[Paleopsych] Freakonomics: "Peak Oil:" Welcome to the media's new version of shark attacks

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"Peak Oil:" Welcome to the media's new version of shark attacks
Sunday, August 21, 2005
[Links omitted on purpose. Too much irrelevance. I posted the NYT Magazine 
article yesterday.]

    The cover story of the New York Times Sunday Magazine written by Peter
    Maass is about "Peak Oil." The idea behind "peak oil" is that the
    world has been on a path of increasing oil production for many years,
    and now we are about to peak and go into a situation where there are
    dwindling reserves, leading to triple-digit prices for a barrel of
    oil, an unparalleled worldwide depression, and as one web page puts
    it, "Civilization as we know it is coming to an end soon."
    One might think that doomsday proponents would be chastened by the
    long history of people of their ilk being wrong: Nostradamus, Malthus,
    Paul Ehrlich, etc. Clearly they are not.
    What most of these doomsday scenarios have gotten wrong is the
    fundamental idea of economics: people respond to incentives. If the
    price of a good goes up, people demand less of it, the companies that
    make it figure out how to make more of it, and everyone tries to
    figure out how to produce substitutes for it. Add to that the march of
    technological innovation (like the green revolution, birth control,
    etc.). The end result: markets figure out how to deal with problems of
    supply and demand.
    Which is exactly the situation with oil right now. I don't know much
    about world oil reserves. I'm not even necessarily arguing with their
    facts about how much the output from existing oil fields is going to
    decline, or that world demand for oil is increasing. But these changes
    in supply and demand are slow and gradual -- a few percent each year.
    Markets have a way with dealing with situations like this: prices rise
    a little bit. That is not a catastrophe, it is a message that some
    things that used to be worth doing at low oil prices are no longer
    worth doing. Some people will switch from SUVs to hybrids, for
    instance. Maybe we'll be willing to build some nuclear power plants,
    or it will become worth it to put solar panels on more houses.
    The NY Times article totally flubs the economics time and again. Here
    is one example from the article: The author writes:
    The consequences of an actual shortfall of supply would be immense. If
    consumption begins to exceed production by even a small amount, the
    price of a barrel of oil could soar to triple-digit levels. This, in
    turn, could bring on a global recession, a result of exorbitant prices
    for transport fuels and for products that rely on petrochemicals --
    which is to say, almost every product on the market. The impact on the
    American way of life would be profound: cars cannot be propelled by
    roof-borne windmills. The suburban and exurban lifestyles, hinged to
    two-car families and constant trips to work, school and Wal-Mart,
    might become unaffordable or, if gas rationing is imposed, impossible.
    Carpools would be the least imposing of many inconveniences; the cost
    of home heating would soar -- assuming, of course, that
    climate-controlled habitats do not become just a fond memory.
    If oil prices rise, consumers of oil will be (a little) worse off.
    But, we are talking about needing to cut demand by a few percent a
    year. That doesn't mean putting windmills on cars, it means cutting
    out a few low value trips. It doesn't mean abandoning North Dakota, it
    means keeping the thermostat a degree or two cooler in the winter.
    A little later, the author writes
    The onset of triple-digit prices might seem a blessing for the Saudis
    -- they would receive greater amounts of money for their increasingly
    scarce oil. But one popular misunderstanding about the Saudis -- and
    about OPEC in general -- is that high prices, no matter how high, are
    to their benefit.
    Although oil costing more than $60 a barrel hasn't caused a global
    recession, that could still happen: it can take a while for high
    prices to have their ruinous impact. And the higher above $60 that
    prices rise, the more likely a recession will become. High oil prices
    are inflationary; they raise the cost of virtually everything -- from
    gasoline to jet fuel to plastics and fertilizers -- and that means
    people buy less and travel less, which means a drop-off in economic
    activity. So after a brief windfall for producers, oil prices would
    slide as recession sets in and once-voracious economies slow down,
    using less oil. Prices have collapsed before, and not so long ago: in
    1998, oil fell to $10 a barrel after an untimely increase in OPEC
    production and a reduction in demand from Asia, which was suffering
    through a financial crash.
    Oops, there goes the whole peak oil argument. When the price rises,
    demand falls, and oil prices slide. What happened to the "end of the
    world as we know it?" Now we are back to $10 a barrel oil. Without
    realizing it, the author just invoked basic economics to invalidate
    the entire premise of the article!
    Just for good measure, he goes on to write:
    High prices can have another unfortunate effect for producers. When
    crude costs $10 a barrel or even $30 a barrel, alternative fuels are
    prohibitively expensive. For example, Canada has vast amounts of tar
    sands that can be rendered into heavy oil, but the cost of doing so is
    quite high. Yet those tar sands and other alternatives, like
    bioethanol, hydrogen fuel cells and liquid fuel from natural gas or
    coal, become economically viable as the going rate for a barrel rises
    past, say, $40 or more, especially if consuming governments choose to
    offer their own incentives or subsidies. So even if high prices don't
    cause a recession, the Saudis risk losing market share to rivals into
    whose nonfundamentalist hands Americans would much prefer to channel
    their energy dollars.
    As he notes, high prices lead people to develop substitutes. Which is
    exactly why we don't need to panic over peak oil in the first place.
    So why do I compare peak oil to shark attacks? It is because shark
    attacks mostly stay about constant, but fear of them goes up sharply
    when the media decides to report on them. The same thing, I bet, will
    now happen with peak oil. I expect tons of copycat journalism stoking
    the fears of consumers about oil induced catastrophe, even though
    nothing fundamental has changed in the oil outlook in the last decade.
    (For those of you interested in more economic perspectives on peak
    oil, check out these three posts by Jim Hamilton of econbrowser: here,
    here, and here. And thanks to Alex from marginalrevolution for
    pointing me to Hamilton's posts.)

    posted by Steven D. Levitt at 11:31 AM


    head lem said...
OK I'll be your Huckleberry.
In 1971, President Nixon declared a "War on Cancer".
"The Market" has had 35 years to respond.
In fact, very rich people who are dying of cancer are willing
to pay whatever price they can afford for "the cure". The Shah
of Iran came to NYC with his cancer and his untold wealth. It
did not help him. Peter Jennings of ABC news (lung cancer 2005)
was probably wealthy. The "market" did not help him.
And amazingly, Nixon declared his war on cancer AFTER we had
been to the Moon in 1969. Why heck, if WE can go to the Moon,
we can do anything. The Market always provides. Right? Right?
Technology always finds a way. Technology will save us. Right?
The market will save us. "They" who tinker in science will save
us even though they fret that they might be able to this time.
It's always happened before and therefore by unquestionably
"sound" logic it must happen again. Right?
Peak Oil is one of a number of Global-Scope Catastrophes that
are rolling up onto Humanity's beach. The Tsunami of Sumatra
was nothing compared to what is heading our way. We know about
it, and yet the ever-insightful "market" does nothing. Just as
it did when the dot.com bust was rolling in and people knew
(Barrons). Just as it did when the first oil shock hit
(Hubbert's 1973 USA peak). When are you religious fanatics of
"economics" and Adam Smith's invisible waving hand going to
wake up and admit you worship a false deity?
There is only a finite amount of easily-extractable oil
underground. We are at the point where our high-tech straws are
sucking it out as fast as they can. The faster they suck, the
quicker we reach peak and go over.

8/21/2005 2:01 PM

    Preston said...
The economics principles I don't disagree with, its the degree
of the reponse. You say:
"If oil prices rise, consumers of oil will be (a little) worse
off. But, we are talking about needing to cut demand by a few
percent a year. That doesn't mean putting windmills on cars, it
means cutting out a few low value trips. It doesn't mean
abandoning North Dakota, it means keeping the thermostat a
degree or two cooler in the winter."
But our use of energy is far more fundamental to both our
population growth as a planet, and our standard of living as a
What the economics can't compensate for are the physics and
fundamentals of the laws of thermodynamics. Our standard of
living requires a certain energy input. Renewables can't
provide energy at the rate we are accustom to, so we use the
"battery" of oil that we are draining. When that battery runs
out, the economics will adapt, but along with it is a more
painful adaption we will have to make in the way we live.
As just one example of how fossil fuels go beyond just gas
trips for errands, read this article:

8/21/2005 2:22 PM

    Davis said...
Using cancer as an example doesn't help your argument here --
it's a shining example of common misunderstanding. There is no
such disease as cancer -- "Cancer is actually the end result of
what are probably hundreds (thousands?) of different diseases.
We have confused ourselves by giving them the same category
name - it's like the old-style classification of infections as
various 'fevers.'"
I would argue that "peak oil" is an issue which suffers from
common understanding in a similar way -- the complex details of
the real situation become obscured by attention-grabbing,
headline-friendly rhetoric. The Economist had an excellent
survey discussing peak oil in the April 28th issue; I won't
reproduce their arguments against this kind of alarmist talk
here, simply because there are too many of them.

8/21/2005 2:31 PM

    Eric Galloway said...
The sad thing is that the New York Times is so 'old media' that
most readers of the paper will never know about these
Here an idea: Make this the subject of your next column in the
New York Times. Of course, the Timesies are feeling a little
sensitive to criticism these days (Judy Miller, Jayson Blair,
etc.) so any explicit references to the Peter Maass piece might
be ill-advised.

8/21/2005 2:37 PM

    mtraven said...
Yes the market will respond. As Hamilton points out, the
framing of this question in terms of peaks or sudden cliffs
where prices shoot up instaneously is naive. However, nothing
in the market-economics arguments addresses:
- the size of the dislocation (small increases in oil prices
can multiply their effects as it raises costs throughout the
- the time to respond. This is the big one. A rational response
to a rise in oil prices involves consuming less transportation.
Everyone who lives spread out in the suburbs will be hurting
and, perhaps, be economically motivated to live in a denser
development pattern where they can rely on human-power or
public transit. However, getting to that state requires an
enormous shift in investment, public and private. It's not
going to happen quickly and it's going to cause pain.
- Speaking of pain, downturns, recessions, and depressions can
all be part of a market response. While a long-view economist
can interpret it all as a welcome and necessary correction,
that doesn't lessen the pain for individuals involved.
I'd like to see you and James Kunstler, who has a new
doomsaying book out, have a good optimist/pessimist debate. Us
ordinary citizens don't know who to believe, but a good battle
is always entertaining.

8/21/2005 2:52 PM

    Jamie Brockington said...
Dr. Levitt:
You make an excellent that is often overlooked in the
mainstream media and among the general populace. Taking into
account another basic economic principle, that people make
rational decisions, it is illogical to assume that people will
pay say, $5 per gallon of gas if an alternative can offer half
of that. It is also reasonable to assume that people would
drive less if driving costs more. The idea that rising gas
prices could be the "end of life as we know it" is just
completely absurd.
Toyota and Honda obviously understand it. They're beginning to
create more hybrid vehicles.
to head lem:
Contrary to your assertion, the market is responding to cancer.
While there is no efficative cure for the disease, there is a
copious amount of money and research towards developing one.
That IS the invisible hand at work. Were there no economic
response to such a devastating illness, there would be Cancer
Societies, no funds devoted towards curing cancer, and less
attention paid towards it. Just because a few wealthy,
cancer-afflicted aristocrats could not use their money to cure
themselves, doesn't negate the economic, incentive-based
reaction towards cancer.

8/21/2005 2:59 PM

    Anonymous said...
The flaw in your logic is the speed with which society will
adapt. I don't feel it will be a slow shift away from oil, but
rather a sudden drop in supply will come first - unrest in
Nigeria or Venezuela and suddenly supply drastically exceeds
demand. Look at the panic buying which ensued during the UK
petrol protest in 2000 - it literally brought the country to a
The US is particularly dependent on petrol for transport. Look
at Walmart's worry over oil prices. Look at Surprise, AZ - a
community with no public transport, a group of suburbs which
are virtually unsustainable without cheap fuel:
We all agree that hybrids and changes of habits must happen.
Unfortunately, I bet that a sudden drop in supply will cause
total chaos before any real lasting change in habits begins to
I am also highly sceptical of any replacement technology for
oil - how long will it take to build the nuclear plants
required? Any idea how many plants would be needed? You can't
build a nuclear plant overnight.
Oil is to society as alcohol is to an alcoholic ... sadly, I
feel we're going to have to wake up in our own vomit before we
start any process of a real substantial move away from oil.

8/21/2005 3:50 PM

    JW said...
"The consequences of an actual shortfall of supply would be
immense. If consumption begins to exceed production by even a
small amount, the price of a barrel of oil could soar to
triple-digit levels."
The price of oil has gone up precipitously in the last few
years, mainly because excess capacity has disappeared. We are
still consuming more every year. If and when we get to the
point where supply actually decreases, the price of a good with
an inelastic demand curve will go through the roof, at least
I agree that as long as cooler heads prevail, this does not
mean the end of civilization, but modern civilization is built
on the idea of growth. Our current system where the rich get
richer will only work when there is growth in the system. This
will become extremely difficult once energy becomes
constrained. Is it hard to believe that when the economy goes
into an extended funk and the people at the bottom are getting
squeezed the most, that people will want a scapegoat, esp one
thats supposedly sitting on all the oil?

8/21/2005 3:58 PM

    Mike said...
The real problem with your analysis of the situation as one
which can be resolved by simple economics is that you're right.
You're right - prices will go up until enough demand is
destroyed for them to stabilize. There'll be a lot of up/down
in the meantime.
But what does this mean? In our country, this means you won't
be able to live in the suburbs anymore in most cities (no
public transportation; and no feasible way to deliver it to
most suburban neighborhoods). So what does that do to our
Concrete laid down now to build the latest exurbs has a long
life. And conversely, rebuilding today's suburbs to be dense
urban neighborhoods in which mass transit can actually work is
expensive even with CHEAP oil.
One thing economists forget is that demand destruction in the
abstract is a perfect solution to a supply/demand imbalance.
But when the suburbanites are trying to get to work or school
at $6/gallon gasoline, and there still isn't a bus in their
neighborhood, and they still can't carpool since their town has
offices spread all throughout the suburbs rather than in one
central location, what are you gonna do?

8/21/2005 4:01 PM

    Prof. Goose said...
This post has been removed by the author.

8/21/2005 4:15 PM

    odograph said...
Economists seem weird to me. Yes, I've seen and commented in
some of those other blogs. Valid points are made, but an
undercurrent of economic weirdness returns. They seem to think
they have "the answer" because no matter what happens, supply
and demand will meet. It doesn't matter if they meet in a
return to $10 gas (SUVs for everyone!) or at $100 (goodbye
Fedex) ... it's still a market success.
A comment above says:
Taking into account another basic economic principle, that
people make rational decisions, it is illogical to assume that
people will pay say, $5 per gallon of gas if an alternative can
offer half of that. It is also reasonable to assume that people
would drive less if driving costs more. The idea that rising
gas prices could be the "end of life as we know it" is just
completely absurd.
I submit to you that driving less, even having to think about
how far you drive, is a change in life as we know it.
Be careful that your prediction of optimism doesn't come to
match someone else's prediction of pessimism!

8/21/2005 4:21 PM

    odograph said...
sorry, $10 oil not "$10 gas."

8/21/2005 4:22 PM

    Prof. Goose said...
Cheap oil is necessary and sufficient for economic growth.
Cheap oil is what could have facilitated the development of
alternative sources of energy, had it been used wisely.
You see, without economic growth, lives change. Period.
Economics is a discipline that is very normatively pleasing
when economic growth exists. Growth facilitates rational
choices and we all feel warm and fuzzly about the market.
However, at its core, economics, when there is not economic
growth, turns into a rationalist, Hobbesian State of Nature
that decays rapidly. Why?
Actors have to make tougher choices, that while still rational,
do not stem from a growing pie, but a shrinking one.
Then throw in the psychology of people with no hope of growth
or betterment...and what do you have?
NB, I do not subscribe to the real doomers like Kunstler,
because I think humans can innovate and change if we understand
the situation and are driven to do so...and we can do so in
time to come in for a soft landing.
We just have to get our heads out of our asses and start. Now.
So, I hope you all learn as much as you can about peak oil.
Simmons, Deffeyes, etc., etc.
And if you're so inclined, come on over to The Oil Drum, where
it is our mission to talk about this and many other related

8/21/2005 4:35 PM

    Anonymous said...
As knowledge of the impending energy crisis begins to spread,
hording will take precedent over conservation-- pushing the
price higher and higher, even in the face of falling demand.

8/21/2005 4:37 PM

    Eric Galloway said...
I see Peter Maass (the author of the NY Times Mag piece) is
writing a book about oil. I'd advise him to write quickly--just
in case the price of oil collapses down to $10 a barrel again
(as in 1998)--if he wants to produce a freako'-style
bestseller. Next year we might be back to worrying about the
threat from Japan (or perhaps killer bees, or possibly even

8/21/2005 4:40 PM

    Aaron said...
A few thoughts from up here in "Oilberta", Canada.
- I have a friend who burns raw vegetable oil in his mercedes
diesel at 77 cents (CDN) per litre.
- People in my town are responding by snapping up Smart Cars.
They are everywhere in the Great White North.
- It might not be the price of oil in terms of dollars, but the
price of dollars in terms of oil. The US dollar has taken a
substantial hit as of late.
- Price of oil is based on expectations. Investment houses who
buy futures contracts do so on expectations. They almost have
an incentive to propagate a theory of limited future supply.

8/21/2005 4:47 PM

    J-Deal said...
âWe know about it, and yet the ever-insightful "market" does
How can you make such a claim? It now costs $1,000 dollars to
change any car into a Natural Gas or propane car. Oil can now
be cheaply extracted from Sand Tar and Coal. -did you know
America could supplement itâs oil supply with itâs coal supply?
Electric cars are now completely viable, still not as good as
oil driven cars, but 300 miles on an overnight charge ainât
bad. Combustion Hydrogen cars can be made for 50k, fuel cell
for about 100k. Should we go on? There are hundreds of
examples, and hundreds of alternatives that could go into
effect, and be improved upon within months, if your catastrophe
ever comes about.
âThere is only a finite amount of easily-extractable oil
You need to research this a bit more, you do realize that the
definition of easily extractable oil has changed every single
year of your life? Tar sand which a few years ago was
considered costly, can now be done for relatively cheap. Deep
oil which was once impossible to drill, can now be done for $12
a barrel. American Oil companies have not once accurately
predicted oil prices beyond 5 years. Always stating a higher
cost than they expected, always underestimating the increase in
technology. Tappable Oil reserves have increased every year I
have been alive. If that ever changes, you will soon see oil
substitutes increase every year.
âRenewables can't provide energy at the rate we are accustom
to, so we use the "battery" of oil that we are draining.â
France gets 80% of itâs energy from Nukes, we get 20%. Even if
your statement is true, we have a long way to go.
The article you link is basically bunk. About 90% of oil use in
America goes to transportation. That other 10% can be made up
easily just through use of alternatives. It doesnât even
explain the green revolution properly. Look it up at Wiki if
you care.
I donât know if you know anyone in the car business, but bring
this all up with them. Every car company has a plan to switch
from Gas to other alternatives. The price of which would only
be about 16 billion dollars. The cars would not be as good as
gas cars at first -miles per tank of about 200-300 miles- but
that would improve very quickly.
âLook at Surprise, AZ - a community with no public transport, a
group of suburbs which are virtually unsustainable without
cheap fuel:â
A really bad example, seeing that just last year Phoenixâs oil
supply was cut off by a pipeline rupture. Gas went to 20
dollars a gallon. And though their was much complaining, people
just car pooled for the week while the pipeline was being
fixed. Heck at the very worst, it takes about a day to switch
your car over to natural gas or propane. Phoenix having one of
the best natural gas infrastructures in the world would be able
to remedy this quickly.
Thatâs not to say it would be havoc for a good month or two,
but people who think it would be a catastrophic way to life as
we know it, just donât seem to understand the history.
The prices of commodities have always gone down, new technology
has always arise, better means of extraction have always been
invented. This has and will always be the case. Why should oil
be any different? Iâm 27 years old now. I have been hearing
this same debate for my entire life now. At every step of my
life my teachers have told me we will run out of oil in 10
years. I used to think, that if they kept saying it, someday it
would be true. Now I realize it will never be true. Man learns
to adapt. For there are only two great truth in the world.
The world is always getting better, and everyone always
believes itâs getting worse.

8/21/2005 5:03 PM

    peakguy said...
Dr. Levitt
I urge you not to make hasty comments about this subject
without more deep analysis. Oil is not just a commodity, it is
THE commodity that makes everything in our modern world
possible, in particular food production and most forms of
transportation. Barring some major innovation, there is no
technology or energy source that can replace oil and it's many
uses. It's like water and air. 6 Billion people need oil. 100
million maybe...
If you read the Maass article closer you will find that really
the oil market right now suffers from gross price distortion
(probably way too low) because of a dearth of basic data on
reserves and a well by well analysis of production rates. This
is why people like Matt Simmons have been crying out for more
data. Until we have more data I don't think anyone should be
complacent about oil prices moving slowly in any direction.
The problem is that we have invested Trillions of Dollars into
an economic structure predicated on consistently low oil
prices. We have trusted politically motivated leaders and
economic interests that oil is plentiful and can meet an ever
rising level of demand. If we had better data then the market
could have continuously bid up the price as it became
increasingly apparent that oil supplies were becoming scarce.
Instead we are left with a situation in which all of this will
become apparent when there are real shortages which will cause
a huge spike in prices and the Saudis simply cannot increase
production to alleviate the shortage. Then the market will
react with brutal efficiency throwing the economy into an
economic depression. Will oil restabilize at a lower price?
Perhaps. It depends on whether you think inflation will be the
main effect or an economic collapse causing rapid deflation of
asset and massive unemployment. Remember that everything is
relative. If there is rapid deflation and massive unemployment,
then $10/barrel may be unaffordable. Please research this
subject more closely and come back to us with a more thorough
analysis of the subject. It's only the fate of our economy and
civilization that hang in the balance.

8/21/2005 5:29 PM

    Anonymous said...
One very quick point.
Why is it do you think that in Canada our oil and natural gas
reserves are managed by the Ministry of Natural Resources,
Environment Canada, run mostly by enviornment science grads but
in the US oil and how to obtain it is a matter of National
I find Americans to be very reactionary. If oil and the
procurement of it become to expensive and difficult I feel that
it actually may be a very good thing for LOCAL economy.....why
buy a tomato from Chile when you can buy one from the farmer
down the road, and that sort of thinking.

8/21/2005 5:47 PM

    Jim said...
All this discussion with no mention of Julian Simon's bet with
Paul Ehrlich? Simon's proposition is that comodities get
cheaper over time due to human creativity. Real gas prices are
not much more than they were in the '50's, while real income is
much higher.

8/21/2005 5:53 PM

    Ripley said...
The hosts of this blog make several huge assumptions. First,
"people respond to incentives." That's true, but the incentives
to oil suppliers are not necessarily monetary. Countries like
Iran or Sudan may sell to China because it can protect them
with a UN Security Council veto. Hugo Chavez may lead Venezuela
to stop selling to Americans because he doesn't care about
maximizing profit.
The second assumption is that any "changes in [oil] supply and
demand are slow and gradual... [so] prices will rise a little
bit" at most. Without knowing exactly how supply or demand will
change, how can that be automatically true?
The third assumption is market forces will solve the problem
rationally. But doesn't that assume some sort of perfect
market, with many buyers and sellers? Many responses to high
oil prices would require huge initial investments, and it
doesn't make sense to the individual entity to make those
investments unless it's clear that they will be profitable on a
long-term basis.
Also, certainty of supply is important in the real world
because oil is such a critical resource. This is a long-term
issue which an economic analysis should address.
The economic issue I'm the most interested in is the elasticity
of demand for gasoline, which accounts for about half of U.S.
oil use.

8/21/2005 5:57 PM

    coffee17 said...
j-deal: could you post some links about tar sands being cheap?
I remember that local producers were having to double the
initial overhead to increase production a mere 0.1 mbpd (from
$4.3 billion CDN to $7.8 billion CDN). Additionally, combined
oil sand production by 2015 is supposed to be 2.7 mbpd (
s-fools-black-gold.html ), so even if it was cheap, that's
about 2.7% of the projected oil demand at 2015. Where's the
rest of the increased oil production supposed to come from.
As for people who drive their cars for 77 cents a gallon with
vegetable oil, it's a question of scale. I saw a news story
about one such person, and he depended on waste oil from a
local restaurant. They won't be able to supply an entire city.
There's a waiting time in many places to get a hybrid vehicle,
and it there are multiple month long waiting lists to buy
enough solar panels to power a house. Not to mention that with
the increased price of oil this will be attached onto the cost
to manufacture said solar panels.
Nuclear power stations take 5+ years to build, and are very
energy and capital intensive. And there are no new ones coming
on line in the US (yet).
Switch one's car over to natural gas? That's a great idea,
considering North American natural gas production has already
peaked, and the worry about oil prices is regarding the
impending peak. Oh, wait, perhaps on the scale of all cars (or
even 20% of all cars) that might not be the wisest long term
Where are you going to get the hydrogen to fill up your
hydrogen (or fuel cell) car? Remember, this isn't just your
car, but everyone's car (or again, how about 20%), so the
question of scale applies again.
Transitioning to all these new technologies will take a lot of
oil when oil is getting scare. Additionally our economy
currently depends upon cheap oil. Which means that
transitioning away from oil takes a lot of capital when there
will be (at least) a recession going on, multiplying the
apparent cost to transition.
This doesn't even take into the fact that about 15% of the
USA's oil use is for making inorganic fertilizers, without
which agribuisness won't work. And don't count on cheap apples
from argentia as well, shipping costs will be up. So the people
in the cities will have less direct need of oil, but won't be
able to grow their own food. The people in the suburbs will be
densely packed enough that crime could be a real problem with a
less mobile police force, but at least they have the
possibility of growing some of their food. However, for those
who've put the work into a successful garden realize that it
cuts into the leisure time, and how many people have worm bins
to make their compost faster than a compost pile? How many
people are ready to grow a garden which will give them some
approximately balanced nutrition? And if America has less
leisure time, then the terrorists have won. Or something like
Yes, there are lots of small scale alternatives, but none of
them currently answer the question of, "What if everyone did
this?", and then there's the issue that even if we find
something that ramps up well, will it ramp up fast enough. Yes,
there will be demand destruction, but consider what demand
destruction is for people in the suburbs, when there's no
housing left within walking/biking distance to work, it's the
middle of winter, and they pantry is empty. Now consider demand
destruction for natural gas which has already peaked (at least
it currently has lower decline rates) in Canadian cities.
Touching back on oil sands again, current processing uses a lot
of natural gas, and as we use more natural gas (cars and
busses), what do you think will happen with the price of
natural gas and how will this affect oil sands?
Lastly, decline in rate of oil recovery for individual wells
varries greatly on the techniques used. Horrizontal wells run
well until they peak, and then they decline sharply. New wells
are energy intensive, and new fields don't contain as much oil,
or as fine of a quality of oil. Which means it takes more
energy to refine the oil into something useable. As EROEI goes
down, effectively the amount of oil produced goes down still

8/21/2005 5:58 PM

    Dimitar Vesselinov said...
"Fear is the path to the dark side. Fear leads to anger. Anger
leads to hate. Hate leads to suffering."
Is there any hope? Yes, there is. Help is on the way.

8/21/2005 6:00 PM

    wkwillis said...
Why do you assume that oil can't collapse in price and increase
in price, say, going from 65 dollars/45 euros per barrel to 650
dollars/15 euros a barrel?
That's without US hyperinflation, either. Just a balance of
payments renormalisation.
We get loaned money by the rest of the world. We buy oil. If
the rest of the world doesn't loan us money the dollar
collapses and it costs us more money in real terms to buy oil.
So we buy lead for battery powered cars, instead.

8/21/2005 6:01 PM

    peak oil said...
The inaugural meeting of the US branch of the Association for
the Study of Peak Oil (ASPO) will be held in Denver, Nov 10-11

8/21/2005 6:17 PM

    SW said...
People have predicted that I would die.
I haven't died.
Therefore, I will never die.

8/21/2005 6:21 PM

    Anonymous said...
As a Coloradan, let me assure you that the long term problem is
about 500 years. There are mountains on the middle slope that
are basically horrible piles of black gunk filled with oil--no
green trees, no lovely golden aspen, no pretty fuzzy cuddly
deer or chipmunks--just ugly black piles of oil poisoned shale.
Take the trip along I-70 from Denver to Grand Junction before
you argue with me.
Our dear former President Jimmy
Carter paid me 18.73 an hour to buld an oil cracking plant at
Parachute, Colo.--the site of the former city of Grand Mesa. I
worked on that sucker for the entire summers of 76 and 77. It
would have brought in gasoline for under a dollar a gallon. Our
lovely friends in Araby decided to lower their prices before it
came online, so now weeds are growing through the cracks in the
The smart boys (oaky, my chemist father) said then that there
is enough oil there to supply the entire planet for 500 years.
That was in 1976, so maybe there's only enough oil to supply us
until, say, 2375 A.D. at today's demands. So it costs us $60.00
a barrel. That's less than we seem to be paying now.
To paraphrase Frank Zappa, those mountains are ugly and they
want to die.
--Bruce Dearborn Walker

8/21/2005 6:29 PM

    Ralph said...
We'll survive peak oil, but the transition will not be
pain-free. Oil is transportation. There are limited
substitutes. I can buy an electric car to take me to the
grocery store, but the trucks and trains that get the food to
the store have no alternatives. Batteries large enough to power
these vehicles long distances would make them extremenly
inefficient. Planes also have no fuel alternative. Biodiesel or
liquid fuel from coal is a possibility, but significant
infrastructure is not in place.
Natural gas production in North America has peaked, and the LNG
infrastructure to import oversea NG is hardly started, so
conversions to this fuel has minimal upside for the time being.
This is not a matter of minor fluctuations in supply and
demand. China had a 20% year over year increase in oil demand.
This has accelerated the process. In this country, SUV
purchases have fallen off the map, but efficient hybrids have
long waiting lists, and many upcoming hybrid models are only
slightly more efficient than the normal models.
What is really disappointing about this glib rebuttal is the
ipse dixit manner in which Levitt dismisses the concept. His
book and research have been focused on ignoring surface
appearance and looking at what the data actually says, and this
piece makes pronouncements without bothering to look at the

8/21/2005 6:29 PM

    Steven D. Levitt said...
To SW-
The right analogy is:
People have predicted you will die.
You haven't died yet.
You probably won't die in the next 5 minutes.
The point isn't that we will never run out of oil, it is that
by the time we do we probably won't care very much.
Steve Levitt

8/21/2005 6:46 PM

    J-Deal said...
Rereading my statement, I may of overstepped. I probably should
of stated "cheaper" instead of "cheap". Generally speaking Oil
reserves are considered any oil that can be drilled for $15 a
barrel, much of the Alberta oil hovers right at this price,
most is closer to $18 -but with $60 a barrel for oil, I would
consider that pretty cheap, though not as cheap as the $2-$4
Persian Gulf oil. As for some links -I got this info from hard
print, so just googled for info.
However, if you think I was trying to imply that Alberta sands
were the end all be all, you are mistaken. it's just one piece
of the puzzle. You act as if it is all zero sum.
Let me ask you something, what if we learn how to shale drill
cheaply? Well then all our problems go away overnight.
As for your questions on Hydrogen, Natural Gas and and propane.
First of all, each one of these would lesson our demand for
oil, even with a 10% decrease, this would be huge. However,
hydrogen could easily become our soul source almost overnight.
-We have plans just to do this, in case of catastrophe.
Hydrogen is more expensive than oil in output per unit -think
mpg-, and the vehicles are more expensive. however with mass
production, that could change quickly.
You ask where the hydrogen will come from. Well Hydrogen can
come from any electrical source. It's one of the easiest things
to make on the planet. Actually it's transportation costs that
are a pain right now. Hydrogen should not be looked at as a
fuel, but an intermidiatary. Much like elecrticity. If an
overnight catastphee should happen, which I think is extremely
unlikely. You could make the hydrogen in home units with
equipment bought at Home Depot. large scale facilities would be
put in place within about a 3 month period.
It can be made from any electrical source. So unless you think
Oil will dry up within a 3 month period, this could be eased
into to avert a mass spike in oil demand.
You act as if one day we will have oil, and the next day it
will be all gone. It just doesn't work that way. If you believe
it does, then there is nothing I can say that will change your
You also speak of the peak in NG demand, but don't mention LNG
at all, LNG is still in it's infancy. Soon we will be able to
import LNG much like we import Oil. And guess what, when LNG
peaks, we'll find something else, and after that, something
else. And so on.

8/21/2005 6:47 PM

    Anonymous said...
We should just trust the Saudis, they love us over there. They
would never let anything bad happen to us.

8/21/2005 6:55 PM

    Anonymous said...
I would agree with you completely if it was guaranteed that oil
depletion would be only "a few percent a year". Unfortunately,
that's not a solid assumption. Various provinces either are or
are about to deplete at over 10% per year. Eg the UK:
and Mexico:
Saudi depletion on existing oil production is estimated at 11%
a year (but they may be able to make up the difference with new
production for some unknown period).
It appears that a lot of provinces have been adopting
technology like 4D seismic imaging of the changing oil in place
and horizontal wells at the top of the oil layer which lead to
maintaining production flat for a while, and then very rapid
depletion on the backside of the peak.
So, the worst case scenario is global depletion at O(10%) per
year in a few years. Not saying that's certain by any means,
but it's not off the wall either. That's very very hard to
overcome when you consider that the average lifetime for a car
on the road is 9 years, a truck is twice that, and new nuclear
power plants need a lead time of 5-7 years.
Stuart Staniford

8/21/2005 7:06 PM

    Anonymous said...
Sorry, that should have been average *age* of a car on the road
is nine years.
Stuart Staniford

8/21/2005 7:14 PM

    Anonymous said...
> new nuclear power plants need a lead time of 5-7 years.
No, they don't. The political and regulatory environment
imposes that kind of delay, but the planning and construction
can be done in far less time.
I predict that we'll first see the relevant cracks in US
gasoline formulation regulation. There will be a production
glitch that starves one area and not another and the obvious
questions will get asked and the standard answers won't be

8/21/2005 7:16 PM

    J-Deal said...
Peakguy, you stated
"I urge you not to make hasty comments about this subject
without more deep analysis. Oil is not just a commodity, it is
THE commodity that makes everything in our modern world
possible, in particular food production and most forms of
transportation. Barring some major innovation, there is no
technology or energy source that can replace oil and it's many
uses. It's like water and air. 6 Billion people need oil. 100
million maybe..."
Hmm, whatever did we do before Oil? Let me ask you, what would
affect your life more, the loss of Oil? or the loss of Copper?
Or maybe, lets be more fair, $600 dollar a barrel oil or $15
dollar a pound copper?
I urge you not to be hasty, think about it. What is more
important to you, having cheap electricity or having cheap gas?
being able to cool your food in a fridge? or having cheap
plastics? heck, using wood instead of plastics? A lot of people
assume Oil is more important to us than it really is, just
because we buy it at the pump everyday. We never think of the
importance of copper. How copper is the commodity that makes
our modern homes possible.
As for the whole food production comment, I really don't even
know what to say to this. Start buy learning how fertilizer is
Oil is the #1 most important substance we have for
transportation, you will get no argument from me on that one at
all. However, ever since the 70's, we have shifted our oil use
in other applications, over to alternatives. Open up an
Almanac, look at our Oil use over the past 25 years, you might
be surprised. hint, it's increased about 12% from 34.20 qbtu to
39.07 qbtu while total energy use has increased 19%.

8/21/2005 7:19 PM

    Loren Coleman said...
The Copycat Effect Blog
Sharks, Gators, Oil

8/21/2005 7:24 PM

    odograph said...
Just curious ... is "everyone drives a little electric car"
optimistic or pessimistic? Is it the success of the invisible
hand, or the end of life as we know it?
I've got a sense that a lot of SUV families would see it as the
sky falling. I get the idea it might be contrary to the
"lifestyle" our government thinks it must defend.
If it was me, I'd take freedom, honor, peace, and electric
cars. YMMV.

8/21/2005 7:25 PM

    J-Deal said...
Anon, you stated.
"I would agree with you completely if it was guaranteed that
oil depletion would be only "a few percent a year".
Unfortunately, that's not a solid assumption. Various provinces
either are or are about to deplete at over 10% per year. Eg the
I don't disagree with this in theory at all. But the problem
is, world production is still increasing. Even last year, which
was a horrible year, we increased at about 2%. -And it wasn't
until last year that Oil companies really started to ramp up,
many still remeber the losses they took at 10 dollar oil.
Now say next year, we are flat, or go down a a few %. Then we
need to get our @sses in order, and fast. If it came in as you
state, and dropped 10%. Then I think we'd have a few months of
Havoc, as we went into a huge burst of energy production from
other sources.
Also I know it's generic to say, but kinda needs to be saying.
France gets 80% of it's power from a source that was unknown
100 years ago. Whose to say that in 100 years, we won't be
saying the same about the US.

8/21/2005 7:27 PM

    SW said...
"The point isn't that we will never run out of oil, it is that
by the time we do we probably won't care very much".
It has bugger all to do with running out. It's all about RATES
of production. You need to address that in a substantive way
rather than invoking motivation. We agree that there will be
plenty of motivation to inspire people to "unlock their
creative genius". The question is, are you allowing yourself a
realistic assessment of the physical realities that this genius
is up against. I suggest not.
If you want to make the argument that mining for sand and shale
and the resulting processing is going to take the place of what
we are losing to depletion and increased consumption and these
new sources are going to come on line quickly enough to prevent
near term supply shortages, I'd like to see the numbers. Where
specifically are the projects where the anticipated production
in the next five years can possibly compensate for the 4
million barrels per day we are losing to depletion plus the
increased demand represented by growth both here and in India
and China? I just don't see the numbers working out without
significant 'demand destruction'. You can't just click your
heels and make it happen. You can't rely on pixie dust.
In the real world, most good leaders prepare for the worst and
hope for the best. It is true that there is a real lack of
solid data, particularly from the Middle East. And it is also
true that a guy like Mat Simmons may be giving us what amounts
to the worst case scenario. But given the implications, you
would be a complete idiot not to have a plan to deal with the
worst case scenario. To blithely assume that there is no chance
that it could be an accurate prediction of what is to come
amounts to public policy malpractice. The consequences of being
wrong on this are simply too severe.
Besides, the simple obvious things to do, are undeniably good
anyway. Efficiency, doing the same amount of work, with less
energy, is a growth industry. It is the next wave of high tech.
Disengaging ourselves from the Middle East makes sense.
Limiting our carbon emissions makes sense. So getting our
public policy going in the right direction is going to help
even if this turns out to be a pessimistic projection and we
really have more time to prepare for something that is, I'm
sure you will admit, inevitable.

8/21/2005 7:35 PM

    odograph said...
"Whose to say that in 100 years, we won't be saying the same
about the US."
Oh, as an engineer I have seen the "invisible hand" fuel R&D
... they've just never let me deliver an "invisible product."
Or put another way, the invisible hand is not a wishing well.

8/21/2005 7:43 PM

    cerqueira said...
Steven, I was really disappointed by this post. By focusing on
Maass' article, you've managed to avoid the real question of
oil depletion and its implications on economy.
If the "peak oilers" are right and oil production reaches a
maximum then, surely, people will adapt. The cost of it,
though, might be high. The last time oil prices raised, in the
seventies and early eighties, it was followed by inflation and
recession. Demand was destroyed by recession. In peripheral
countries (I live in Brazil) the consequences (of high oil
prices and high interest rates) were felt for a long time.
As an engineer, I have almost the obligation to believe that
energy conservation and alternative sources can cope with the
needs. In my own country, ethanol from sugarcane constitutes
some 50% of the fuel used by cars.
But in the last three years world daily demand for oil has
risen some two million barrels a year. Finding alternative
sources for that much would be tough - and if you consider
anthropogenic climate change, coal derived fuels are not an

8/21/2005 8:09 PM

    Sandy said...
There was also no way the oil fires in Kuwait could be out in
less than 10 years.
There was also no way the Y2K problem could be solved in time
to avoid TEOTWAWKI(tm).
There was no way prices for commodities would be less in the
1980s than the 1970s.
There was no way to feed the world in the 1980's, either.
Remember when all of that happened? Me neither.
Lots of bright people have said "there is no way that..." and
produced lots of learned graphs and data as to why it can't be
done, yet to date it has been done. Now, that's not a guarantee
that this one time out of all the others, they'll be right, but
the trend doesn't go their way.

8/21/2005 8:32 PM

    head lem said...
Yes people have always predicted you will die, some promising
it will happen very soon.
They were all wrong so far.
But now you are in ICU. The Chevron doctor has said "Will You
Join Us?"
Still willing to bet on that next 5 minutes?

8/21/2005 8:38 PM

    Aaron said...
The Saudis are repatriating billions in investments from
abroad, which is just a nicer way of saying "we don't want to
fund your consumption habits".
No wonder Dick Cheney is coming to Canada in search of oil.
There's plenty of it up here. It was profitable at 13 canadian
dollars a barrel, or about 9 US.

8/21/2005 8:50 PM

    head lem said...
Thanks to "globalization", the markets provide their perfect
solutions everywhere, even in Africa, today:
What exactly is the "market price" for a pauper's burial site
in Africa? ... you know, speaking in cold terms of supply and

8/21/2005 9:00 PM

    Anonymous said...
Mike, and others - we have a serious arithmetic problem
standing between us and doom. After all, at $6/gallon they're
still building suburbs in Europe, although package tourists
never see them. And Europeans still buy enough SUVs that their
Socialist Parties keep dreaming up schemes to ban them from
A little back-of-the-envelope calculation clears up the
mystery. Returning to the U S of A, housing in and near cities
is unaffordable. So, in order to buy, people move 20, 30, or
more miles out, even in out-of-the-way smaller cities like
Madison, Wisconsin. Buying gets them an instant $20k or more a
year in capital appreciation. It gets them another $10k or more
from income tax they can shift to somebody else by taking the
mortgage deduction.
Double or triple these numbers around big coastal cities.
Now, to swim in this $30k to $60k a year of
government-subsidized free money, a couple might drive an extra
30k miles a year between them. That would take 1000 gallons of
gas at 30mpg. Seems to me the minimum breakeven is $30k divided
by 1000 gallons, or $30 a gallon, or $1260 a barrel - or $2520
a barrel along the coasts.
Now, of course, that's a naive analysis holding all other
things equal, and they never are. Still, as long as government
policy is to keep real estate so hugely profitable, it might
even be economically feasible to pay Norwegian trolls with soda
straws to suck oil out of shale by the teaspoon. That sort of
policy certainly makes gas (or diesel) at $3/gallon one of the
all-time bargains in human history. It would remain so at $10
and beyond, which is much higher than any of the (serious)
spike forecasts being bandied about.

8/21/2005 9:02 PM

    Anonymous said...
It is not that oil will disappear, rather that to meet demand
the price will rise high and quickly. Adapting to that price
will be painful for us as the US has predicated its economy on
cheap oil.
Energy production is completely different from every other
technology we know. In most industries, the more modifications
or alterations you make to something the more value it has. A
Porsche has more value than a VW due to the work and thought
going into it.
Energy production is the opposite. The more you have to do to
produce a fuel the less valuable it is. Oil shales did not work
because they required vast amounts of energy and water to
convert them to fuel. Tar sands in Canada are marginally
productive requiring a barrel or more of oil for every four
barrels produced.
This is what makes oil so fantastic. It has the highest energy
density of any fuel except nuclear fuel and to obtain it we
just stick a pipe in the ground and let it flow out (best
case). No other fuel we know of provides so much benefit for so
little work.
This is what will make the transition to the age after cheap
oil so painful. We'll have to make extensive changes to our
lives and we won't have cheap oil to do it with.

8/21/2005 9:29 PM

    odograph said...
To the Anonymous above this, talking about "doom" ... remember
that doom is just one of the two extremes of opinion (or
The people who (in my opinion) don't think this through tend to
immediately jump to one of two extremes. Either it is doom, or
no problem at all.
In the middle ground there are lots of scenarios ... clouds
with or without various silver linings.
Just to pick minor historical dislocations, think "farm crisis"
or "rust belt" ... I think there is enought meat in the oil
depletion argument to make that kind of "adjustment" possible.

8/21/2005 9:29 PM

    WHT said...
I am very disappointed with Steve Levitt in his analysis. I
thought Freakonomics was all about looking at the statistics
and basic math underlying a premise and trying to debunk or
support that premise. Many times you (Levit) have been able to
do this in your book by demonstrating how that almost certain
correlations between cause and effect were simply anomolies
that could not overcome the null hypothesis.
But now with this quickie study, you say " I don't know much
about world oil reserves." So, with that, how can you say
anything, one way or another, on how things will turn out.
Cripes, in the whole post, you didn't even mention that the USA
has gone through its own peak oil in the 70's and you could
have started one of your classic Freakonomics statistical
studies from that well-understood set of data.
Actually I am not sure where you are going with this. I realize
that you tend to take a balanced view of things, hitting
progressive and conservative mistakes with eqivalent gusto.
With this, it seems you clearly do not want to upset the
conservative circle.

8/21/2005 10:04 PM

    Pixy Misa said...
Energy production is completely different from every other
technology we know. In most industries, the more modifications
or alterations you make to something the more value it has. A
Porsche has more value than a VW due to the work and thought
going into it.
Energy production is the opposite. The more you have to do to
produce a fuel the less valuable it is.
Energy production works just the same as everything else.
You're just confusing cost with value.

8/21/2005 10:13 PM

    Anonymous said...
Hi Stephen,
I had no idea you would take on peak oil so soon. I mentioned
once about some of the undecidables in economic theory, but I
found an interesting argument that points out the difference
between humans and free markets. Suppose I have a pond full of
trout and for some insane reason I introduce a breeding pair of
Sea Lamprey. Of course from the lamprey's perpsective the
market is flooded with trout so there is no real reason to plan
family size or worry about supply. The lamprey population
booms. Is it always true that the two species reach
equilibrium? It is not always true, there exist systems in
which the rapid rise of the lamprey and there life expectancy
forces them to consume all of the trout in the pond. This
example is like the interaction of renewables of supply and
demand. But what if the trout were sterile so there was only a
finite number? Then of course both the trout and lamprey would
go extinct. Obviously evolution works too slow to make the
lamprey suddenly eat pond scum.
The question is when the fundamental need for oil is built into
our way of life how quickly will we be able to change in the
face of demand outstripping supply? Can we change easily at a
rate of 3% of the auto fleet per year, that's only five million
cars. Can we start to produce 3% more of our food locally or
regionally to offset rising costs of imported food. If we can
than great.
But the secret underbelly of peak oil is the risk that we need
to deal with. If OPEC artificially inflated its reserves back
in 1980 then we are in for one hell of a decline. Why, because
water infusion makes the wells produce in a skewed
distribution, the decline is much steeper and therefore
quicker. A good short term policy would be to get OPEC to allow
auditing since the future of their resource is the future of
the oil economy.
The other thing I wanted to say is that just because the trout
and lamprey system has a natural way of operating it does not
mean that it is an acceptable way of operating or that it is
the best way in light of other concerns. Thus the invisible
hand, and glove and foot may be the way unfettered markets
would act but underneath that chaotic dance with equilibrium is
real human suffering. I can't imagine that you have contented
yourself with that.

8/21/2005 10:39 PM

    Aaron Donovan said...
The price of oil goes up, and demand for oil goes down. It's
that simple. But because oil fuels economic activity, when the
demand for oil goes down, economic activity has a way of
slowing down too (remember '73, '79, and '90). So Dr. Levitt is
right that the market always reaches an equilibrium, and the
peak oilers are right in that the end of cheap oil would mean a
global economic recession, followed by depression, unless some
alternatives were found to stave that off.

8/21/2005 10:40 PM

    Tom Kelly said...
It is now time to short oil.
The guy who mows my grass almost quit mowing about five years
ago to day trade internet stocks and then of course he got
wiped out.
Just today he stopped me to talk about how gas would soon be $5
a gallon.
Since the New York Times has not shown itself recently to be
half as smart as the guy who mows my grass- the end of high gas
prices is certainly near.

8/21/2005 11:13 PM

    coffee17 said...
j-deal: thanks for the links. Altho there's conflicting
information in each article, from some other articles I'd read,
it seemed like they were still taking a bath on oil sands. Then
again, it is heavy oil, which is less useful, and while it's
not particularly sour, it's definitely not sweet. But as you've
said, there's more in the game than just oil sands. The only
thing that really bothered me is one article says that they use
oil and gas from within the tar sands for the extraction, and
another article mentions the costs of the natural gas that they
burned to extract the oil. As one who lives in Canada, where
natural gas is the primary heating fuel, and knowing that
natural gas has peaked in north america, and that liquid
natural gas shipments aren't going to be ramping up quickly, it
seems criminal to use it to make oil.
What if we learned how to drill shale oil cheaply? Google for
"Leon Smith" and shale, and apparently someone has found a way
that's comparable to oil sands. Of course, there's not much
else out there about him other than his announcement. But shale
oil would be another issue like oil sands. There's a lot of
oil, but it's low capacity. With depletion of existing wells,
and most new wells coming on line are from the same fields
(meaning they'll never produce as much capacity as the earlier
wells did, and they'll go into depeltion sooner) capacity is
the problem, not total reserves. Cheap is not enough, it has to
be cheap and fast. If there was cheap and fast shale, that
would be great for all but the environment.
Yes, I admit that a quick 10% depletion of demand (not
destruction) would be great. But I think you're overstating the
"overnight" case. I don't think that society as we know it is
going to end. But I do think there's going to be great
difficulties because of the transition time, and current
infrastructure. However million many cars there are in the US
won't be replaced over night. Heck, there's a shortage of
hybrid cars, and they've experienced more effort into producing
a consumer product that hydrogen cars have been.
Yes, hydrogen is simple to make, you don't even need to go to
home depot, just cut an existing extension cord short and stick
the ends in water. Or did you mean that there are products one
can buy at home depot which will create and trap hydrogen which
one could feed to an air compressor? Well, regardless, one
could fashion things together at home depot, and eventually
someone would put out a finished product. But how long until
there's been enough hydrogen cars to take 10% of the gas
guzzlers off the road? I suppose it would be more important to
ask how long until there are enough hydrogen powered busses?
They seem to just be hitting the market (as in first bus
delivered, and pilot projects).
We won't just run out of oil. But when we're short on capacity
by 500,000 a day, how much will price have to rice until demand
for those half million is destroyed? And how high will prices
have to go before the next years shortfall of 1.5 mbpd or 2.5
mbpd? And when people are paying those prices what will happen
to the economy with them not buying other stuff with that money
(and if they're americans, they certainly wouldn't be saving
it!)? Anonymous posts some equations showing that it's cost
effective for people in the suburbs to pay $30 per gallon of
gas. However, while some of that $30 they save via gas goes
towards consummables, I think at least an equal portion went
towards owning a more expensive house (essentially living
beyond their means). And if there's $30 gas and the true costs
of living in the suburbs are apparent, I'd be willing to wager
home prices would go down, but that won't help the people with
the APR mortgages. They'll still be paying the original amount,
but at new interest rates, and I don't think they'll be as good
as they were. For those who can't afford it and can't sell,
they lose their initial investment, get to try and find a place
to rent in the cities, or ... well, demand destruction?
Again, I really don't think that this is the end of the world.
But given the large unknowns from the oil companies, the
knowledge that a corporation is quite willing to take advantage
of the consumers, and even willing to take advantage of it's
long term viability for short term profit (depending on
individual corporations), I think that the problem is something
that more people should be concerned about, and I don't think
it's going to be without problems.
Coal towns didn't have good prospects on the switch to oil, and
that was under the best of terms. Unless we have a viable
(read: as good or better) alternative to oil by the time
desired demand outstrips supply, I think it could be worse.

8/21/2005 11:15 PM

    Anonymous said...
Please note: lifting cost in Saudi is lower than other places,
say 5 dollars a barrel. Canadian oil is perhaps 15 dollars a
barrel. Money spent on increasing production at higher rates is
wasted if the price of oil drops below 20 dollars a barrel.
That is the problem with high cost energy sources, not so much
the cost, but the risk of bankruptcy from a flucutating oil
The US and other governments can act to stabilize oil prices by
a policy of purchase for a petroleum reserve when the price
drops below 25 dollars, and sales from the petroleum reserve
when the price goes above 50 dollars a barrel.
Another policy that would help would reduce 'designer gas'
requirements so refineries could fill each others requirements
when they have to shut down for maintenance.

8/21/2005 11:33 PM

    M. Simon said...
For a lot of uses modems are a very good substitute for autos.
The USA is ready if the need arises. The change could be done
in days.

8/21/2005 11:41 PM

    Mr. Snitch said...
Pretty healthy discussion as internet boards go, haven't seen
the word 'wingnut' once. (This one won't count.)
1) Re predictions about 'dying': What actually happens is
either some one predicts you'll die soon, and then when you die
at 95 they say, 'See?', or when your continued living becomes
embarassing to them, rather than changing their worldview they
look for ways to make you die. Understanding that concept means
understadning 95% of national politics.
2) I love these discussions about life-and-death commodities.
When the power goes out, it's electricity that's indispensible.
When it's oil we're concerned about, it's oil. One comment
mentioned copper. There's only one vital commodity that we have
to manage, and that's water. No one worries about that because
it looks like there's plenty, but it's the one commodity we
should be more concerned about - because there IS no
3) I like the potential energy alternatives we have now and am
very encouraged about the prospect for electric (hydrogen) cars
in ten years or so (they won't be around in large numbers much
before that I think). That still means the hydrogen has to be
produced somehow. I speculated on that here.

8/21/2005 11:44 PM

    M. Simon said...
Basic economics: demand does not outstrip supply as long as
prices can vary.
The price of oil has hisen by a factor of 6X in 8 years without
destroying the American economy.
It is screwing the Chinese economy.

8/21/2005 11:47 PM

    M. Simon said...
Hydrogen cars are probably not the wave of the future.
Methanol cars probably are.
The problem with hydrogen is low densitty of energy when used
as a transportation fuel.
Why methanol? Because, computer companies want it to power
Methanol is starting from behind but will catch up fast as the
methanol fuel cells actually go to market in the next year or

8/21/2005 11:52 PM

    Gene Hoffman said...
There are two separate issues and problems here. One set is
macro and one set is micro.
On the macro side, people are confusing cheap oil with cheap
energy. The US economy is dependent on cheap energy. The US
economy is so large and diversified that it can easily absorb a
slight increase in what is the definition of cheap energy as
the mix shifts away from oil simply on price. To show an
anecdotal story to explain this, look at domestic transport.
People point to trucks and trains as causing a huge impact on
the price of consumer goods if oil prices increase
substantially. However what is much more likely is that
subsidized long haul trucking shifts in favor of rail lines
that are more effecient and can further convert to electrical
energy sources. We do face a technological challenge around
batteries. Lots of alternative energy sources would be viable
if we had serious improvements in our ability to store energy.
The sad thing is that the best energy storage mechanism we've
come up with is pumping water uphill. That should give you a
sense of where we can make dramatic technological changes that
would have a very real impact on the cost of useable energy.
On the micro front, two items are pushing current prices
higher. One is simply the lower value of the dollar relative to
other currencies. As the dollar recovers strength the price of
oil in dollars will decrease. The second is that the Chinese
economy is distorting the price of oil by placing caps on the
price paid at the pump. This is an attempt to stimulate growth
but is not long term sustainable. As the political-economic
reality sinks in, their demand will decrease and potentially
decrease at a surprising rate. Artificial price mechanisms are
as brittle as folks would like to say relatively free markets

8/22/2005 12:07 AM

    Anonymous said...
Just to widen the discussion a little, they say a picture is
worth a thousand words. Check out this guy's analysis.
It's America we can have more than one take on things right

8/22/2005 12:17 AM

    Anonymous said...
How Oil Dependence Fuels U.S. Policies
From Iraq to China, from the Gaza Strip to Iran, the biggest
foreign-policy problems of the summer all are setting off the
same alarm: It is imperative for the U.S. to become more energy
But that, of course, is precisely what Washington's
policymakers have been unable, or unwilling, to accomplish.
Instead, America's exposure to trouble in the world's volatile
oil-producing regions actually is on the rise, even as the
summer driving season heads toward its climax with oil near a
once-unthinkable $65 a barrel. In brief, while the 20th century
was the century of oil, the 21st already is unfolding as the
century of whatever follows oil, or the century of fighting
over what's left of oil -- or both.

8/22/2005 12:24 AM

    Anonymous said...
"Which is exactly the situation with oil right now. I don't
know much about world oil reserves."
Opinion on a subject you base on economics without any industry
experience. Nice one.

8/22/2005 12:28 AM

    Anonymous said...
so when you take a whole bunch of speed, just fill your system
with it over and over and over until at one point you cant get
as much into the system as you need to keep the system running
at such a high speed, and presumably inefficient way (compared
to the way it was designed to run)... at that point is it
really right to complain about the loss of speed or is it more
right to realize that we shouldnt have been taking so much?

8/22/2005 12:32 AM

    M. Simon said...
China uses 6X as much energy per unit of output as the USA
Perhaps the problem is that the Chinese government controlled
economy is not investing enough in energy efficiency because
the government is screwing with price signals.

8/22/2005 12:49 AM

    William said...
"As for people who drive their cars for 77 cents a gallon with
vegetable oil"
It was per-liter, which equates to roughly 2.50$ a gallon. And
you need fertilizers (petro-based), and insecticides
(petro-based), to grow those vegetables.
I also suppose global warming's just a big liberal lie and we
shouldn't worry at all about the fact that tar oil creates
about 3 or 4 times more emmissions than "cheap oil" just
through extraction.
And the way societies & markets adapt is by panicking, and if
you lay back and say things are going to fix themselves, they

8/22/2005 1:12 AM

    Marty said...
The rogue ecomomist says: "I don't know much about world oil
reserves". Oh, how rascally of you.
I originally got a degree in geology but now I study the brain.
If somebody said, 'I don't know much about neuroscience, but
here is how I think the brain works', I'd probably take them
less seriously. Why not take a look at actual oil and energy
numbers? I've summarized the basic ones here.
After all, that's what the scientists you are depending on to
save your butt do.

8/22/2005 1:42 AM

    Anonymous said...
Anon -- "Energy production is completely different from every
other technology we know. In most industries, the more
modifications or alterations you make to something the more
value it has. A Porsche has more value than a VW due to the
work and thought going into it."
This is Marxist stuff and Karl's biggest error. A product or
service is worth EXACTLY what the market price is and not your
inputs including cost of labor. An army of Garden Gnomes could
sculpt and spray paint a pile of dog doo. You'd have a hard
time selling it. In contrast people will pay for the most
ridiculous junk simply because it has a designer name slapped
on it.
Point being that technology and substitution provide
work-arounds and the market responds to buyer preferences
expresses as willingness to buy at price points. The world was
running out of Whale oil for lamps until some obscure Colonel
found oil in Pennsylvania.
Much of the discussion is being fueled by "why won't people
live a morally pure life like we tell them to?" People
abandoned the cities as soon as possible, when I lived in New
Orleans it was clear that the streetcars in the 1840's onwards
drove suburban life, starting out from the St. Charles line
(the line is still in existence btw). Other lines along
Magazine stimulated development upriver as well, with obvious
fill-in housing as lines were added in between. This helps
explain the curious set of mansions on the main streets and row
houses off them a few blocks over.
A few more high-profile terrorist attacks, coupled with
continuing urban crime, and oil prices will have to be high
indeed for suburban dwellers to trade safety and privacy for
"moral living." That's the real incentive that drove people out
to suburbs even back before WWII; the same pattern developed
around rail lines in Victorian England. So sad isn't it that
people live their own lives instead of what people lecture them
to do?

8/22/2005 3:02 AM

    Red A said...
"why buy a tomato from Chile when you can buy one from the
farmer down the road, and that sort of thinking."
Please let me know when the farmer down the road has tomatoes
in winter. The reason many countries export fruit to the USA so
well is their growing seasons are different - in Chile's case
their summer is our winter.
You know, electricty prices rocketed in California a few years
ago...my mother tried to save energy and got her summer bill
down to US$ 32.00 / month or some insanely low level. It was
not too hard.
I can imagine high oil prices will make people drive less,
combine trips, and wear sweaters indoors and probably could
save 30% on their bills.

8/22/2005 3:24 AM

    head lem said...
Overheard in the cockpit of the Venezeulean airline that ran
out of fuel (assuming news rumor is true):
"Relax, market forces will soon equalize the gap between our
fuel supply and gravity's demands (the latter having been
recently renamed by the President of the USA as "intelligent
falling" or "Rapture at 3,000 feet")

8/22/2005 3:29 AM

    Anonymous said...
Everything that has been said in the comments to this post was
said in discussions I have had about this very same topic in
the early 1970's, 1980's and 1990's with people who were
convinced that oil would be prohibitively expensive and
commercially unavailable sometime in the 1970's, 1980's or
1990's. If I were older, I suppose I might be able to refer to
discussions on this same topic I had in the early 1960's, but
alas I was only in elementary school in the early 1960's
This doesn't mean that the pessimists will forever be wrong. I
just think that they will have to develop better arguments to
convince me that doomsday is looming than the same old tired
arguments that have been wrong for as long as the topic has
been discussed.
As to how long will it take to adjust to lower suplies and
higher prices I would make the following observation. Everyday
I ride a bus to work on a half-empty bus and observe that
almost every car that passes me has only one passenger. I would
venture that the amount of gas used for commuting could be cut
by 60% to 75% in the United States without enourmous effort
simply by prividing sufficient price incentives to fill every
existing bus and encourage people to drive into work with one
or two other person in each car. Although people would gripe,
the actual inconvenience of adopting these consevation measures
is relatively small. The reason this hasn't already happened is
that despite everyone's whining, gas is still relatively
inexpensive compared to incomes so that people are not willing
to foregoe the relatively inexpensive luxury of driving to work
everyday in their own car.

8/22/2005 6:09 AM

    Anonymous said...
I'm with you on the idea that reporting Shark Attacks
ad-nausium is ridiculous. But, the reason is not because they
do not occur - every story is true. The reason being informed
about shark attacks is silly is that it affects a miniscule
percentage of the miniscule number of people that swim in the
ocean. Oil is a requirment for the lives of the vast majority
of people on this earth. Comparing issues like this to shark
attack stories is ignorant.

8/22/2005 7:40 AM

    Paul Dietz said...
An earlier message mentioned methanol...
Interestingly, a few years ago many methanol plants around the
world were converted to use the Fischer-Tropsch method to
produce hydrocarbons. This technique can produce an exceptional
diesel fuel (very low sulfur, very high cetane number; low soot
and other emissions; CARB was considering mandating its use in
California) for the equivalent of $20 to $25/barrel oil, and it
can be made to work with natural gas, coal, biomass, or any
other material that can be converted to synthesis gas (a
mixture of CO and hydrogen).
The only reason very large scale construction of FT gas-to-oil
plants isn't occuring more is the expectation that oil prices
will decline in the near future.

8/22/2005 8:32 AM

    Anonymous said...
Oil men in the White House have discouraged alt energy, and the
industry bought up and buried the patents to most of the
alternative energy sources developed since our last gas lines
in '73. Wages have been stagnant while prices have risen
sharply for everything that must be delivered (due to fuel
costs). There is no room in the household budget for any of

8/22/2005 8:45 AM

    M. Simon said...
There is a very simple reason oil consumption in China is
rising 20% a year.
It is priced below market. The purpose of below market pricing
is to insure growth to keep domestic peace.
How long can the Chinese keep the party going?
My guess. The party is over.

8/22/2005 9:40 AM

    M. Simon said...
Fuel cells (of any kind) have one significant problem.
Platinum. There is not enough of it to support a 100% fuel cell
transportation system.
In time we will find a way around this problem. So far all we
have is glimers (nickel maybe?)
The fuel cell transportation system is not ready for prime

8/22/2005 9:45 AM

    TallDave said...
The real problem is timing: it takes a few years to bring new
production online.
In a few years oil prices will probably dive again.

8/22/2005 9:49 AM

    Anonymous said...
Interesting discussion. Professor Levitt, I commend your effort
in taking up such an interesting matter.
What is truly fascinating is the natural inclination toward
catastrophic prospects that human beings keep on exhibiting.
All these catastrophic scenarios, bei it overpopulation,oil
depletion or whatever are nothing but the secular humanistic
versions of the classical biblical Apocalyptical scenarios.
It always amaze me how on earth could those "enlightended",
atheistic, socialistic multiculturalists deride the
"superstitious" beliefs of religious people.

8/22/2005 9:54 AM

    M. Simon said...
Patents are public records.
Could anon. cite a few that would solve our energy problems
I'm not interested in ownership. Just patent numbers.

8/22/2005 10:05 AM

    Anonymous said...
"What is truly fascinating is the natural inclination toward
catastrophic prospects that human beings keep on exhibiting."
No, what is fascinating is how it drives home the old criticism
that Americans have two modes: complacency and panic.
What you typically see in a new "peak oil" discussion is an
argument between the complacent and the paniced.
Shades of gray, resonable questions in the middle ground, are
slow to emerge.

8/22/2005 10:11 AM

    Anonymous said...
It's 2005. 2005-1973=32 yrs.
You suppose those patents are still in effect?
Hydrogen is not an alternative fuel, merely a
conversion/storage method. It has to be produced
somehow...perhaps from electricity, derived from (usually)

8/22/2005 10:15 AM

    M. Simon said...
We have been running out of oil for my whole life time. (I was
in high school in the 50s).
It is one of the things that got me interested in a career in
engineering. (I do aircraft electrical systems among other
things. I have also worked on oil field monitoring systems -
which surprisingly enough are solar powered.)
Every time oil prices peaked the refrain was the same.
BTW high rises and cities may be more efficient energy wise,
but they have one huge drawback. Disease can run through them
like wild fire. Dispersed housing is more disease resistant.

8/22/2005 10:21 AM

    odograph said...
If we are going to digress on hydrogen, we should point out
that most is now being made from natural gas. The "hydrogen
highway" filling stations usually reform natural gas at the
station. Nuclear, coal, electric sources for hydrogen auto fuel
are all "promises."
In the meantime we depelete our natural gas (which could easily
drive cars directly and efficiently) to "prove" hydrogen ...
what a scam.

8/22/2005 10:24 AM

    Anonymous said...
Okay -- Now I understand what they mean by thinking inside the
box. The specific box you doomsayer commenters -- not to
mention the original NYT article -- are all trapped in is
clearly of seventies manufacture. Less oil equals no suburbs,
equals denser construction, equals life having to change to
such an extent that a prolongued depression arises.
Come into the twenty first century my friends and look at the
object into which you're typing. It's a computer -- yep.
Virtually miraculous in its capacities to allow people to
conduct business at a distance. And all that's needed to use it
for this purpose is... fewer regulations, incentives to
businesses using telecommuting and other stroke-of-pen issues.
Will people still need to show up to work. Oh, heck, yes.
Manual and service workers. BUT if office workers can work from
home, then oil demand will fall. A lot. And think of all those
office buildings not getting heated.
Will this happen? -- supposing a halfway rational, not inately
anti-oil and for fuzzy wuzzy warm-and-cozy alternative fuels
administration in the next ten years or so -- probably yes.
So -- people will be at home more and there might be a fall in
daycare business and a rise in divorces till situation
stabilizes. I'd say not "end of the world as we know it"

8/22/2005 10:26 AM

    odograph said...
Anonymous at 8/22/2005 10:26 AM, did you notice my comment way
up above, saying:
"Be careful that your prediction of optimism doesn't come to
match someone else's prediction of pessimism!"
I actually agree with you that this level of adjustment is
possible. I also think you are looking at whole job categories,
and perhaps industries, left behind.
It is the difference between "end of the world" and "end of the
world as we know it"

8/22/2005 10:32 AM

    Podchef said...
Okay, so you've taken the moderate position on this "problem".
Others want to be extreem on either side of the issue.
Nevertheless, the real issue is being ignored: 1st World
Countries are using too much of a non-renewable resource. The
shortages, and problems this will lead to, maybe not today or
tomorrow--or this decade--will be real and globally painful.
Beyond wind generators and solar power we need to begin to
solve this shortage issue--to send a message, like you said, to
the oil producers--perhaps they will drop prices; but that only
works for a while--even oil producers are up against fixed
How can we send this message and what will it be? Should we all
switch to hybird cars? Quite possibly. But there are other
solutions--using used vegetable oil from restaurants to power
desiel vehicles is a start (frybird.com). Perhaps, today, don't
drive so much. Stop waiting for the outcome to cry foul. Reduce
your number of trips to WalBobs or the MiniMart now, not when
things get worse--they already are worse.
If you want to make more of an impact, start looking for local
sources for your foods and other household items. Why pay, both
in increased product cost and global costs, to have a sofa from
the other side of the country? Or beets? Or carrots from China?
Someone in your neck of the woods is growing carrots, beets and
a whole lot more. Start going to Farmer's Markets and
supporting the locals. If enough people do this then the money
stays in the community and your neighbor begins to travel less,
and their neighbor and so on. I'm not suggesting that
everything we use can be found within 100 mile of us, but that
by shopping as locally as we can. By reducing transportation
times and costs, every individual can have a global impact by
reducing fuel consumption. This winter, find a local
craftsperson and spend a few extra dollars to buy a nice thick
sweater from locally grown wool. Then keep the thermostat at 68
degrees during the day. At night drop it to 65 or 60. If
Chicken Little had had any sense he would have pause for a
moment, surveyed what his position was and cornered the market
on falling acorns. The Sky-is-falling position is fearmongering
and never leads to a solution in time.

8/22/2005 10:42 AM

    JLP said...
Excellent post!
Sadly, the people writing these articles don't know what they
are talking about. I also remember seeing an article in the
Wall Street Journal about how there is a theory that oil is
replenishing itself. It was an interesting article and I could
kick myself for not saving it.
JLP at AllThingsFinancial

8/22/2005 10:42 AM

    JLP said...
Hey, I found that article (it cost me a whopping $2.95) I was
talking about. The article titled "Odd Reservoir Off Louisiana
Oil Experts to Seek a Deeper Meaning" was in the Wall Street
Journal on April 16, 1999. It talks about how this oil field in
the Gulf is supposedly replenishing itself. I haven't done any
research to see if those claims still hold true. Anyway, it
makes for an interesting read.
JLP at AllThingsFinancial

8/22/2005 11:03 AM

    Mike said...
"After all, at $6/gallon they're still building suburbs in
Technically true, but you know damn well their suburbs aren't
the same as ours - they're built on a scale that still allows
for transit use and carpooling, while ours aren't. (I was in
Yeovil UK a couple years back and even worked for a week at an
office park out in the 'burbs; worked 3 weeks in Hursley for
IBM a few years before that, driving back and forth from my
hotel in central Winchester).

8/22/2005 11:43 AM

    Anonymous said...
Lets check the oil market today, oh it is up again. Funny thing
about the law of supply and demand, it cares not for National
Boundaries or Political Demagoguery!
All hail the infinite wisdom of the free market! Live or die!!
Your kids Ivy League Education will come in very handy as
mid-21st century horse and buggy farmer.

8/22/2005 12:14 PM

    Anonymous said...
Oops, there goes the whole peak oil argument. When the price
rises, demand falls, and oil prices slide. What happened to the
"end of the world as we know it?" Now we are back to $10 a
barrel oil. Without realizing it, the author just invoked basic
economics to invalidate the entire premise of the article!
It seems to me that the premise of the article is: "High demand
and low supply for oil is likely to have serious and broad
economic consequences, maybe a global recession."
It seems to me that your counterargument is: "But if there's a
global recession, the price of oil will come down! Neener
neener neener!" It would be downright laughable in its
cluelessness if so many people weren't taking you seriously.
You've misrepresented the NYT article and the Peak Oil theory
in order to debate them more effectively. Sure, there are
exaggerated predictions of doom out there, but this kind of
dishonesty isn't helping anyone.

8/22/2005 12:17 PM

    M. Simon said...
The best way to get alternate fuels are:
1. Lower their cost
2. Raise the cost of current fuels
If #1 is not possible in the short term then, driving a Hummer
will help #2. Burn it up.
As to the problems of the third world. Their #1 problem is bad
government. The price of oil will have aproximately zero effect
on that problem. There are too many thug regimes in the world.
If the source of oil near the surface is deeper underground
resivoirs then we do not have a resource problem. We have a
technology problem. How to tap the deep resivoirs economically.
We know there are huge planets whose atmospheres consist of a
lot of methane. Did that methane come from biological activity?
Very doubtful. Might not some of that glactic methane have been
incorporated in the earth during its formation? Likely.
Thomas Gold estimated that petrolium reserves may be 100X those
already discovered based on interplanetary formation of
Well you know how it is: fear will keep the star systems in
I have been listening to the fear for 50 years. I'm bored with
it. In the mean time for those of you who are fearful: I have
some designs to reduce energy consumption and others to deal
with electrical energy storage. Every time I get into one of
these discussions I ask any one interested in investing in
change to contact me. So far zero responses.
That gives me one important data point. Lack of real interest.
It is all talk.

8/22/2005 12:32 PM

    Anonymous said...
"Technically true, but you know damn well their suburbs aren't
the same as ours - they're built on a scale that still allows
for transit use and carpooling" - Mike
Ummm...yes and no, but a bit more of the no. Yes, they're more
compact, but no, you can't walk much of anyplace useful because
they tend to be single-use pods just like here. (And yes, just
maybe you can walk to a small row of shops charging ghastly,
exorbitant prices, but maybe not, and that's about it, and so
The denser scale doesn't help carpooling, because the issue is
not how far you're going, but whether you're going to the same
place at the same time and whether you want to have a life. And
bus service to these pods tends to be only half-hourly even at
rush hour, which I guess is OK if you have lots and lots of
valueless time on your hands.
BTW I was in Chiba, Japan recently, and it's amazing how over
the last 15 years, bicycles have gone way, way down (but are
still used much more than in the U S of A) and cars have gone
up. That's at about $4.50/gallon - and with public transit to
places where people actually live - as opposed to districts
tourists see - more frequent and reliable than to such places
in Europe. Some homeowners even purchase elevators to stow two
cars (that pesky "we aren't actually going to the same place at
the same time" issue) in the driveway, one over the other. The
cars do, however, tend to be small.

8/22/2005 12:36 PM

    M. Simon said...
We have had recessions when supply and demand get out of whack.
We are richer than ever. How is that possible?

8/22/2005 12:39 PM

    odograph said...
We are richer than ever. How is that possible?
We? I might be. You might be. But I feel a little bit for the
guys sleeping on the side of the road!

8/22/2005 1:15 PM

    Anonymous said...
Here is something I posted on usenet a few days ago:
If Americans drove cars that were a little more than twice as
efficient, there would almost not be any need for oil imports
-- which
would mean there would be no need to attempt to control the
East's oil reserves with the Iraq invasion and our multiple
bases all
around Iran.
It would also mean there would be an extra 12m barrels of oil
on the
market, which is something like 12% of world supply. I'm sure
would lower prices and make the oil supply last a bit longer.
But, it's all kind of pointless now. With peak oil, the price
inexorably climb. Companies and governments will scramble with
gassification, mining bitumen, heavy oils, biodiesel, ethanol,
depolymerization, etc., which will blunt the impact but not
scale to
meet current demand.
Only by radically redesigning our way of life and economy can
this be
dealt with and even the mere mention of this is political death
America. Not to mention the fact that world populations are
growing, the population will have to be reduced, most likely by
very unpleasant means.
Poorer nations are already feeling the pain. Their governments
been heavily subsidizing oil prices for years and now the chasm
what the people pay and what the government pays for oil is so
large it
threatens their solvency. Raise the price just a bit and you
riots, so shortages are the most likely scenario there.
I expect a major global financial recession before 2010
followed by a
brief collapse in oil prices followed by shortages and then oil
that make $70/barrel seem ultra cheap.
The whole American way of life is built on cheap energy.
cities, Wal-Mart, 10 MPG hummers, etc. -- Something is going to
have to
give somewhere, unless actually outright seizing oil fields and
stealing oil is going to be palatable to the American public
and the
other nuclear powers of the world.
Of course none of this will register with the US public.
They'll blame
the government, OPEC, oil companies, aliens, etc. -- Anything
to avoid
looking at the reality: Oil is a finite resource, no new oil is
made, and we've been gorging on it for over a century and the
end of
the party is in sight.
The sad part is that this has been known since the 1950s, and
much proven in the 1970s. We've had 30 years to prepare, and
done more or less the opposite, becoming more dependent on oil,
especially foreign oil, not less.

8/22/2005 1:34 PM

    Mike said...
"The denser scale doesn't help carpooling, because the issue is
not how far you're going, but whether you're going to the same
place at the same time and whether you want to have a life. And
bus service to these pods tends to be only half-hourly even at
rush hour, which I guess is OK if you have lots and lots of
valueless time on your hands."
Yes, it DOES help carpooling, in two ways:
1. Offices are more likely in the same area
2. Shorter distance to your next cow orker.
To imply, as you do, that European work commuters suffer
roughly the same issues as do American commuters is misleading
AT BEST. The objective statistics for commute split SHOW you're
not being accurate here - they STILL use transit, carpool, ride
bikes, and walk at a far higher percentage than we do even in
our more enlightened cities (i.e. London >> New York;
Winchester >> Portland; etc.)

8/22/2005 1:36 PM

    M. Simon said...
I have slept beside the road. I'd rather do it in America than
any other country I can think of. I've seen people throw away
perfectly good 27" color TVs when they get their home theaters.
You want to have a good life on the cheap? Scour the upscale
neighborhoods on garbage day.
If you have never been really poor and desperate you have no
idea how good the poor and desperate have it in this country.
50% of the bottom 20% own their own homes.

8/22/2005 1:38 PM

    odograph said...
All I'm getting at is that a smooth transition, from cheap oil
to (ultimately) beyond oil, means less human tragedy.
We are already dealing with this as a society. We have hybrid
car hackers, and french fry biodiesel recyclers. We have
hybrids from Japan and (pie in the sky) hybrids in Detroit. We
fund ethanol on a truly massive scale.
The only adjustment we need, in my opinion, is to be a little
more "real" about our solutions. If ethanol is really a farm
subsidy, then it isn't real as a fuel. If hydrogen is a way to
deflect emissions and efficiency standards, then it isn't real
as a fuel either.
Today I feel pessimistic. I don't think the US can be real, in
time. That means we'll have those painful little adjustments.
We'll see those little human tragedies on nightly TV.
And ultimately we'll buy our transportation solutions from
Japan ... were (with no native fuel supply) they don't have the
luxury of believing their own BS.

8/22/2005 1:49 PM

    odograph said...
Sorry, meant to say "(pie in the sky) hydrogen from Detroit."
If the blog owners want to mine a rich vein of funky economics,
the hyrogen highway is probably it. Where else do we assume a
one million dollar product (a hydrogen fuel cell car) can be
made afordable for everyman ... just because we wish (or
incentivise) it?
Why don't we just go for flying cars while we're at it ...
they're probably cheaper.

8/22/2005 2:01 PM

    M. Simon said...
There is no direct line from here to where you want to go.
Small adjustments if effective will expand to their limits.
An economic system that does not constrain ideas grows
organically. A trial here, a test there, more of the same if it
is profitable. It looks messy but has an advantage: lots of
ideas get tried. Those that are good enough get replicated.
Organic growth and change are best. Even in industrial systems.

8/22/2005 2:08 PM

    odograph said...
Oh I'm a big believer in the market ... but don't like the
whipsaw corrections when people suddenly discover an error in
their economic logic.
All those little things I mentioned above (electric cars,
hybrids, boidiesel, ethanol, hydrogen) are at the fringes. The
bulk of America is out there driving along at 20 mpg (latest
fleet average).
I've heard recently that Ford's current product line averages
poorer mpg than a ford model A.
Indirect, organic, market adjustment might have worked (past
tense) if we had been real about our oil supplies.
Instead, we get to see a little of that old time Creative
Destruction. Some in this thread might even find themselves on
the wrong end of it ... and I've always said that creative
destruction is more fun to watch than to live.

8/22/2005 2:19 PM

    Marty said...
Boy, reading some of the delusional posts here makes me think
we should call it "Intelligent Energy" -- that's the kind that
senses when you're running out it, and then it replenishes
Several mentioned various alternative energy resources but
without considering the fact that they are all made using
non-renewable fossil and fission fuels. Not-yet-working
alternatives like fusion also require limited resources like
helium (for superconducting magnets). Helium cannot made and is
instead extracted from a small number of oil and gas wells, and
is on similar depletion curves to oil. Because of this, the
price of renewables is likely to go up, not down as fossil
fuels and other limited resources deplete.
For example, the price of silicon photoelectric cells has been
going up the past year (25%). This was explained as simple
supply/demand by the NYT. The real situation is a little more
complicated. Current generation photoelectric cells (the kind
already on satellites decades ago) are made from silicon
crystal rejects from the semiconductor industry. These have
started to get scarce as forward-thinking well-to-do
Californians have been installing them like no tomorrow. This
is simple supply/demand. But as the throwaways are depleted,
the price will likely go up even more because the throwaways
were being sold for less than they cost to make. Third, if
fossil fuel prices continue their rise (oil back up to
$66/barrel today), the price of silicon photoelectric cells
will go up yet further.
Now, of course, there are other solar techs on the way,
invented by number-loving people who did their homework
problems, such as CIGS (copper/indium/gallium/selenium)
photoelectric cells sputtered onto thin metal (the way harddisk
surfaces are made), and solar-concentrator-driven Stirling
engines. And hopefully, there will be enough indium and gallium
(elements, which as the alchemists long ago discovered are very
hard to make), and hopefully, the price of renewable energy
will eventually stabilize when renewable energy devices (and
mining, and steel production, etc, etc) all begin to be done
using renewable energy.
It's important to keep a positive attitude. From a recent
And so, while the end-of-the-world scenario will be rife with
unimaginable horrors, we believe that the pre-end period will
be filled with unprecedented opportunities for profit

8/22/2005 2:36 PM

    drewhinton said...
I want to believe in Markets. I really really do.
But I'm not sure I trust human nature. I think markets are
imperfect just like we are. They manage to pull out of crisis,
perhaps more often than not, but many times people can't adapt
because of their own assumptions or cultural baggage.
I think the tale of the Viking settlers in Greenland is a
poignant example.
They ignored better methods for survival because of cultural
hubris, and they perished. Markets are made of humans. And
sometimes humans are just plain stupid.

8/22/2005 3:19 PM

    dag said...
Freakonomics said:
"I don't know much about world oil reserves."
Obviously.....you dont

8/22/2005 3:51 PM

    M. Simon said...
Hybrids are not on the fringes. Several million will get built
this year with production ramping up.
A guy in Cali. is retrofitting hybrids with more batteries
creating the gasoline/electric hybrid.
Toyota is taking note. Given Japanese design cycles expect to
see them on the road in 2 1/2 years. Detriot will do it 4 years
after they see a Japanese example on the road.
If you are paying attention things are not so bad. The real
boost will come when autos go to 36V (nominal) electrical
systems with Integral Starter Generators (ISG). They will be
defacto hybrids.
There is time to work out the bugs.
Wind is coming down the cost curve. Once turbine size reaches 8
- 12 MW (peak) the cost of wind will equal the best coal
plants. About 5 to 10 years.
In the mean time 3,000 MW (peak) of wind will get installed
this year. About one nuke equivalent (1,000 MW).
We are ramping up.
BTW nice to see solar ramping up even if it is straining
supples. If the buyers are there the industry will get

8/22/2005 4:45 PM

    Anonymous said...
Let's clear up a couple of misunderstandings:
First, for those criticising the OP for writing about oil when
he doesn't know much about oil specifically: Economists can do
this because the information they need revolves around prices,
incentives, and the response of people to them. Economists can
predict the movement of prices on pork bellies without knowing
anything about pig farming. They can predict demand for real
estate at a given price point without having to know how houses
are built. And they can predict how consumers of oil will react
when the price increases, without having to understand the oil
Now, assuming the market will 'solve' the problem supposes a
couple of things: one is that alternatives to a commmodity
exist, and the other is that prices reflect the true cost of a
commodity and people are free actors to choose to buy or not.
In the case of oil, this is not necessarily the case. For one
thing, the price is not free to move with demand, due to the
OPEC cartel, local price caps and subsidies, and other
market-distorting interventions. For another, the availability
of substitutes for oil is still debatable. Certainly it's
possible to replace oil with alternatives, but there are
legitimate questions about the rate at which this can be done
and the eventual cost.
However, we can make some good inferences from currently
available information. The biggest is the price of oil futures.
I believe 10 year oil contracts are currently set at about 65
dollars. This almost certainly represents our best
understanding of what we're going to be paying for oil ten
years from now. If some oil expert really knew that oil was
about to peak, he would be buying up futures like mad and
driving up the price. If he knew oil was much more abundant and
that we're in a price bubble, he'd short like mad and drive the
futures price down. So the futures price in a free market is a
pretty good distillation of current understanding.
If you don't believe this is the case, I suggest you put your
money where your belief is and start buying oil contracts like
mad. One thing you might consider first, however, is that the
drop-off in supply will not be linear. As the price of oil
reaches certain price points, alternative supplies will enter
the market. Alberta's tar sands have recently been re-estimated
to have 175 billion barrels of recoverable oil at today's
prices, giving Alberta the second-largest oil reserves of any
country on the planet after Saudi Arabia. If oil doubles in
price, the recoverable barrels goes over 300 billion, and shale
oil all over North America becomes cost-competitive. Also, oil
wells are closed not when they are empty, but when the cost of
recovering the remaining oil is so high as to make them
uneconomic. At very high oil prices, many of those fields will
be re-opened. Plus, alternative energy sources like wind and
solar will become a bigger part of the picture as they become
more profitable.
Next: American energy independence. Here's the thing: oil is a
fungible resource. That means that once it comes out of the
ground, it's worth the same no matter where it came from. Saudi
oil is no more or less valuable than Alberta oil (assuming the
same grade). So if the U.S. suddenly stopped buying Saudi oil
and instead bought Alberta oil or started using an energy
source that was home grown but more expensive, all that would
do is cause the U.S. to waste money. And the drop in demand
from the U.S. leaving the world oil market would cause the
price of oil to drop, benefiting everyone else and driving up
demand for oil elsewhere. Net result: higher energy costs in
the U.S., lower energy costs for everyone else, and an increase
in demand for oil by others to offset the U.S. drop in demand.
This is simply not an intelligent strategy from a purely
economic standpoint. It might make better sense in terms of
national defense, but that's a different argument.
So the last question is whether or not we can move to an
alternative fuel regime in a timely manner. And I believe the
answer to that is yes, especially if the real problem takes a
few years to appear. The current move to hybrids is important
because it gives us a way to disconnect the drivetrain of a car
from its fuel source. The power source for the car is
electricity. How that electricity is generated doesn't really
matter. For example, it would not take much of a change at all
to turn a hybrid into a 'plug-in hybrid'. Add a little bigger
battery and a charging plug, and now for short commutes (say
less than 50 miles) the gas engine doesn't even come on. You've
just completely removed the dependency on gasoline from the
car, or reduced the consumption to just a fraction of the
amount you need now. Perhaps we'll all be driving electric cars
that still have gas engines, but the gas engine is really just
an emergency charging device. Plug-in hybrids can get 100 mpg
on average across the fleet.
You still need to generate the electricity, but we know we can
do that. Nuclear power. France gets 70% of its electrical
energy from nuclear. The U.S., only 20%. Roughly 175 new
reactors could produce enough hydrogen to completely replace
gasoline for the U.S. vehicle fleet, assuming no changes in
efficiency. So it can be done, and will be if we need to.

8/22/2005 5:04 PM

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