You need to read Jim Bliss’s article on peak oil, and you need to read it now.
I’m sceptical that the engineering facts he points out (the big one being that global oil output has almost certainly peaked) lead to his conclusions about the certain collapse of Western capitalism. However, it’s undeniable that a) we need to seriously change what we’re doing and b) we need to do so Right Now.
Increasing fuel tax tenfold across the EU and spending the money on new nuclear power stations would be a bloody good start (*and* it would piss off all the right people, which is always a bonus). Better to wean ourselves off car culture gradually, rather than watch all aspects of society collapse when suddenly the cars won’t go.
Unfortunately, that looks rather unlikely to happen (see the "piss off all the right people" point above). I recommend alcoholism and drug addiction as a coping strategem (and possibly the acquisition of a 50-year supply of canned food…)
We can’t do that. There isn’t enough Uranium in the world… Fuck.
or other nucular materials…
Come on John, you’ve got an economics degree. This collapse of civilisation stuff is ignorant twaddle. There’s no shortage of energy..yes, there might eb a shortage of easily storable and transportable energy as cheap as we have it now, but that is a much more minor problem.
I don’t think we’re inherently fucked, but I also don’t think that the global economy the way it’s currently structured will deal at all well with the end of readily available, cheap, transportable oil.
It’s going to be enough of a sudden shock that without significant government intervention to manage the decline, there’s a danger that things could get very bad indeed. The lead times on the kind of projects we’d need to build to develop alternaties to oil are such that if we don’t act now, there’ll be a gap during which things are Very Very Bad.
A 40-year timeline for commercial controlled nuclear fusion looks plausible (ITER will be ready in the late 2010s and will be almost net-energy-producing; I’d guess its prototype-fusion-plant successor DEMO will be 20 years after that), so we’ve probably got enough uranium to just about sort us in the meantime.
I’m not equipped to judge the science relating to peak oil, so I don’t know one way or another. I have read that it’s demand for oil from China and India that’s causing the current spike in prices and it may be that emerging economies will create a situation where supply can’t meet demand whether the peak oil scenario is true or not. The problem here is that cheap oil underpins the globalized supply chain as it now stands. So what’s the alternative to that and which government is supposed to intervene to make a difference?
None, which is the problem. However, the EU and the US are each sufficiently large and self-contained that they would be able to intervene locally, gradually deterring businesses from using oil through taxation, subsidy and regulation. This would make the transition for people in those areas a gradual drag on GDP growth instead of a sudden and painful collapse.
Examples: raise diesel tax by 25% a year. Ban the construction of new oil- or gas-fired power plants. Subsidise new nucular plants. Improve rail capacity (electrified, obviously) to the point where most long-distance warehouse-to-warehouse freight can be moved by train.
It’s all okay – I’ve got my spiked shoulder pads spray-painted silver, ready for the post-Apocalyptic world.
The only real question is whether technological progress in alternatives (not necessarily solar, wind, and ‘fashionable’ eco-alternatives – genuine economic substitutes) will outpace the decline in availability of cheap, transportable fuel, like oil. I’d bet on human ingenuity, but there’s an outside chance that we’ll have a scary couple of decades while the transition from an oil-economy to an alternative economy happens. Buy gold.
Disclaimer: Not investment advice. Don’t buy gold.
Disclaimer 2: That wasn’t either. Don’t buy or sell gold.
Or hold gold.
Just do what you were going to do with the gold anyway.
This is the sort of twaddle I mean:
"For those who aren’t familiar with the idea of the OPEC target band, it’s quite simple. The organisation attempts to calculate how much the average barrel of oil costs to produce. It’s impossible to arrive at an exact number for this; there are too many imprecise variables involved; but they do a good job of narrowing it down (as you can imagine, a lot of money depends on the accuracy of that calculation). They then factor in their desired profit (the controversial bit, which I’ll come to in a sec) and that’s the target price band.
Since the year 2000 the band has been set at 22-28 US dollars per barrel. That means that OPEC believed they could make sufficient profit to satisfy them if oil was sold at that price.
The price band, however, overtly takes no account of geopolitical concerns. "
This is bollocks. The average price to produce? What, you mean they set the oil price so that only 50% of production is cheaper than that? So that 50% of production loses money? If the target price is $28 and Saudi oil is $4 to pump up then there’s some poor bastard who has to keep pumping at $52 cost and sell at $28?
This simply isn’t how the target price is set at all. It makes no reference, none at all, to production costs. It is set so as to maximise revenue (as you would expect a cartel to do). What is the highest price we can charge for our oil without (significantly) reducing demand, thus leaving us with empty capacity? That’s how the target band is calculated. It’s a reasonably sophisticated attempt to measure the elasticities of demand for their product….again, just what you would expect a cartel to be doing. Fairly basic economics that and Jim Bliss then spends half his time stating that economists are idiots. He doesn’t even understand how economics is used to set the current target price!
With analysis like that why take anything else he says seriously.
Will admit though, some of his other writings on drugs are spot on.
Jim’s problem is not with the economics, although he has stated in the past that he doesn’t believe economics is a good model for human behaviour. I do, and I know you do, Tim. So we have different priors. Not a problem, we just have to accept that. The difference then comes in what we should do about the problem. I believe, and I know you believe, that a technological solution will be found, and found sufficiently quickly for this ‘problem’ never to materialise. Rising oil prices will only encourage that process along. Jim believes that will not happen, and that the best solution would be to re-engineer society to cope with lower energy consumption.
So there is little sense in arguing, as it comes down to different beliefs. I think we have history on our side, when it comes to human ingenuity. Time will tell. There’s nothing that concentrates the mind so much as having a loaded gun pointed at it.
Tim, you’re not right.
What, you mean they set the oil price so that only 50% of production is cheaper than that? So that 50% of production loses money? If the target price is $28 and Saudi oil is $4 to pump up then there’s some poor bastard who has to keep pumping at $52 cost and sell at $28?
No, because "the average cost of production" in this context means the average marginal cost of production. They set the price so that (roughly, and ignoring the difference between the average producer and the median) fifty per cent of producers are bound by the cartel and fifty per cent have already expanded production up to their marginal cost.
It is set so as to maximise revenue (as you would expect a cartel to do).
Not if that cartel is OPEC. OPEC are aware of the geopolitical importance of oil (and of the existence of non-OPEC producers with whom they have to interact strategically) and so they do not follow the classic Marshallian model of a monopolist in one-period equilibrium. (Not that they could even if they wanted to; they do not face a continuous or differentiable supply or demand function, so the relevant marginal cost and revenue curves most likely do not exist). So they do, in fact, do roughly what Jim Bliss says they do (albeit that they pay more attention to geopolitics than he says they do) and set their target price roughly at that level which will give them a "fair" rate of return on oil industry investment. They also take into account their desire not to set the target price so high that they would create incentives for people to invest lots of money in finding substitutes for oil.
There are a couple of good and detailed books on the OPEC price-setting process and I would be very cautious about claiming that "economics is used" in any simple way, or hat the OPEC price band represents any sort of estimate of the price elasticity of demand for oil.
(btw, if OPEC were to switch to a price elasticity approach to setting their band, that would be very good evidence that they believed that peak production had been reached)
How does one pronounce "Marshallian"? It feels unwieldy.
John, increasing fuel tax tenfold is a terrible idea. I say that because it would mean that I couldn’t afford to work, so would therefore lose my house. Is that what you mean by pissing off all the right people? You mean the people who’d be driven (ha!) into unemployment? How nice.
Marsh – alien is the way I’ve always heard it …
S2 – that’s why it’s phased over several years, allowing people time to gradually adjust their living patterns for a post-oil world (ie you could move somewhere near enough for you to cycle to work, the local authority could build a tramline, etc).
My whole point is that we need to start this process *now* to allow gradual adjustment, rather than waiting for the oil to run out – otherwise you’ll run into the same can’t-afford-to-work problem in 20 years’ time.
Damn, got here too late. Andrew makes the same point I was making on his blog: uranium is basically a very finite resource: see Jim’s post at Australian government report which states that
"[a]t current rates of consumption, existing and estimated uranium reserves recoverable … are sufficient for only about 50-60 years" and point out that "growth in the nuclear industry will reduce this period."
I am beginning to think that nuclear is not the way to go: we should probably replace the current plants which are coming to the end of their lives, but not build any new ones. Of course, the current government’s plan seems to be simply to pipe in gas from Russian…
I went to a series of talks in Oxford on this topic (what to do when the oil runs out): it was scientists talking, and was fascinating from a scientific/tech viewpoint. John’s timeframe for fussion seems reasonable, which gives me cause for hope.
One thing which did strike me was the unfetted optimism on show. For example, the general attitude to hydrogen is that "electricity will be too cheap to meter, and from this nearly unlimited supply, we’ll make hydrogen". I heard these very words from people. Not wishing to say that history always repeats itself (I don’t believe this), this is what people said about nuclear power, before it became apparent it was no cheaper than other forms of power generation.
I went to a series of talks in Oxford on this topic (what to do when the oil runs out):
Short answer: Buy a gun and plenty of ammo. Stockpile food and fresh water. Trust nobody.
‘[a]t current rates of consumption, existing and estimated uranium reserves recoverable … are sufficient for only about 50-60 years" and point out that "growth in the nuclear industry will reduce this period."’
Um. Note carefully the bit immediately following that sentence about fast-breeder reactors. Basically the point is that uranium you dig out of the ground is ~0.7% U235 (the stuff that’s useful in a power station). The rest is U238, which on bombardment with fast neutrons will turn into plutonium, which is fissile. So, naively, if you move from using ~0.7% of the fuel to using ~100% of the fuel to give an increase in endurance of the supply of about a factor of 140. (Obviously that’s not quite right because you lose some energy in 238U + n -> 239Pu, but that’s only a few per cent.) Of course, in this approach you have to put up with there being lots of plutonium piling up all over the place, which might (quite reasonably) upset those of a nervous disposition.
Moving on, the bulk concentration of uranium in the earth’s crust is about 2 parts per million. Suppose we invent some industrial process — a trendy one would be to genetically engineer some bacterium which secreted the uranium while ignoring everything else, as in the Oklo reactor — which can separate out uranium at 2ppm from random bits of rock which we feed in. Would this be energetically favourable? Unsurprisingly the answer is "hell yes" (consider the entropy of mixing). So there’s quite a bit of uranium about.
Something else worth reading in this general area is David MacKay’s Order-of-Magnitude Morality (on solar power).
Yeah, if I go on to quote from where you left off (to play the same game, as it were):
The development of fast neutron reactors is generally on hold at present, mainly for economic reasons (particularly depressed uranium prices), but also because of engineering complications, and public concerns about safety following incidents at Super-Phnix (France) and Monju (Japan).
I think I stand by my comments that in the next 30-40 years, a huge investiment in nuclear is not possible. Either we need to investigate new technologies and revisit politically difficult old technologies (which also need further work), or we will run out of fuel. If we’re doing the first, then why not put the money in fussion and renewables?
On renewables, read the David MacKay piece. The nice thing about breeder reactors is that we know how to build them and they already work, more-or-less. Fusion is still thirty years in the future, as it has been since 1950, and renewables are problematic.
(I should say that considerable care is needed on the "peak oil" thing, too, but that’s for another day.)
The best explanation of OPEC oil pricing strategy was by the serving Saudi oil minister at the time of the first oil shock in the 70s. Whilst everyone else at OPEC was trying to restrict production to produce an artificial step change in profit/revenue to the maximum level (as a Cartel would be expected to do) he made the following comment at one OPEC production meeting "The human race didn’t leave the stone age because we ran out of stone."
Unfortunately most commentators / politicians / economists etc. didn’t (and still don’t) understand his point.
On a separate note and as someone who has actually spent a good year of his life studying various energy production methods and their relative costs I want to point out now to be very, very careful indeed of statements like “Nuclear electricity is far more expensive than Gas produced electricity” as the figures are usually accounting costs not real cash costs.
Accounting methods used between different energy producers in the UK are diametrically opposed and massively bias the quoted pence per Kwh figures. One example is that decommissioning costs for Nuclear are front loaded into the price, but no decommissioning costs are assumed for gas! One of my biggest bugbears is that non-Carbon producing energy producers in the UK get a rebate from HM Treasury proportional to the carbon “economic cost” they’ve saved. You’d think logically this should be awarded to the nuclear industry but it isn’t!!!!! Apply this to nuclear and it actually costs less than conventional electricity, even using current dodgy accounted cost models.
Do not let anyone convince you that energy pricing economics confirms to classical economic theory, there is too much direct political and strategic influence to let that happen.
> that’s why it’s phased over several years, allowing people time to gradually adjust their living patterns for a post-oil world
No, that doesn’t work. As the price of oil goes up, I need more money to afford to get to work. Only there’s no way my wages will go up to cover it, because my employer’s costs will all be increasing due to the rising price of oil. Most likely, the rate of increase in my wages will decrease; maybe they’ll even freeze.
> (ie you could move somewhere near enough for you to cycle to work
No, I couldn’t, because, due to the increased cost of commuting, house prices near commercial centres would go through the roof, way out of my affordability range. The only direction I could afford to move would be further away from my work.
> the local authority could build a tramline, etc).
Ah, yes, the public transport panacea so beloved by urbanites. Well, a tramline could conceivably work for me, but have you ever been to the countryside? There are vast swathes of the UK where trams and trains are not an option, and buses aren’t always that great an idea either. Furthermore, buses and a lot of trains run on oil, so their prices would be soaring as well.
And, as I try to adjust to the cost of my commute, I’d simultaneously have to adjust to the rising price of every single thing that exists, since every manufacturer and supplier also relies on oil.
But you didn’t answer my question. Even if I could, somehow, adjust to all that, I’d end up extremely poor, living in a hovel, eating shite food. And that would piss me off. Is that what you mean by pissing off the right people? The people whose lives your policy would utterly fuck?
Presumably the countryside could revert to its old use – that is, food production, and the people involved with food production would get first dibs on fuel.
However, I hope this doesn’t happen any time soon as I’m intending to reward myself for all my hard work by moving to a nice country pile – and frankly, having all those tractors and cows clogging up the road would piss me right off when I’m trying to get to work. And I don’t give a fuck if that means some wanker in the city has to go without bread and milk.
Squander Two:
As oil supplies dry up, the price will increase. Jim Bliss thinks this will have catastrophic effects, and your arguments support that point. If we accept that point, then the question becomes what we do about it. John B’s idea does at least involve spreading rising prices over a longer time period, which should reduce consumption (extending the physical lifetime of the remaining oil reserves, and thus the time available for new technologies to become available), increase the availability of revenue for funding mitigating or replacement measures, and help the economy to adjust as naturally as possible to increased transportation costs (such as increasing the dispersion of economic centres and expanding the scope of remote working). Of course it’s far from perfect, and has some serious downsides and potential pitfalls. But at least it is a serious sugestion for tackling a serious problem. Do you have an alternative approach? "Do fuck all" isn’t really an answer.
Not sure how much credibility this has, but the Saudis don’t seem too concerned.
Iain,
I don’t see your point. As you rightly note, as the oil supply dries up, the price will increase. You want to mitigate that by, er… increasing the price far, far more.
I don’t suggest doing fuck all. I suggest that the government do fuck all. I bank on human ingenuity and governmental ineffectiveness. (Well, on a good day, government schemes are ineffective; more often, they’re counterproductive.)
By the way, massive taxation does not allow economies "to adjust as naturally as possible". Natural adjustment is what an economy does with zero taxes.
There seems to be a strange correlation between those who believe "natural" increases in the market price of oil will not have much impact on the economy, and those who believe "unnatural" taxation-led increases will devastate it (and vice-versa, for that matter).
On S2’s point, it has to be admitted his situation is pretty desperate. He is saying that his reliance on oil is such that he would lose his house if the price increased markedly from its current level. As such movements are not unknown in the oil market, this is folly on a grand scale. He might be right that the government shouldn’t exacerbate the situation from here on, but it perhaps makes the case for the levels of historic government intervention we have seen as clearly if the price had been lower in real terms he would be consuming more, not less, and be more reliant, not less.
However John, if you’re saying that the current oil price doesn’t reflect well the relationship between demand/supply and recoverable reserves, what gives you such confidence that road-pricing is going to work in allocating that resource?
I’d have thought the way to use road pricing in this scenario would be to change people’s behaviour away from petrol/diesel vehicles to non-oil-burning modes of transport, rather than to fix up any more general market failure in the energy market.
Matthew,
> He is saying that his reliance on oil is such that he would lose his house if the price increased markedly from its current level. As such movements are not unknown in the oil market, this is folly on a grand scale.
Bollocks. Of course I can absorb oil price fluctuations. What John suggested was a ten-fold fuel tax increase. Since most of the cost of petrol in the UK right now is tax, that amounts to a more than eight-fold price increase: from 85p a litre now to, say, £7.20 a litre in several years. You reckon that sort of increase is not unknown in the oil market? Really? When did it last happen? And you think it’s folly for anyone to live their life without a £1000-per-month slush fund to allow for changes in petrol prices? In what way, exactly, is your opinion not idiotic?
Whoops, my fault, I read it as ‘doubled’ for some reason, not ‘tenfold’. It’s not totally out of the question though – between 1970 and 1980 the oil price rose 20 times in nominal terms and 10 times in real terms. Between 1999 and 2005 it rose
Chris – I meant in allocating road space, though I guess the answer would be ‘it is better than no pricing at all’. There is a serious problem with road pricing if it is revenue-neutral, in that there would be less incentive to produce fuel-efficient cars if the duty on petrol disappered.
Matt – thanks for saving me some research – I was pretty sure the level of increase I was talking about was roughly equivalent to that seen in the 1970s.
S2 – there are a great many people in the UK who manage to combine owning a house with not having enormous car-based commutes into work. While it would be less convenient for you to join their number, I think you’d struggle to seriously claim it would be impossible…
Sorry I forgot to add the 1998 (not 1999) to 2005 it rose 4 times in nominal terms (and these are annual averages – I think from the low in 1998 to the high in 2005 it rose 7-8 times).
"There is a serious problem with road pricing if it is revenue-neutral, in that there would be less incentive to produce fuel-efficient cars if the duty on petrol disappered."
Yeah. You can always adjust for this by manipulating the prices for different vehicles, but it’s messier than simply taxing the fuel. I’m something of a fan of taxing things to their externalities, so would suggest retaining a fuel tax but having it cover the direct environmental costs of pollution, and using road pricing to encourage less congesting behaviour, but this obviously makes the thing slightly harder to sell politically (since it’s a new tax, not a "fairer replacement for an existing tax").
> While it would be less convenient for you to join their number, I think you’d struggle to seriously claim it would be impossible…
Oh, no, not impossible. There’s no train where I work, but I could get a bus here from Belfast. Only I don’t live in Belfast, so I’d have to commute into the city first, so my commute would nearly double in length, on far slower methods of transport, increasing my commute time from about half an hour to about two hours, leaving me with no time for anything in my life but work. Yay!
But that’s just me. Plenty of people in the UK live in places where there are one or two buses per day. Not everyone lives in a city centre, which is why Scots Highlanders get so pissed off with urbanites talking about increasing fuel tax to "encourage" everyone to use public transport. For millions of people, it’s simply not an option, and increasing fuel tax simply "encourages" them to become poorer while funding public transport for people in cities.
Still not answered my question, I see. Are people who would be impoverished and who would have their quality of life fucked up by your policy the right people to piss off?
"Scots Highlanders get so pissed off with urbanites"
Ah, but they’d gain from the road-pricing, so everything would be ok.
The road-pricing John mentioned in his post, you mean? Oh, no, I see he didn’t.
Do you take everything too seriously or just arguments about oil?
I probably take everything less seriously than you think.
If I see a government realistically proposing to multiply fuel tax by ten, I’ll take that seriously. I don’t think Mr Band has Mr Brown’s ear, though, so I’m really quite relaxed about it all.
S2 I don’t think that John proposed tax-increases are designed to piss people off (though they certainly would). In particular the idea is precisely not to mitigate the rising price of oil. They’re designed, as Iain says, with a view to extending the physical lifetime of the remaining oil reserves, and thus the time available for new technologies to become available. If we do nothing, and people’s touching faith in human ingenuity, faith in the market to cope with every eventuality, and faith that a technological solution will be found, if that all fails to produce the goods in time, then we’re all going to have a lot more to worry about than having no time for anything in life but work. Buying ourselves more time to find a solution might be the prudent thing to do, however unappealing it would be.
> I don’t think that John proposed tax-increases are designed to piss people off
No, neither do I, which is why I didn’t say so.
Andrew is high on crack. Thermodynamics always trumps economics. S > 0 always. Entropy never stops. Grab a science book for once.