While discussing the concept of ‘Peak Oil’ at work today, I offered that it made no sense to to invest in an expensive high mileage car (for example) in order to ‘save oil’. Any oil you saved would just be used by someone else at today’s low price and - in the meantime - you would put yourself at a competetive disadvantage by paying more for energy than you needed to.
The other person offered that this was an example of the “tragedy of the commons” since everyone was incentivized to use the oil and no one was incentivized to conserve it. Although I couldn’t argue that it certainly looked the same, I always thought that the “commons” argument pointed to a problem with property rights - that common ownership was at the root of these sorts of problems. However, it doesn’t look like oil supplies - in general - suffer from a common ownership problem.
So I’m confused with how to classify the whole situation, is it:
An example of the “commons” tragedy? But does that imply that “commons” is more than just property rights? or that oil supplies have ownership issues?
An example of something else with similar consequences? perhaps some sort of game theory?
A problem with the argument as a whole? (by assuming peak oil is true, am I putting some false constraint on the issue?)
Any help appreciated - even a link somewhere - I’m not sure if this is a “commons” issue or not.
No. Peak Oil is a tragedy of idiotic US government policies. First, they inhibit research in alternative fuels by draining credit away from productive private sector investments to the public sector via corporate taxes, capital gains taxes, income taxes, and borrowing that fuels government debt. Second, the government refuses to take actions that would reduce the burden of high oil prices on Americans, such as allowing offshore drilling and shale oil.
Peak oil seems to be a theory for geology, not economics. So long as new oil is being discovered and appropriated, the supply of oil is for all purposes limitless. Once oil discoveries stop, then oil preservation becomes a rational choice.
This is not just a discussion for geology. Peak Oil is an interesting concept, but as with any resource, the key rationing device is the price. Conservation of oil can and will be dictated by the price alone. What seems very strange to me is that oil continues to be exclusively denominated by it’s price relative to the US dollar. There are many countries throughout the world that have suggested oil be denominated relative to another currency.
What’s also very interesting is that other forms of energy are denominated relative to a barrel of oil equivalent (BOE) and our friends at the IRS define BOE in terms of joules (J). But why does the IRS determine this and not a convention held by the market or at least the Department of Weights and Measures? The problem with defining oil in terms of joules is that it assumes the conversion rate of oil is constant and that there’s no possibility for efficiency gains. Efficiency gains in the burn rate of oil would effectively increase the amount of oil by increasing the energy derived from converting it to another form of energy.
Peak Oil could be a construct of this thinking that the energy derived from oil is constant. But it is certainly not. So why does the government hold it constant?
Two theories:
(1) the government creates the Peak Oil myth to declare the supply of oil will run out in the short-run. Many DOE estimates over the past century have declared we will run out of oil, only to have to push the estimate back with new discoveries. Efficiency gains are like new oil finds. But the myth helps to drive the push for government interefernce in the energy markets: conservation efforts, taxes, and “investments” in back-end (consumer) efficiency technologies.
(2) the Peak Oil myth is a way of controlling the means of production. Declaring that if we running out of oil justifies the capture of land to prevent from being used for E&P operations. Preventing E&P limits the supply and increases the price of oil and the inputs costs to other production. Preventing input costs from falling prevents the efficency gains throughout the rest of the economy and the corresponding fall in wholesale prices (their dreaded deflationary event in Keynesianism).
Ask any proponent of the Peak Oil Theory what the exact amount of fossil fuels the earth contains. Without knowing this amount no rational claim of Peak Oil can be made and it is thus a Myth as currently proposed.
The only entity preventing further exploration and extraction of fossil fuels is the state and the only entity negatively effecting the actual cost of fossil fuels is the state through taxes and regulations. Only the state can cause shortages of resources and any energy “crisis”. In a pure free energy market all land would be available for energy production at a free market price, thus availability would be limited by cost, technology and of course actual supply. Say a hypothetical obtainable limit to our demand was reached in actual supply, long before this was reached prices of fossil fuels would rise, once fossil fuel prices rose above what other competing free market energy sources were, these cheaper energy sources would be adopted on their own. All without government intervention. The government was not needed to switch away from horses to cars. But we have no such scenario since the state is artificially creating supply shortages by restricting land access through regulations. The state is also artificially increasing energy costs above free market rates with taxes and regulations. In essence the state is creating a Peak Oil scenario to benefit the green lobby. But no such thing exists even with known reserves:
Actually, the latest IEA and EIA reports show that the world’s major elephant oil supplies (like Ghawar) are declining in production at a rate of 6.7% per year. In the next couple years Mexico won’t be exporting oil. Neither will England’s North Sea oil.
Matthew Simmons has done a lot of research on this. You should try to read some of his stuff.
Matthew Simmons has no evidence for his claims, he just keeps repeating them over and over in any loony documentary that will have him. Mathew Simmons is the Al Gore of the Peak Oil Myth. His claims have been debunked:
The problem is that government has been declaring that the world’s oil supply will run out ever since the 1940s. It’s constantly been used as an excuse for more government intervention. In either case, market signals (prices) would serve as a signal for conservation and investment in alternatives.
Thats wrong: Hubberts theory was laughed at when he published it in the 50s, until the US peaked in early 70s.
Prices are indeed hard to use indicators as how the oil situation is due to credit bubbles and crunches distorting the market. But if we look at production numbers we get a pretty good idea: OPEC is still increasing in production it seems(but cant be for long since their big discoveries were a couple of decades ago), while the rest of the world is declining. Oil discoveries have been decreasing since the 60s(they also had a peak), all the new fields are either low quality oil like tar sand or shale, or they are in hard to access places like deep ocean floors
Forgot to add: world crude oil production has been stagnant at 73-74 Mbarrels a day for 4 years now so there is a high likelyhood that we are in fact at the peak.
That is primarily because people are being restricted from investing in new oil production and refinement capital. Could be that we are running out of oil, but once the price is high enough there will be enough of a demand for substitutes that people will invest in making those substitutes.
The EIA & IEA reports state that we need to invest $350 Billion per year for the next 20 years just to keep producing at the rate we are at now. We are clearly cutting back on capital expenditures in such areas. Also, there are no new elephant oil field discoveries like those found back in the 19th century. Most of the oil now is in little pockets, deep see drilling and oil sands. All these forms of oil require high price like $70/barrel to be profitable.
To all who replied - thanks for your thoughts. As i read the replies and thought further, I’m beginning to think that this is not an example of a tragedy of the commons. While there are problems with government interference and questions about whether or not the theory is even valid, let’s assume for the moment that peak oil DOES exist and there is no government interference in the situation. You could then say that the market is a normal market which balances the need and expectation of buyers and sellers. Could the sellers have wrong information and are making dumb decisions by selling oil too cheap? Sure. Could the buyers be oblivious to the effect of diminishing oil supplies in the near future and instead should allocate money to oil with both fists? Sure.
But in both of these cases, the results are not an example of the “tragedy of the commons” (where folks take advantage because they don’t bear the responsibility of their decisions) - but simply the uncertainty of the future (by ‘assuming’ peak oil was true, I was just wiping away all that uncertainty that exists and entrepreneurs try to exploit). I’m voting (for the moment) that my confusion was because of a poor argument.
As to whether peak oil exists or not - the engineer training in me says “well of course it does!” (everything breaks or runs out of gas eventually…) - but I don’t think you can look to the price for affirmation or disproval. Thanks again to everyone who supplied reference as well - guess I’ve got some reading to do…
Quite true but I would like to reiterate that you must first know two things - 1. What is the exact amount of fossil fuels on the planet and 2. How are fossil fuels created. Which leads me to…
The Monkey Wrench - What if fossil fuels were created different then we thought and what if we could create them cheaply:
“Suncor Energy Inc., which last week rolled out massive spending cuts because of the credit crisis and slumping oil prices, said it will earn C$28 for every barrel of oil it produces should crude trade at US$60/barrel”
Which means the oil sands need oil to be at about US$40/barrel or more to make a profit.
Yes I do agree that the long timers that have been developing in the oil sands since oil was $20/barrel are making profits today. Companies like Imperial Oil, Petro Canada, Syncrude, Suncore, Royal Dutch Shell, Huskey, and others are all still in business. Many of the other energy trusts like Pennwest, Enerplus, NAL and Baytex, Canadian Oilsands have cut back their distributions and they’re still profitable - but many have hedged contracts at higher oil prices out until next year. It’s the new developments with the inflated prices of capital goods and labor that required $70/barrel or so to be profitable. It’s these new developing companies that have now shut down. A lot of people have been laid off in Calgary, Edmonton and Fort McMurray because of the shut downs. A lot of projects are on hold or canceled. This is to be expected in any market that has fluctuating prices where production changes to meet demand.
It is likely that with other commodity prices falling the cost of capital goods are getting cheaper and expansion more affordable. However, none of the oil sands projects are expanding anymore except for a couple of the old timers.
Also, oil shale & tar sands create huge amounts pollution. I live in a country with a population of 1.5 million that gets its electricity from oil shale and guess what? We are pretty much the world’s biggest co2 producers on a per capita basis, even though our energy consumption is much smaller than some advanced countries’
“The economic value of energy just doesn’t depend very strongly on raw energy content as conventionally measured in British thermal units. Instead it’s determined mainly by the distance between the BTUs and where you need them, and how densely the BTUs are packed into pounds of stuff you’ve got to move, and by the quality of the technology at hand to move, concentrate, refine and burn those BTUs, and by how your neighbors feel about carbon, uranium and windmills. In this entropic universe we occupy, the production of one unit of high-grade energy always requires more than one unit of low-grade energy at the outset. There are no exceptions. Put another way, Eroei–a sophomoric form of thermodynamic accounting–is always negative and always irrelevant. “Matter-energy” constraints count for nothing. The “monetary culture” still rules. Thermodynamics And Money”
You seemed to be confused about air pollution which has nothing to do with CO2. Carbon Dioxide (CO2) is NOT pollution.
“CO2 for different people has different attractions. After all, what is it? - it’s not a pollutant, it’s a product of every living creature’s breathing, it’s the product of all plant respiration, it is essential for plant life and photosynthesis, it’s a product of all industrial burning, it’s a product of driving – I mean, if you ever wanted a leverage point to control everything from exhalation to driving, this would be a dream. So it has a kind of fundamental attractiveness to bureaucratic mentality.” - Richard S. Lindzen, Ph.D. Professor of Atmospheric Science, MIT
Ozone (O3) * (formed from the photochemical reaction of Nitrogen dioxide (NO2) + Hydrocarbons)
Particulate matter (PM-10) *
Sulfur dioxide (SO2) *
Air Pollution is already regulated in the: 1970 Clean Air Act (Amended: 1977, 1990)
Air Quality in America
- The United States has sharply reduced air pollution levels, despite large increases in nominally “polluting” activities (Source) - Air pollution affects far fewer people, far less often, and with far less severity than is commonly believed. (Source) - Areas in the United States with the highest pollution levels have improved the most (Source) - Air quality in the United States will continue to improve (Source) - Regulators and environmental activists exaggerate air pollution levels and obscure positive trends in the United States (Source)
Leaving the CO2 issue aside(would go too off topic to debate it here), my claim of prices not giving a good idea about energy source usefulness is due to subsidies, heavy taxing, state ownership distorting the energy market quite a lot.
I guess the debate over existing huge reserves and their usefulness comes down to how much the coming fossile fuel EROEI drop will influence the economy and the feedback.