[ExI] [extropy-chat] Re: peak oil debate framed from a game theory standpoint ?
brian at posthuman.com
Mon May 19 21:44:02 UTC 2008
Three years ago Hal made some interesting posts regarding oil. Hal, are you
still reading the list? Anyway, one of the signs he was looking for of peak oil,
contango in the futures markets, seems to be emerging. We'll see if it lasts.
Hal Finney wrote:
> 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.
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