For Western oil companies,the rational strategy will be to stop oil exploration and seek profits by providing equipment, geological knowhow, and new technologies such as hydraulic fracturing (“fracking”) to oil-producing countries. But their ultimate goal should be to sell their existing oil reserves as quickly as possible and distribute the resulting tsunami of cash to their shareholders until all of their low-cost oilfields run dry.
His claim is that there is no need to discover more oil. There is plenty of cheap oil available, albeit in countries that are not our favorites. But if you can pump oil for a few dollars a barrel in Iran or Russia, it is wasteful to search for oil that costs over $30 a barrel to extract elsewhere.
My main reaction is that we sure have come a long way from “peak oil” theory.
To a large degree they already do. They make sure their costs are covered before anyone gets any profits. Is that should be from a moral perspective because who believes they would do anything of the sort? More likely they will buy into successful alternatives including manufacturing it since the energy density makes it irreplaceable. Problem is it isn’t worthwhile to develop when prices are low and there are strong incentives not to when the price is high to avoid undercutting themselves so it will continue to jerk from feast to famine motivating periodic expensive development.
So during the oil peak of the late 70’s US Steel bought Marathon Oil, I guess now Marathon could go back and by USS? And just repeat until all the money is gone.
Gone? Marathon’s sellers should have more enough to go back and do just that if they wanted. US Steel’s owners, not so much.
Whether or not there is ‘plenty’ of cheaply pumped oil depends on one’s time horizon. Eventually pump rates from those sources will peak and gradually decline into exhaustion.
Also, would you guess that the total increase in annual oil production from all sources over the last 30 years is only 50%? Does that match your intuitions regarding how many more people have gotten wealthy enough to afford petroleum based transportation, energy, and materials over that time frame? And will that continue?
Anyway, when the OPEC cartel (and their ‘observers’) still has a strong claim to being a price-maker in the market, it’s hard to reason about anything from the current price change. If prices are currently low, then to some extent OPEC is deciding to keep them low for its own reasons.
Because oil has both inelastic supply and demand, small increase/decreases in supply or demand can have a very large impact.
Niether tar sands or deep sea or arctic make money at $30 oil (and $30 oil does not mean they get $30, as with discounts for grades and transportation cost, tar sands for example gets less than $15). But most of costs were incurred in times of higher oil prices and very hard o shut down production once on line. Take out high cost oil, which I will define as needing $60 or more, and my guess is 1/3 of current production disappears.
Russia, US, Canada, North Sea, and Brazil are all in general high cost producers. Russia and US are 2 of top 3 producers.
The economist has a recent chart that shows what proportion of each country’s oil is viable at several different price points.
See http://www.economist.com/blogs/graphicdetail/2016/01/daily-chart-6 for details.
Unfortunately they don’t distinguish startup costs versus ongoing costs, but it’s a start towards understanding where the high cost versus low cost oil is.
Please remember the Economist is always wrong about Russian cost of production. In general, they accomplish this feat by ignoring the fact that Russia uses the ruble as its national currency and the value of the ruble fluctuates, often in response to changes in oil prices. Their infamous May 1999 “Drowning in Oil” cover story is another wonderful example.
We’ll run short of current forms of energy within a few centuries anyway, regardless of what we do, according to the guy who wrote most of the energy legislation passed in Congress in the 1970s. Should we just go ahead and do that?
In every quarter century lately, much happens to overturn accepted wisdom. Yet in the long view, sometimes we return to the discarded ideas, maybe because:
1) they were pretty much right about what we should do, after all, even if it’s for the wrong reasons;
2) they are still our best counter-hypotheses to provide stimulus for fresh thinking;
3) most folks don’t really know history just from knowing a paragraph about a discarded idea. The details about the rationale behind predictions of peaking oil supply –supposed to occur a decade ago — are not as discredited as the prediction itself.
I’m motivated in part by ego, which gets the juices going, you know? I had mentioned peak oil in a pro-environment letter to the editor of my college newspaper in 1978.
That prediction, by the former congressman, was intended to encourage new thinking and describe the gravity of the situation, not predict doom. It was based upon consumption trends and estimated production potentials, as known a few years ago.
The details about the rationale behind predictions of peaking oil supply –supposed to occur a decade ago — are not as discredited as the prediction itself.
But they should be.
Peak oil makes sense on the surface. If every barrel of oil has a cost of extraction, then by the law of large numbers that cost per barrel will be normally distributed. When you see the growth of production start tapering, you can now fit what you have seen in the past to a normal distribution in the future, predict the peak, and predict the supply past the peak.
So, yes, this rationale makes sense on the surface.
An economic perspective, on the other hand, finds that it is quite a bit more complicated than that. In particular, the cost of extraction will change as extraction technologies change, and the amount desired at the current cost of extraction will change as demand for current uses changes, as new uses are discovered, and as substitutes for prior uses are found.
So under one realm of extraction technology and usage pattern of oil, the bell curve taper appears very clearly and geologists then predict peak oil. Then in an even more gruesome failure to comprehend economics, they predict Peak Oil as the downfall of western civilization and the font of monographs and long articles.
In the meantime, higher prices induce new technologies that change the cost of extraction for the backside of the original bell curve, putting us on a different bell curve — and we have no idea what it looks like. Granted, again by the law of large numbers the sum of these bell curves is another bell curve. But the peak of that cumulative bell curve is entirely unpredictable from prior observation.
In short, that model of predicting peak oil is not useful. So we need a new model.
Perhaps Julian Simon’s model.
Wouldn’t the Julian Simon-esque perspective that as long as oil exists, so long as the economy continues to grow we will be happy to pay incremantally higher prices to extract it?
Actually it would be that as long as we keep getting smarter about finding, producing and using oil we will be happy to pay incrementally less for it.
That’s the other side of the coin. The side I’m talking about is that as long as we keep getting smarter about everything else (including energy alternatives, but not just those) then we’ll pay whatever the energy cost happens to be. I don’t think it is only about the specific terms of the resource price bet.