Peak oil? Maybe not so much…

Peak Oil

I’ve been writing about the implications of Peak Oil here for a number of years. (If you’re a new reader, Peak Oil is the idea that eventually we will have accessed all the cheap oil that remains in the ground, there will still be additional oil, but the prices will rise.) I’ve been particularly concerned about the effect that a steep rise in energy prices would have on the life of a local congregation.

Over the past month there’s been a number of reports online that indicate that while we’re coming close to exhausting the major easily accessible oil fields globally, the situation is changing. The BBC has a good piece with lots of background that cuts to the chase thusly:

“Supply has been boosted by unconventional oil extracted from rocks which were previously uneconomic to exploit – like oil shales and tar sands. It takes much more energy and water to separate the oil from these rocks than conventional oil drilling so it’s much worse for the environment.

But your car doesn’t know or care whether it’s running on conventional oil or tar sand oil.

Fears over ‘peak oil’ haven’t evaporated, but the advent of unconventional oils has driven the peak further into the distance.

There’s also a boom in unconventional gas production that’s made the Americans relax about energy security. Gas can be turned into diesel – at a cost – pushing peak oil further into the distance. If things get really bad we can also turn coal into diesel.”

More here.

There’s a longish white paper (with a convenient executive summary) that you can read as well. The paper says that the big issue at the moment isn’t a decline in oil reserves but that the recent investment in oil production methods has had the effect of massively increasing our ability to pump more oil.

So… does this mean the Peak Oil concern is dead? Well, it’s not as big a deal as it was five years ago, that seems certain.

One of the key parts of the idea was that sans some sort of technological breakthrough we were going to have the global economy stymied because of rising energy costs. What appears to have happened is we were able to find that technological breakthrough – in the form of new drilling methods that have allowed us to get access to previously unexplainable reserves.

But there is a bit of a catch – the actual cost of extracting the oil is rising. The new tech is more expensive than the previous tech. But since about 80% of the cost of a barrel of oil at the moment is due to speculators on the commodity market driving up prices, there’s plenty of give in the present price. If you double the cost of extraction (a reasonable estimate) you still have oil at today’s price, with 60% of the cost per bbl due to speculation.

Which means the free market setting the oil price still has a lot of elasticity, and we shouldn’t expect a major run-up in prices anytime soon. In fact the concern is the opposite, that prices might fall precipitously and the resultant decline in revenues would destabilize OPEC national economies.

I imagine there are still implications for the Church, but I think they’re second order effects, and we’ll need to think a bit about what they might be. But in the short term, people are going to be able to afford to drive their cars to worship. The trend toward young people moving to the city cores again will probably continue, but I don’t imagine it will be accelerated by people worried about energy costs. The other thing is that I don’t imagine energy prices will fall in a major way from where they are now – at least not in the long term. That means a large, but hopefully stable, portion of a congregation’s budget will be dedicated to HVAC energy expenditures. It’s still probably worth trying to find conservation methods to lower that cost.

Any thing else that you can think of?

The Author

Episcopal bishop, dad, astronomer, erstwhile dancer...

4 Comments

  1. Dean Knisely,

    You write [emphases added]:

    about 80% of the cost of a barrel of oil at the moment is due to speculators on the commodity market driving up prices

    I am intensely curious to know to whom you refer as speculators (by functional or operational definition, not by name), and how they are “driving up prices”. More specifically, are you referring to traders operating in the futures markets, or some other class of traders?

    Pax et bonum,
    Keith Töpfer

  2. I’m referring to future’s traders Keith. I don’t mean speculators in a pejorative sense at all. It’s capitalism in action – but the truth is that the commodity markets are driving up the cost of a barrel of oil to much higher than the actual cost of producing it.

    • Dean Knisely,

      Thank you for the clarification. Nevertheless, I would observe that futures markets contribute to a more stable working of the markets, at least when they work correctly to allocate finite resources among the multitude of possible uses of any particular resource. All that the future’s traders do is pay for the privilege of assuming the risk associated with the fact that the producers and capital goods consumers cannot know with certainty what the actual demand, and thus the market price, will be when their product (in this case a “raw material”, i.e., a capital good) is available for sale into the market. The market, insofar as it is not impeded by fraudulent actors or improper government interference, operates on the basis of supply and demand. The unobstructed operation of those two factors determine the most valuable use of scarce resources.

      I do not intend cricitcism, even Adam Smith initially made the error of thinking that the value of a good was determined by the cost of producing it, sometimes termed either the “labor” or “cost-of-production” theory of value. The alternative to a futures market would be frequent, and not necessarily small, fluctuations in the prices (costs to the purchaser, income to the producer), which would make for a much more “interesting” market, “interesting” in the sense of the word embodied in the alleged Chinese curse (I actually think it might well be much worse than that might imply). The uncertainties are unpredictable, and the “speculators” (a term most often used today in a very pejorative sense, even if not intended by yourself) not only profit when they correctly assess a change in supply or demand, they lose when they get it wrong.

      I would suggest that a relatively stable price for fuel is an economic and psychological good for the public, compared to the alternative, and am grateful that there are such risk takers.

      Pax et bonum,
      Keith Töpfer

  3. Late visiting to this because Dean was talking about peak oil today and I thought, I wonder if Nick is still blogging about that? But my question re this post is: what are the implications of peak oil’s having been staved off if there is additional cost/impact to the environment?

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