[extropy-chat] Re: peak oil debate framed from a game theory standpoint ?

[Hal Finney]

Samantha asks a good question: what would it take to persuade me, as
a skeptic, of the truth of the Peak Oil theory?  And for that matter,
why am I skeptical?

The first thing I can say is, it's a complicated issue.  I have spent
probably hundreds of hours in the past few months reading and thinking
about Peak Oil.  I've read two books about it, one pro and one con,
many web pages, and I closely follow such web sites as theoildrum.com
and energybulletin.net.  But I honestly can't say that I have a good
understanding of the matter even after that much study.

When will the peak happen?  And what will be the consequences?  There are
an enormous number of unknowns.  Probably the biggest question mark
is the state of the Saudi Arabian oil fields.  The Saudis are quite
secretive about their oil situation, but publicly they claim that they
can pump oil and increase the quantity as much as the world needs, for
many years to come.  Some experts are skeptical, but no one has access
to the details necessary to get a firm answer to the question.

That fact alone, in my opinion, renders any firm statements about when
any peak will occur nonsensical.  There is simply not enough public
information to make a well founded judgement of the potential oil supply
over the next decade or two.

There are other complications as well.  Chinese demand has grown
incredibly fast the past few years, but this year its growth has fallen
off precipitously.  What will happen in the future?  The Peak Oil
situation is highly sensitive to what happens in the Chinese economy the
next few years.  How on earth can a layman claim to have expertise in
such an esoteric subject?  The Chinese government is another secretive
and opaque institution; again there are no strong grounds for making
firm predictions about what will happen there.

As I have written before in other contexts, I don't believe it
is practical or feasible for the lay person to come up with a well
founded judgement on such difficult matters, where even the experts
can't agree.  My approach is not to try to learn all the details of a
difficult subject and try to become enough of an "instant expert" to
make a judgement myself.  Instead, I look elsewhere and try to learn
from the expertise of others.

The best institution for such purposes, in my opinion, is academia.
It has a good track record of success and strong institutional
incentives to seek out and correct errors.  Unfortunately, I haven't
been able to determine an academic consensus on the Peak Oil situation.
There doesn't seem to be much study of the issue.  It combines aspects
of geology, international finance, economic modelling, and other fields
in a complex way.  Cross disciplinary questions like these seem to be
difficult for academics to handle.

There are a few professors who have published opinions that generally
favor the Peak Oil scenario, but most of them are elderly and/or retired.
In my experience, retired professors are less reliable as a source
of informed opinion than ones who are still actively engaged in the
intellectual life of their academic communities.

We can also look at other institutions, those more directly involved
in the oil business, such as oil companies and the governments that
regulate and in many cases nationalize them.  Generally, these groups
downplay Peak Oil scenarios.  Their public statements recognize that
there are challenges ahead in meeting the growth in oil demand but
express confidence that these challenges can be met.  Unfortunately these
assurances seem in some cases to be largely a matter of public relations.
Internally these organizations are quite opaque and it is hard to know
if they are being frank in their actions.

The U.S. government does publish a number of analyses and predictions
of oil supply and demand issues, and they generally forecast adequate
supplies for at least the next several years.  As far as I can tell,
these are good faith estimates, but ultimately they rely on public
sources of information which, as I noted above, are highly unreliable.

I do put considerable faith in one other institution, which is the market.
When people are putting their own money behind what they say I am much
more inclined to listen and believe them than when they are making empty
statements.  Fortunately we have a number of commodities markets in the
energy field, including crude oil of different grades, gasoline, natural
gas and heating oil.  The crude oil market goes out six years or so and
is in my opinion the best source of unbiased information about the beliefs
of the "smart money" as to the future course of oil supply and demand.

If Peak Oil were widely seen as a likely scenario in that time frame,
we would see increasing oil prices out in the 2008 to 2011 time frame.
For technical reasons, these markets tend not to have large price
differentials across the delivery years (basically because it is easy to
move oil deliveries backwards and forwards in time), so we would expect
high future prices to drag up present-day prices.  This is actually
one of the great services of commodity markets, that they make the
high prices of future shortages felt in the present day, encouraging
conservation and searches for alternatives well in advance of an actual
supply/demand mismatch.

But this is not what we see.  While oil prices have risen steadily
for the past few years, they have not been led up by future prices.
Rather, future prices three to six years ahead have consistantly lagged.
Those future prices are being dragged up by high present-day prices,
rather than vice versa.  This is exactly the opposite of what we would
expect to see in a Peak Oil scenario.

Another great feature of futures markets is that they encourage insiders
to bet on the basis of their private information.  This rewards them
with healthy profits while informing the marketplace indirectly of their
information through its effects on prices.  Even if such insiders as oil
companies, or the Saudi and other national governments, were forced for
P.R. reasons to put on a happy face about a future oil supply problem,
they would be able to make enormous profits in the commodity markets
by betting (through proxies if necessary) on the high prices they would
know were ahead.  This would drive up those future prices and we would
see the phenomenon I described above, the situation futures traders call
"contango" where future prices are higher than present day ones.

To sum up, the answer to Samantha's question is that I am skeptical
about Peak Oil because none of these institutions seem to show the signs
of an impending shortage.  There is no academic consensus on the issue;
industry and government seem to be downplaying the problem even when it
would seemingly be to their advantage to make people see that there is a
good reason for high prices; and market prices don't have the structure
we would expect if insiders knew about a shortage ahead.  And I would
become more convinced of the reality of the Peak Oil scenario if these
various institutions started showing the signs I have outlined.

There are of course limitations to this analysis; for one thing, the
commodities markets only go out six years or so.  While the markets are
forward looking and they will anticipate shortages even beyond that time
frame, to some degree, the effect is somewhat weak.  The current data
can't rule out a significant Peak Oil scenario much past the 2010 to
2015 time frame.  Of course the further out we go, the more the chances
that some kind of wild card will appear, a new technology or some such,
that could change the nature of the situation we face.

Hal