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March 01, 2006

Peak Oil

For those who believe in the Peak Oil hypothesis (in essence, that there is something magical about the point where we’ve used more than half the oil) like Jim Bliss, have a look at this deconstruction of the idea by Russell Roberts.

But gasoline's price isn't zero.  It's positive.  And it isn't randomly positive or set arbitrarily.  As people try (as they always will) to buy more of something they like than there is of that stuff available, the price goes up and rations expansive demand relative to finite supply.

This is true when most of the earth's oil is under ground undiscovered and unrefined.  It will still be true when most of the earth's oil has already been discovered and refined and we are in the allegedly frightening history of oil when reserves are falling. There's no reason for price to spike suddenly because some arbitrary number of reserves are left relative to demand.

Sorry folks, the entire structure of the peak oil argument is nonsense.

March 1, 2006 in Economics | Permalink

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Comments

yes it will peak in price in a relative short time,as we are using too much gas and we cant quit...at the rate china is increasing its usage they will raise the price rapidly for us..

Posted by: embutler | Mar 1, 2006 11:01:44 AM

Isn't the point simply that if supply cannot expand in response to a demand increase, or worse it is falling, then the price change needed to get supply and demand back into line is that much greater?

Tim adds: That’s a rational point. Slightly different from the one usually made, that the moment we pass the peak then civilization collapses.

Posted by: Matthew | Mar 1, 2006 11:51:40 AM

Doomsday in 2037? So that gives us 30 years to sort ourselves out.

If we take a dispassionate look at how technology has changed since 1976 I think it's fair to say that things in 2037 will be quite different from what they are now.

In terms of bulk electricity I doubt windchimes or any of the other magic bullets so beloved by Mr Blair will ever meet all our needs no matter how much more efficient they become. I am prepared to bet, though, that some future government will have finally girded its loins sufficiently to permit the building of new nuclear power stations. These will probably use far more efficient technology than the last generation making them smaller, cleaner and cheaper.

For automotive transport, fuel cells are likely to be smaller, lighter and more economic and hence will be used in a lot of vehicles (pause for subliminal plug of platinum here). For those applications that still require liquid fuel, either mineral oil could be used or a substitute source. Biofuel may provide this, but more likely oil from coal technology will assume greater importance (this is already in existance and operating and is likely to become much more efficient as time goes by). Oil from coal could also be attractive for the UK as the country still has quite large coal resources. The mines didn't close because they ran out, they became too costly. Increasing oil prices may make UK coal viable again.

So all in all, I'm more concerned whether the country will survive the government's assaults on liberty than I am about the oil doomsday.

RM

Posted by: The Remittance Man | Mar 1, 2006 11:57:18 AM

[If we take a dispassionate look at how technology has changed since 1976 I think it's fair to say that things in 2037 will be quite different from what they are now. ]

It is perhaps odd that this comment is immediately followed by a mention of the nuclear industry, where technology really does not look very different at all from how it looked in 1976. Nuclear power plants have a bit more automation, somewhat more sophisticated control systems, but they are still based on the same "something very hot with a kettle on top of it" mechanical principle that has been around since James Watt.

Posted by: dsquared | Mar 1, 2006 2:01:20 PM

The mid 70's was about when most people stopped building new nukes, so no wonder the technology of existing reactors is stuck at that level. But I take it you have never heard of Pebble Bed reactors if you think that nucleur has not advanced at all.

Posted by: chris | Mar 1, 2006 2:38:05 PM

Incidentally on Friday Honda announced they were going to sell a fuel-cell car from 2009/2010, which was rather a surprise, at least to me, as I rather take the view that it's the 'technology of the future, and always will be'. But '3-4' years still leaves plenty of time for things to go wrong, I would expect.

Tim adds: Have you got a link to that? A Ballard Systems cell? Or another technology? Professional interest on my part.

Posted by: Matthew | Mar 1, 2006 3:36:40 PM

http://www.automotive-business-review.com/article_news.asp?guid=3B72CBC9-B8E0-492A-B0D1-31F59AF28A72

Tim adds: Wow! Seriously cool. Reforming the natural gas most homes already get, combined heat and power fuel cell system in the home (or maybe the car linked up when it’s at home?) plus the car.

Now all I have to hope is that they’re using the SOFC technology from Toho Gas and the demand for scandium will soar! More likely though (grump) they’ll be using the Ballard Systems platinum based cells.

Posted by: Matthew | Mar 1, 2006 5:21:56 PM

Palladium is another platinum like catalyst.

I'm hoping for rises in that metal myself.

Posted by: Rob Read | Mar 1, 2006 5:53:01 PM

I suspect that high oil prices would make foreign coal mines viable again before they would make British coal viable again. But it depends on transport costs, I suppose.

I think that the host has inadvertently erected a strawman. The point of the Peak Oil argument is not that as soon as production starts to shrink the world collapses. Everyone accepts that Peak Oil will come at some point. Logically, it has to. The Peak Oil crowd are arguing that it will come in the next five years - or has already happened - as opposed to the conventional wisdom that it is about 30 or 40 years off at least. This has two implications: first, that falling production means prices will continue to rise, rather than stabilising at their current level; and second, that use of enhanced extraction on some ME oil fields mean that the drop in world production after the peak will be far steeper than, say, the drop after Peak US Oil was.

Tim adds: A strawman? Ttry reading some of Jim Bliss’ stuff on the subject. He literally thinks that western civilisation will fall in a few short years.

Posted by: ajay | Mar 1, 2006 5:55:56 PM

In the news:

"THE Chief Executive of UK Coal has predicted that the coal industry's recovery will be threatened unless the Government provides loans to help it get back on its feet. Gerry Spindler said he also wanted the Government to devise a regulatory regime that helps his company raise cash. . . Earlier this month [February], it was revealed that Hatfield colliery, near Doncaster, is to reopen in April 2007 under Richard Budge, former RJB Mining and UK Coal chief, who is hoping to raise £35m on the Alternative Investment Market (AIM) to fund the project through his new company Powerfuel.
The re-opening will create 350 jobs for local coalminers and work is due to start on the mine next month. Following a massive increase in coal prices over the past two years – up from $35 a tonne (£20) to $55 (almost £32) – coal in Britain is once more an attractive investment."
http://www.yorkshiretoday.co.uk/ViewArticle2.aspx?SectionID=56&ArticleID=1367122

As for downstream spillovers:

"The agreements setting up the coal health compensation schemes were signed in 1999. Processing of all claims is expected to be finally completed in 2011. The schemes are now closed to new applicants. There have been 580,000 claimants in the lung disease scheme and 170,000 for vibration white finger. Total costs by 2011 are estimated to be approximately £7 billion - £4.5 billion (65%) as compensation . . "
http://www.dti.gov.uk/coalhealth/pdf/ex_review.pdf

Posted by: Bob B | Mar 2, 2006 12:22:07 AM

Rob, it depends on the technology used. Platinum and palladium are both from the same class of metals and do behave very similarly as catalysts. However there are subtle differences in performance.

Geologically the two metals (plus the other 4 PGE's) come as a package. The proportions vary from deposit to deposit, but on a global scale the production ratio is around 1:1 Platinum:Palladium (give or take 10% or so).

Currently a lot of the differential between the platinum and palladium prices is down to two facts. Firstly platinum autocatalyst technology is more developed than palladium. And secondly over the past few years the South African producers have spent a lot of time and effort promoting platinum for jewelery with a lot of success. On a side note I didn't help my career much last year by pointing out to our marketing people that since our company is moving from approximatly a 1.4:1 Pt:Pd ratio to a 1:1 ratio (new mines and changes in our processing facilities), they'd do better to spend some time marketing palladium. They weren't happy bunnies.

So in the short term I don't expect the palladium price to start approaching that of platinum. In the longer term, depending on things like which technology is used in fuel cells, things could change. Certainly if I was designing fuel cells I'd be looking at the cheaper metal as my base catalyst if possible.

Chris,

Thanks for the comment replying to Dsquared's note about nuke technology, it's saved me some finger-keyboard time. Just for interest's sake; South Africa is seriously looking at a pebble bed reactor for the Koeberg power station replacement project. Seems like SA is the only country at present seriously contemplating nuclear power.

RM

Tim adds: One further factor in the Pt /Pd ratios. Auto catalysts for petrol cars contain both, those for diesel only Pt. So demand will vary a little dependent upon the mix of diesel/petrol cars on the road.

Posted by: The Remittance Man | Mar 2, 2006 6:41:52 AM

Governments should put enormous subsidies into the oil industry to make their operations more efficient, and encourage more exploration. This subsidy should be directed at consultancy firms, who will then advise the operating companies what to do.

They should also give huge subsidies to anyone who has studied engineering and subsequently goes into the oil industry, a scheme which works retrospectively for anyone who graduated during or after July 2000.

Engineering consultants in the oil industry are mankind's best hope for survival, and it is everyone's moral duty to set aside a part of their income, in the form of tax, to ensure that these essential workers are adequately paid.

Posted by: Tim Newman | Mar 2, 2006 6:57:47 AM

Palladium, at least at present, isn't a particularly useful in fuel cells. It also still (despite the South African expansion) suffers from a more politically risky supply base, which I think even at today's price differentials makes a lot of car makers worried about being reliant on it (though given the diesel issue (which is now not 100% platinum though) they in effect can't really help it)

Though of course the recycling facilities for these metals are pretty good, and getting better, and in the case of fuel cells is meant to be very simple.

Posted by: Matthew | Mar 2, 2006 8:40:29 AM

Palladium supply (like platinum) is limited to SA (60%), Russia (30%), US (7%) others (3%) roughly. So yes it could be said that SA could hold the world to ransom for its fuel cell needs. However, new demand did take a dip a few years ago when the recyclers got in on the act and really only jewelry demand and the increased use of catalytic converters in diesels has kept overall demand growing.

Of course the alternative, Scandium, is so rare few people have ever heard of it and from my research only one or two mines (now closed) in OZ ever produced it (as a very minor by-product).

Who would you rather have hold you to ransom? The South Africans (with the chance the Russians and Americans could trump their little ploy) or Mr Worstall and a bunch of Australians?

Besides, think of the oportunities the lefties would have to bitch when President Jeb Bush invades SA in 2020. "It's all about Platinum" they'd chant. At least it would make a change from "It's all about oil" and the Marines would probably appreciate the change of scenery as well.

RM

PS Mr Newman - I like your idea provided it is emended to all engineers working in the resource field who graduated after 1998. An extra provision should be made for mining engineers who work for corporates managed by complete mugus.

Tim adds: Scandium based fuel cells are a completely different technology to the Pt based ones. And as for Sc production, no, not Oz. Kazakhstan is the only place to have ever produced any significant volumes. As for mining for it, a ludicrous idea. Take it from the wastes of other mining processes, a vastly better idea. Anyone with a Bayer Process plant (bauxite to alumina) can produce 100 tonnes a year of Sc at little cost. As there’s 37 of those spread around the world a much better diversification of supplies.

Posted by: The Remittance Man | Mar 2, 2006 9:11:34 AM

RM - I don't understand your comment. It was the Russians, not the South Africans, I was labeling 'risky' compared with platinum, and their proportion of palladium output is much more than 30%. It's about about 45% of mine supply, and just under 40% of total supply (inc recycled). It is falling though.

Posted by: Matthew | Mar 2, 2006 10:35:46 AM

Tim, So that's where it comes from. Googling it eventually led me to two mines in OZ now defunct that said they had Sc in the tails. And another austrailian exploration company that muttered about scandium in the deposit. Since I don't trust exploration companies very much, particularly antipodean ones I kind of disregarded them.

Matt, I'll bow to your superior knowledge. The big poster on my wall was published by Platinum Guild International and focuses on Pt not Pd. I made the mistake of applying the global average ratio without remembering that Norilsk was basically a nickel mine with Pd as a by-product and Pt as a minor by-product. My only excuse is that no-one really knows what the Russians are producing. Precious metals output is a state secret even today. In the past we knew they had big stockpiles but our view is that these were depleted a couple of years ago, hence the apparent falling output.

Of course, I'm squeezing all this research between batch runs on the pc. I'm supposed to have a 60 year strategic plan on the table in two weeks and I only got the geo model this morning. This may explain the less than high academic quality of my research.

Still if platinum (or scandium for that matter) produces better fuel cells the whole debate is academic. If Pt technology is the route we go Russian Pt output is low compared to Pd. That leaves SA, the US and Zim. The known Zim deposits are pretty small scale and even the US doesn't produce that much; which means you will all bow before the mighty Rand. Or the US Marines might still be making an uninvited stay in Cape Town.

My only comfort is that I have better job security than gold miners.

RM

Posted by: The Remittance Man | Mar 2, 2006 12:21:01 PM

Yes, that's true.

On Russia, "Precious metals output is a state secret even today. " is not quite true, as they have now released production data (though not stock data). 3 Moz in 2005.

Posted by: Matthew | Mar 2, 2006 4:34:27 PM

Matthew,

This is only supposition, but in the past when the metal prices have risen, the Russians have usually cashed in by selling from stockpiles. The platinum price is very high at the moment and the palladium price is not unrespectable. But our boffins see no "profit taking" going on at the usual Russian scale. This is leading us to believe that the Russian stockpiles are now exhausted.

Alternatively they could have cooked up some sort of deal with the South Africans not to flood the market every time the price goes up. Mere peons like me are not privy to such shennanigins even if they do take place.

RM

Posted by: The Remittance Man | Mar 3, 2006 7:43:55 AM