I’m neither an economist or an engineer but I’ve spoken to people from both disciplines about peak oil and I can’t help but notice that these two have differing views on the impacts of peak oil. Generally speaking, economists see peak oil as the end of cheap oil and a transition to alternative liquid fuels and transport technologies. Engineers see peak oil, to put it simply, as less liquid fuels = less transportation (= less economic activity?).
Economists tell what I call the ‘end of cheap oil narrative.’ It goes something like this: ”the increasing scarcity of oil results in higher prices. On the demand side, higher prices encourage motorists to reduce consumption and substitute away from oil, adopting more efficient cars etc. On the supply side, investors realise that money can be made from enterprises that produce alternative fuels and substitutes. An alternative fuel technology, such as coal liquefaction, might cost $US70/barrel to produce. This technology was previously unprofitable but becomes profitable once the oil prices exceed $US70. Investment flows into these technologies as entrepreneurs seek out profit opportunities. As these enterprises start-up, the supply of liquid fuels rises, and thanks to competition, prices stabilise just above the costs of the marginal producer.” In the economist view, the higher oil prices around the peak might result in slower economic growth, but in general the world adapts and the economy ticks along as usual.
The engineers’ and peakniks’ narrative might go something like the following or though you could find others: “With an accelerating search effort for dispersed volumes the discovery rate for oil fields follows a bell shaped curve which has peaked in 1960. The rate of oil extraction lags this by several decades and is set go into a terminal decline in the near future. Substitutes for oil do not come online at the scale and speed necessary to replace oil. Oil becomes steadily less affordable, with a volatile prices reacting to geopolitical events and economic disruptions. The efficiency of vehicles improves but this occurs slower than total liquid fuel declines. Liquid fuel powered activity (i.e. most transportation) declines as the rate of oil extraction declines. It is difficult to gauge precisely how a decline in transportation will impact the economy but since most goods have long production and transportation chains, then this could plausibly have a severe impact.”
Economists tend to focus on prices, while engineers focus on physical flows of energy. Now, I’m with the engineers on this one. I think peak oil is going to more serious than the standard economic narrative. That said, economics can still contribute some insights. The problem is that the vast majority of public policy professionals have some training in economics and are therefore much more familiar with the economic narrative. While few have any training in engineering or physics, or similar disciplines and are perhaps less comfortable with the engineering narrative. When the government eventually responds/reacts to peak oil there is a risk that poor decisions will result. This blog is an attempt to build up the knowledge base in an accessible way. It will attempt to engage actual economists and engineers and try and work through the problem from both ends. The following outlines how I expect this will run. Traditionally, you’re supposed to state your opponent’s arguments in the strongest possible terms and then work through the weaknesses, so we’ll start with a mainstream economic perspective on peak oil.
1. The Economists’ Narrative: The End of Cheap Oil
2. The Engineers’ Narrative: Reduced Flows of Liquid Fuels
- How much oil?
- Oil Discoveries
- Conventional oil decline rate
- Tar sands
- Venezuelan heavy
- Coal to liquids
- Gas to liquids
- Shale and other liquids.
- Biofuels
- Transport substitution, efficiency improvements and conclusion.
3. Compare and Contrast
Economic Theory 1: The Efficient Market Hypothesis
Economic Theory 2: The Adaptive Market Hypothesis
Economic Theory 3 : Backstop Technology Substitution
(Biophysical) Economic Theory 4: Energy Return on Invested and Receding Horizons
Economic Theory 5: The Hotelling-Hartwick Rule
Economic Theory 6: Noorgard-Reynold’s critique.
Economic Theory Conclusion.
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