More on the oil story

Coincidentally, about the time a small discussion between myself Frank and Paul, Kevin Drum has posted a lengthy analysis of the demand/supply issue with regard to oil. I think I will quote the thing in full.

The crucial point in relation to the discussion we were having:

If we’re lucky, of course, there won’t be any serious catastrophes, the market will adjust to tighter supplies with gradually higher prices, demand will slowly decrease in response, and there will be only a little bit of pain. The downside to this semi-cheery scenario is that it will convince everyone that we can continue with business as usual and make no serious efforts to curb oil use. But unlike previous oil shocks, the forthcoming one won’t be just the result of an artificial shortage mandated by a cartel, it will be a real shortage caused by the fact that we’re finally beginning to bump up against physical and geological limitations. The piper will eventually be paid, and the longer it’s put off the worse it’s likely to be.

Here’s the full piece:

I was not making a short term prediction of massive price increases. Right now there’s not much spare oil production capacity in the world, but there is some spare capacity, which means prices over the next year could go up or could go down. If nothing goes wrong, prices will probably ease down a bit; if Venezuela descends into civil war we’ll be paying $100 a barrel. Who knows?

But in the medium term, things are different. For the past two decades demand for oil has been increasing much more quickly than production capacity, which means that global demand is now very close to the maximum capacity of the world’s oil suppliers. Most of the world’s spare oil pumping capacity is in OPEC, and their total operational capacity has remained at 30 million barrels/day or less since the early 80s.

As demand has increased, OPEC’s spare capacity has gone down from 15 million barrels/day to 5 million barrels/day to today’s 2 million barrels/day. This means that even if there aren’t any special problems, demand will start to exceed production capacity within a couple of years. And when that happens, prices will go up and stay up. What’s more, with virtually no spare capacity around, every little blip in the oil supply will have potentially huge consequences. Stability of supply will become ever more important and American military policy in the Middle East will start to get really nasty.

There are five main ways to improve this grim picture:

Produce more oil (drill wells, build pipelines).

Switch to other, more plentiful hydrocarbons (gas, coal).

Increase use of renewable power sources (wind, solar).

Increase energy efficiency (higher CAFE standards, energy-friendly building codes).

More conservation (less driving, air conditioners set to 80 degrees).

Unfortunately, the first four of these all take time. Russia and Iraq can produce more oil, for example, but it will likely take a minimum of five years to build the required infrastructure and by that time demand will already have outstripped the new supply. Likewise, using more gas requires the construction of massively expensive (and unpopular) LNG ports, while using more coal requires the construction of costly clean coal facilities. Even if money were no object, both of these things take years to build.

After that it gets worse. Wind and solar are great, but their use is limited in a practical sense (it’s not always windy and it’s not always sunny), limited in a financial sense (both are more costly than conventional power), and limited in a temporal sense (building serious new capacity will take decades). Likewise, there are plenty of ways to increase energy efficiency, but they take time to implement. What’s more, no one in our current government or, to be fair, in our previous government or most of the rest of the world’s governments gives a rat’s ass about either of these alternatives.

Finally, there’s conservation. The problem here is that there’s good conservation and bad conservation. The good kind is when we all decide to turn our air conditioners down in order to give ourselves time to work on the other four ways of fixing our energy problems. This is not very likely. The bad kind is when supply suddenly fails to meet demand and I say “suddenly” since no one seems to really believe this is going to happen even though the numbers are right in front of our faces and the world goes through another oil shock. Like previous oil shocks, this would cause a global recession that in turn would cause us all to conserve one way or another. It would also cause massive worldwide pain, most of it in poor and developing countries.

If we’re lucky, of course, there won’t be any serious catastrophes, the market will adjust to tighter supplies with gradually higher prices, demand will slowly decrease in response, and there will be only a little bit of pain. The downside to this semi-cheery scenario is that it will convince everyone that we can continue with business as usual and make no serious efforts to curb oil use. But unlike previous oil shocks, the forthcoming one won’t be just the result of an artificial shortage mandated by a cartel, it will be a real shortage caused by the fact that we’re finally beginning to bump up against physical and geological limitations. The piper will eventually be paid, and the longer it’s put off the worse it’s likely to be.

This is a global problem, not just an American problem or a Bush/Cheney problem. Still, some leadership from America could go a long way toward producing a global consensus on a sustainable energy policy, and that leadership would recognize that the only possible answer involves steady progress in all five areas, not just #1.

Liberals can help too. How about a deal that trades ANWR drilling for higher CAFE standards, for example? Sounds horrible, doesn’t it? But it might be a politically feasible trade, and in the end the benefit from higher mileage cars probably vastly outweighs the negatives of another pipeline in Alaska. Consider it food for thought.

4 Responses to “More on the oil story”

  1. Peter Nolan says:

    Gavin,

    Am I being addressed as Paul or have I missed a thread somewhere?

    Peter

  2. Peter Nolan says:

    Gavin,

    I’d disagree. An outline of a rebuttal is on my blog.

    Peter

  3. Peter Nolan says:

    Gavin,

    BTW, did I see you at the NotCon conference today?

    Peter

  4. Gavin says:

    Argh im a fucking idiot..sorry Peter I got into my head that you were Paul…my boo.

    I wasnt at the NotCon conf but I would have liked to have been.

    Excellent to get some debate going , I dont think i have you in my blogroll..