[extropy-chat] Peak Oil - the new Y2K?

J. Andrew Rogers andrew at ceruleansystems.com
Wed Apr 20 04:36:36 UTC 2005

Y2K makes a good case study for Peak Oil.  In the case of Y2K, there was a genuine problem 
that billions of dollars were spent averting, and when it actually happened the entrenched 
interests had impressive amounts of motivation to make it look like it hadn't.  Between 
creative strategies to make the problem a non-problem and the powerful impetus to make 
any residual problems that cropped up disappear, the Y2K event for the average person had 
all the appearances of a non-event.  The problems that did occur were buried with 
uncommon efficiency and haste to limit any possible liability (and yes, many serious 
problems did occur -- I was party to dealing with more than one at Fortune 500 companies).  
It is easy to forget just how resilient the market actually is, even though many free-market 
proponents espouse its robustness and adaptivity.

Peak Oil is, in my estimation, premised on a combined Malthusian model and the assumption 
that existing political inertia will continue unimpeded in the face of the economic reality.  I 
find both of these premises to be questionable.  The oil markets are similar to one of my 
favorite whipping boys, the gold markets.  The current world-wide cost of production of gold 
is around $175/oz on average.  The major new mining sites and reserves are coming online 
with a cost of $100-125/oz.  The current price of gold is north of $425/oz.  There is an 
incredibly *VAST* supply of unambiguously profitable gold reserves at the $300/oz price 
range.  The spot price has very little to do with the cost of production or the immediate 

Oil at its current price range encourages 1.) more aggressive extraction of known supplies, 
and 2.) alternative energy sources as an economic optimizer.  For the next few decades, the 
more aggressive extraction of known supplies will dominate due to its infrastructure 
advantages, while alternative sources find their footing.  While there is a long-term problem 
with supply, the problem is not imminent without making some Malthusian assumptions 
about the growth of demand and supply apparently independent of economic pressures and 
investments in technology for long-term profits.  For a cheap example, see the recent 
introduction of small diesel engines to the US automotive market with the increasing price of 
fuel; diesel both has better efficiency and diesel-grade crudes are far more abundant in 
supply than gasoline-grade crudes.  Supply is a function of market value and I find no 
evidence that production cannot adapt to meet demand in the context of fluctuating prices 
given an outlook that is steady enough in the long-term to justify the investment in the 
future.  The theoretical supply at any given price usually follows a power law distribution 
which can be exploited if you can project a profit on a long enough time horizon.

In short, "peak oil" looks like a replay of some rather old mistakes in predicting the future.  I 
don't want to get into the details of it, but I'm really dubious because the entire scenario 
seems to be predicated on a very brittle and unwavering marketplace that I don't think exists.  
At the end of the day, economics talks and the world shifts.

j. andrew rogers

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