Energy Security

[Dayuhan]

Hi Rick,

More comments (there is always something...)

Your choice of the Oil Drum entries by Sam Foucher is a good one to illustrate your point. I must admit that I have difficulty understanding some aspects of both his graphs and his text. In any case his focus seems to be on projections… anticipating the future, and I have little interest in the specifics of predictions.

I don't fully understand how the Oil Drum site works... there seems to be content from a lot of different people, and I'm not sure what sort of vetting or editorial control goes on. I admit that I haven't looked all that closely: there are a lot of barrels on the Internet, and when I find a couple of rotten apples on top of one I tend to move on and look for another.

Predicting the future is an intrinsic part of the peak oil discussion: you can't talk about a peak without postulating a subsequent decline. One of the problems that I have with the projections on sites like Oil Drum is the radical divergence between the projections they cite and those that come from the big three of mainstream energy analysis: EIA, IEA, and OPEC. These institutions have access to all available data on production and depletion, and they have an abundance of analytical resources at their disposal. So why are their projections so different from those we see so often from the "peak oil" discussion? You almost have to postulate that the mainstream analysts are either completely incompetent or conspiring to collectively present baseless projections, and neither hypothesis sounds terribly credible to me.

Many years of working in the muddy ground between financial and political analysis has left me suspicious of sophisticated modeling processes, especially when they kick out results that seem questionable to me. I've seen too many people (especially in the financial world) use the sophistication of their models to validate their conclusions, conveniently failing to mention that cherrypicking the data you feed into the model will provide whatever result you want to produce. Torture the data enough and they will tell you whatever you want to hear.

I'm suspicious of the discourse claiming that the 2005-2008 plateau was "the peak" because too many alternative explanations for the observed phenomena are not considered. It has become almost a mantra in the "imminent peak" circle that from 2005 onward rising prices could no longer call up more production. The possibility that installed capacity had peaked and that high prices can call up production with a substantial time lag between investment and results, while obvious, is not discussed. Similarly, the downward production curve in mid 2008 looks terribly ominous until you put it up against a price chart, at which point the relationship becomes too obvious to ignore. All too often it is simply stated that mid 2008 marked the beginning of "the decline" in production, without discussion of the obvious connection between plummeting prices and production cutbacks.

Personally, I am even more concerned that the burden may fall on them, so the timing of peak seems minor to me (apart from the fact that a later date affords us some valuable time to mitigate, though I doubt that North Americans would cooperate enough to make effective use of the extra time).

I share this concern, which is one reason I feel that crying wolf over hypothetical peaks is a bad idea. If we announce a production peak and there isn't one, the public gets the impression that it's all hype and not an issue. The resource is finite and there will eventually be a peak. The only way I can see to maintain an impetus toward conservation and diversification is to keep prices high. The worst thing that could happen at this stage is another glut.

I don’t think that I agree with your conclusion that our recent difficulties (possible plateau and attendant risks) are unrelated to arrival of peak. I think we are closer to peak than most mainstream analysts concede, and that the increased price volatility is a reflection of that.

There may be a bit of circular logic here: we speculate that price volatility will accompany a peak, then cite price volatility as evidence of a peak. Of course a peak in production while demand is rising will create a price spike, but why should there be a difference between a situation driven by "a peak" and a situation driven by "the peak"?

We also need to consider that 2005-2008 saw intense price volatility across the commodities spectrum, not just in oil. Some of this was related to oil: higher energy costs drive production and transport costs up, and diversion of agricultural land to biofuel production did help to drive grain and meat prices up, but that's not a full explanation.

When I look at that period I see:

1. A rapid and generally unpredicted increase in demand across the commodities spectrum, primarily from East Asia, but this was a period of economic growth and demand growth around the world.

2. A substantial and rapid depreciation of the currency in which most commodity trades are denominated, supporting faster increases and creating an incentive to hedge the dollar with commodity trades.

3. The combination of inflated asset values and overextended leverage ratios created a vast pool of capital for speculation in commodities, and the rapid increase in commodity prices made such speculation attractive.

The extremely rapid spike in commodity prices in early 2008 and the extremely rapid plunge in late 2008 were too aggressive to be explained by supply and demand. The plunge in particular is very consistent with a liquidity crunch sucking speculative capital out of commodities.

I could go on, but suffice to say that there are many explanations for volatility that do not involve an absolute production peak.

I'm not trying to say that the idea of "peak oil" is BS - obviously it can't be. I do feel that the hype around the idea that the peak is imminent or recently past is baseless and may actually detract from rational planning.

Planning for abrupt scarcity is certainly necessary, but I think it's easier to justify that planning on the grounds of security and political risks than on the more nebulous grounds of "peak oil". Whether or not you believe an absolute production peak is near, the vulnerability of major suppliers is clear: I would rather argue that we need an emergency plan to deal with the possibility of a security crisis in the Middle East (Straits of Hormuz closed, instability in Saudi Arabia, nuclear confrontation... take your pick) than claim that we need an emergency plan because a production peak is imminent. It's easier to justify and the need is clearer.

Just thoughts and opinions, as always...

Steve

PS: Couldn't pull down the videos; I live on a mountaintop in the northern Philippines (while working primarily in Dubai - long story) and the connection speed is not up to it. Is there a transcript anywhere? I'd rather read than listen in any case...