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October 28th, 2007

Feedback Loops

Jeff Vail posted on www.theoildrum.com/node/3017 a list of feedback loops that would diminish oil availability after the oil peak. Vail's piece is thoughtful. I highly recommend reading it, preferably before reading my comments about it.

Vail identifies five feedbacks from a diminished oil supply that would make the problem even worse. I'll take the risk of stating them briefly:

  1. Damage to oil supply facilities can be done cheaply, compared to the impact of the damage. (Apparently to make it easier for the terrorist, the US E.I.A. posts a rank-ordered list of US oil refineries at www.eia.doe.gov/neic/rankings/refineries.htm.)
  2. If high international oil "prices are insane," then oil producing countries would reserve their own production for domestic use.
  3. High oil prices can raise national incomes in oil-exporting nations, thereby increasing domestic oil consumption.
  4. Oil-producing regions within nations would try to secede in order for a smaller population to enjoy the wealth.
  5. Privateering: Profit-motivated gangs replace politically-motivated terrorists.

In the opposite direction are the classical feedback loops from Econ 101:

  1. Higher oil prices attract new investment in exploration and production.
  2. Previously uneconomic oilfields become producible in the Arctic and in deep offshore waters. Smaller oilfields become worthwhile.
  3. Unconventional oil sources, like Canadian and Venezuelan tar sands, come into production.
  4. Money is invested in research for better oil finding and enhanced production.
  5. The industry benefits from an influx of young scientists and engineers, motivated in part by higher salaries.

It would be an overly-simple evaluation to say the effects of Vail's five and the Econ 101 five cancel each other out and – as we say in Appalachia – "hit don't make no nevermind." We better sort this out carefully.

The Hubbert scenario is only concerned with the amount of oil discovered or produced. There is no message from Hubbert about who gets to enjoy the benefits. Obviously, who eventually benefits is of great concern to all of us, but that is politics and not geology. Let's look at the lists and ask which of them influence the production of crude oil. In Vail's list:

  1. Attacks on oil production facilities, wells, processing stations, and pipelines, can shut down production. This results in diminishedworld oil production.
  2. Hoarding by producing countries is a "who benefits" issue. However, there is a deeper possibility. Robert Solow, in his 1974 paper on resource economics, pointed out that, at times of rising prices, the owner of an underground resource could reap greater profits by leaving the resource in the ground and selling it later at a high price. I am not aware of major production cutbacks motivated by future high prices, but I nervously watch the United Arab Emirate states because of their large reserves and small populations.
  • 3 and 4 seem to me to be "who benefits" issues.
  1. Oil exploration and production is a long-term investment. Much of the income comes 20 or more years after the exploration effort begins. Without economic and political stability, the investment is incredibly risky. Everything from Russian oligarchs to Nigerian privateers can diminish the attractiveness of an oil investment.

Results from the Econ 101 feedbacks are not kicking in rapidly.

  1. Chevron announced a $15 billion buyback of company stock. Are they out of useful investment opportunities? I have a fantasy that Chevron's last employee will sell their last barrel of oil to buy back their last share of stock. Poof!
  2. Certainly smaller and more expensive oilfields are coming into production. However, a truism about oil – dating from 1955 – states that most of the rewards come from the giant oilfields.
  3. I count Canadian tar sand production as crude oil. Unfortunately, expanding the production is slowed by the shortage of natural gas, water, and personnel.
  4. Michael Economides stated that research investment in the petroleum industry is the smallest of any major industry.
  5. Student enrollment in petroleum geology, exploration geophysics, and petroleum engineering is vanishingly small in US universities. Petronas, the Malaysian national oil company, has their own university training future personnel.

Missing from both lists is the possibility of a profound global economic depression. The price of oil would then drop because nobody could afford it. World oil production would likely decrease. It makes little difference whether the trigger for the recession is mortgage defaults, food prices, or oil prices; it's still the same depression. The rising costs of food and energy are testing the limits, tickling the dragon's tail, finding out what it takes to bring on a Greater Depression. I hope the experiment fails and we don't get into a downward spiral.


 
 
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