extent counteracted by improved drilling technology- which raises the price over the long term.

There is an implication that cheap oil is essential for economic growth. There are other sources of energy available, but they are not as cheap to extract into a useful form as oil was as recently in the 1990s and are unlikely to become as cheap. Its not the oil itself that is important, its finding a cheap, easily extractable, flexible form of energy. If energy is expensive, every time the economy picks up it gets choked off due to the increasing energy costs of the expansion.

Alot of the activity of the financial sector doesn't make sense at all unless you assume that 3% GDP growth each year is the norm (obviously there will be deviations but with additional liquidity you can smooth them over until growth resumes). I don't think we are ready as a country to make the psychological adjustment to flat growth, especially the baby boomer generation who came of age in an unusually high growth era.

6/10/2009 9:10 PM  
Anonymous Anonymous said...


None of the peak oil "genii"--Simmons, Leeb, etc.--said a peep when oil went from 150 to 30. Silent as slaughtered lambs...

They are as reliable about oil's unlimited upside as Roubini is about the economy's downside. I mean, it's that obvious, how come more people don't see it is beyond me.

6/10/2009 9:56 PM  
Anonymous goldhorder said...

Speaking of monetary policy. Anybody see this! Thomas Hoenig (president of the federal reserve bank of Kansas of the "evil ones") apparently has a moment of conscience. I mean he gives this speech and provides a link online....essentially telling the truth or as close as a fiat money Keynesian ever could anyways. This is good stuff. You all call me a crazy gun toting lunatic and don't listen to a thing I tell you...OK...Why not listen to an "insider" and current Federal reserve bank president telling you what I was telling you the last 5 years in the comments section on this esteemed blog. LOL


6/10/2009 11:52 PM  
Anonymous b. said...

There is no alternative energy.

There are only two fundamental sources of energy: gravity-contained fusion (solar) and radioactive decay (supernova fallout turned geothermal, or used for man-facilitated fission). Everything else is repackaging. Entropy (concentration gradients) and gravity (tides) matter on the cosmic scale, but not for technology.

Oil (and coal, and tar, and natural gas) are stored solar energy. The energy expended to get the stuff used to be negligible compared with the energy made available. We might starve on diminishing returns.

Biofuels are a scam, an idiocy. Ethanol needs synthetic fertilizer, needs Haber-Bosch, needs energty from gas or oil, or just energy.

Biofuels are about the desperate quest to find a substance - any substance - that replicates oils energy storage ability (a greened-up rehash of the Nazi's failed attempts at a synthetic fuel economy born from embargo). Biofuels do not make eneryg, they are a sleight of hand by agribusiness, Big Farming and its subsidizers to get into the solar energy business. Big Famine might well be the price.

Looking at life cycle return on investment, fission (and definitely fusion) are possibly questionable propositions, and even if not, the security implications (and the resulting authoritarian fallout for open societies) are staggering. Sustainable plutonium is for everybody.

Silicon-based solar energy is toxic. The rest is steam and mirrors - nothing wrong with that, but not enough solar input to go around unless you are talking global power grid. The kind of engineering that could actually work, technically, is always prohibited politcially until it is too late. There are windows of opportunity, and they are moving fast.

There is space-based solar power - steam and mirrors feeding microwaves. The military implications (space based directed energy on a large scale) will affect the politics. You could go to war with just the mirrors, if you have the biggest military in the world anyway. Again: what technically would offer a roadmap to a more sustainable future is politically impossible until we pull our collective heads out of our respective asses.

Peak Oil is common sense, suffering from the Cassandra effect. Free Lunch is a religion that affects more than executive compensation - the cornucopians have ruled the discourse for a century now. Malthus, too, used common sense, and in time the rearview mirror will prove him right.

Trends that cannot be sustained, will not be. As a species, our cognitive abilities are grounded in the expectation that observable tomorrow will be just like observed yesterday. Our grasp of the underlying dynamics is tenuous, and as long as we can, we will always turn aside a prospect of disaster by focusing on predicting the timing.

The housing bubble was obvious to common sense: wages did not increase, rents did not increase a lot - real estate prices escalated. Now look at how long "animal spirits" and "innovation" sustained the unsustainable. Look at the derision for those that pointed out the obvious. This was about money, something a lot of us care about a good deal - an entire decade flying in the face of common sense.

Do you think that a topic as "mundane" as food, or as touchy as population growth, is going to follow a different trajectory? Nobody who wears tailored suits wants to be caught facing the reality that we eat and shit, and that if we do not, we will not do anything else ever again.

In considering the validity of Peak Oil - or Peak Population - it might come handy to keep Peak Credit as a chart. There is no need to study the Easter Islands, the Caymans will do.

It is one of life's ironies that the math of bubbles resembles that of predator-prey dynamics for a cannibalistic species.

6/15/2009 12:56 PM  
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