Peak Oil: Depends on What You are Willing to Pay
May 31, 2006 22:35 Filed in: Economics
Author Greg Palast has posted
an interesting column on peak
oil. His thesis, half tongue-in-cheek and
half deadly serious: whether peak oil has
arrived depends upon its price. Oil at $10/bbl
peaked years ago, but at $80/bbl oil hasn't come
close to peaking.
Palast is, of course, correct. Oil hasn't peaked when it is priced at $80/bbl because it is profitable to spend more money getting it out of the ground and transporting it to customers
He failed to mention, however, that, although the demand for oil is highly inelastic in the short run, $80/bbl for oil will reduce demand in the long run. People will gradually acquire the habits appropriate to a civilization based on expensive, as opposed to cheap, energy. Worn-out automobiles will be replaced with high-mileage models. New houses will be smaller and use less oil and gas for cooling and heating. If we are wise, we will build mass-transit systems and adopt policies to discourage low-density housing and long commutes. All these developments will reduce the demand for oil.
All this takes time. The American dream will die hard and therein lies the possibility of disaster. The vast, energy-wasting economy that we have come to love took over a century to build and it will not be rebuilt in a year or two. While people are adjusting to the new reality, wealth will flow in a huge torrent from users to producers, even more than in the past. It will be a sellers' market .
Our nation, as well as the rest of the world, will probably be politically unstable and more dangerous for many years. The Bush administration, under the control of the extraction industry, has already wasted six years in which we could have taken remedial actions to lessen the pain of transition. The task will therefore be far more difficult for its successor and for us. Let us pray.
Postscript: There will be a peak and decline in oil production eventually, no matter the price, when the energy to extract the oil approaches and then exceeds the energy the oil can yield. That's the problem with ethanol; the energy used in production of corn plus the energy to distill the fermented grain exceeds the energy yielded by the end product. For that reason, gasahol must be subsidized.
Palast is, of course, correct. Oil hasn't peaked when it is priced at $80/bbl because it is profitable to spend more money getting it out of the ground and transporting it to customers
He failed to mention, however, that, although the demand for oil is highly inelastic in the short run, $80/bbl for oil will reduce demand in the long run. People will gradually acquire the habits appropriate to a civilization based on expensive, as opposed to cheap, energy. Worn-out automobiles will be replaced with high-mileage models. New houses will be smaller and use less oil and gas for cooling and heating. If we are wise, we will build mass-transit systems and adopt policies to discourage low-density housing and long commutes. All these developments will reduce the demand for oil.
All this takes time. The American dream will die hard and therein lies the possibility of disaster. The vast, energy-wasting economy that we have come to love took over a century to build and it will not be rebuilt in a year or two. While people are adjusting to the new reality, wealth will flow in a huge torrent from users to producers, even more than in the past. It will be a sellers' market .
Our nation, as well as the rest of the world, will probably be politically unstable and more dangerous for many years. The Bush administration, under the control of the extraction industry, has already wasted six years in which we could have taken remedial actions to lessen the pain of transition. The task will therefore be far more difficult for its successor and for us. Let us pray.
Postscript: There will be a peak and decline in oil production eventually, no matter the price, when the energy to extract the oil approaches and then exceeds the energy the oil can yield. That's the problem with ethanol; the energy used in production of corn plus the energy to distill the fermented grain exceeds the energy yielded by the end product. For that reason, gasahol must be subsidized.
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