JB said at May 24, 2009 10:52 AM:

Electrification was always more important than caps on carbon-based electricity sources because of dependence on foreign oil and the political and economic instability rooted therein.

If EESTOR arrives as promised, we need to kickstart the electric auto industry in the short term and worry about "green" sources in the long term.

Burn as much coal and natural gas as we can now, no stupid caps, so we can wean ourselves off oil.

Unfortunately our pols are captive to the Big Green monster.

Aki_Izayoi said at May 24, 2009 10:55 AM:

I see a positive effect for increased emissions taxes and higher oil prices: it is the equivalent of a tariff. Essentially, it makes some forms of trade economically "inefficient" and makes wage arbitrage less attractive. I do not see any moral imperative to keep oil prices below $150 as there are positive effects of higher oil prices.

http://yaleglobal.yale.edu/about/pdfs/oil.pdf
http://www.cleanbreak.ca/2008/05/27/is-expensive-oil-deglobalizing-the-world/
http://www.salon.com/tech/htww/2008/06/06/reverse_globalization/
http://www.theglobeandmail.com/globe-investor/article1141752.ece

Perhaps, algae oil would be cheap enough where it can be produced at about $120 dollars a barrel. It is not competitive with the current spot price (or the 2017 price), but at least it would make a nice price cap for oil.

Randall Parker said at May 24, 2009 11:25 AM:

Aki_Izayoi,

But you are digressing. My question: Will the aftermath of Peak Oil increase or decrease the demand for electricity, coal, natural gas?

I see electricity down, coal down, probably natural gas up. My guess is natural gas substitutes better for oil than coal does.

Algae oil: With all substitutes the question you have to ask is whether their cost goes up as fast as oil prices do. Is this a case of receding horizons?

Jeff Rubin's deglobalization argument: Some of that will happen on the margin. But the oil used to push massive super cargo ships is pretty low per amount of freight moved. I think the bigger impact on trade will come from lower overall economic activity.

I'd like to see some comparisons of energy costs to move a freight container x many miles by truck, train, cargo ship. My guess is that it is less energy to move a standard cargo container from China to Long Beach via ship than from Long Beach to, say, Denver via truck. But I want to find a good source for this argument.

odograph said at May 24, 2009 12:50 PM:

That is an interesting exercise, Randall. It certainly seems plausible that an oil-scarcity recession would lead to lower electric energy demands. I think one could imagine a "recovery" after that though as many try to rebalance using electric power.

Ultimately I think it illustrates how many of these scenarios are plausible, and that thinning them to "probable" futures is, as always, a mug's game.

Heather said at May 24, 2009 1:06 PM:

I tend to agree with the general concept of

1/ econ activity/growth, slowing or even declining as it is doing now. Besides the peak oil issue, there is a huge issue of the major de-industrialization that appears likely. We are not going to compete in manufacturing with China, India, Veitnam, etc. Our car industry woes demonstrate the trend.

Concept 2 the type of energy / alternatives has other issues: There will likely be no clear technology "winner". Instead we will have wind power/ national power grids/ nuclear reactors/ more hydro power/ solar energy/ electric & hybrid autos/ expanded frieght & passenger rail transportation/ etc. -- (pure electric cars will be an urban short trip product for a long time to come)

The Obama approach to emphasize education at all skill levels is vital to the maintenance of an economy that will support a modern "middle class" standard of living.

In short it is going to take a "systems" approach to maintain our standard of living.

Randall Parker said at May 24, 2009 1:25 PM:

odograph,

I think it comes down to how much each 1% decrease in oil causes in economic contraction. Does 1% oil decrease cause a .8% economic decrease? Or a .5% economic decrease? Or a .1% economic decrease?

Also, the amount of economic impact will vary by year. On the one hand, the longer the decline has been going on the more time people have had to plan. On the other hand, the farther down the oil supply goes the further into muscle we'll cut in trying to decrease demand. It is easy to cut waste. Okay, once we've cut back on optional uses the impact becomes more severe as we cut uses that are less optional.

I think we can do some thinning on the probabilities.

Heather,

I'm skeptical that more educational spending will speed the readjustments needed in response to a declining oil supply. I suspect capital availability and healthy financial markets matter much more.

Brian Hayes said at May 24, 2009 1:55 PM:

Most commodities are stretched. Crude is first in the headlines. For upcoming business, delivering efficiency and offering source diversity leads - a powerful growth incentive with or without intermediate tariff policies.

There's a new economic framework in merely 50 years that we too often fail to see. Intense activity in more than 1500 trading centers around the globe seems to accelerate change more quickly than we can comprehend. I was struck when I learned "China's total manufacturing costs are now only six percent below those of American factories" [link].

All economies will be very different soon. An exponential four billion new people are coming quickly, a much stronger pressure than our commute or heating options. Among other challenges ahead, their charts indicate a 50% increase in power demand.

Will there be a dominant breakthrough, i.e. a surprise in fusion or storage, or will dozens of tech be erected in every niche?

Heather points to multiple sourcing and I agree.

Michael L said at May 24, 2009 2:35 PM:

I think your underlying premise, of a long term depression induced by high oil prices, is dubious. Oil price can only rise so far - far enough to make coal liquefaction viable. Possibly it has already done so, btw. Well, even if the powers that be in the West are ignoring this technology and will keep on doing so, China and Japan will use it sooner or later. So even worst come to worst, we will just buy synthetic gas from Asia like we now buy crude from OPEC. Which, btw, will encourage OPEC to at least try lowering prices (like, by building fewer palaces and artificial islands).

Now, the above doesn't mean that we wouldn't have a depression. We probably will thanks to financial factors, quality of our government, (anti)industrial policy and various other issues. But "peak oil" in the classical sense would not be the driving force here.

Randall Parker said at May 24, 2009 2:39 PM:

Brian Hayes,

You did not answer the question. Do substitutes come on so quickly that electric power rapidly replaces oil for many applications so that electric power demand rises as oil supply contracts? Or does contracting oil supply so pull down the economy that electric power demand gets pulled down by declining oil production?

Also, use evidence in the response. No point in just spinning on about the rapidly changing world.

Randall Parker said at May 24, 2009 2:43 PM:

Michael L,

So you argue that a rapid shift to coal-to-liquids will prevent an economic decline and therefore will prop up the economy and prevent a decline in electric power. I wonder whether natural gas-to-liquid is more plausible.

Okay learned commenters E-P, Nick G, and Paul Dietz: Can coal-to-liquid prevent an economic decline brought on by declining oil production?

Aki_Izayoi said at May 24, 2009 3:27 PM:

The Clarium paper by Robertson Morrow I linked before stated that container ships are more efficient than shipping with trucks. However, it might be more expensive to ship iron ore from Australia to China AND ship the finished goods to Long Beach. However, if China has the iron ore, it might not matter since container ships are more efficient than trucks (I wonder about trains). Also, the manufacturing plants in North America also need to be in close proximity to iron ore. (China is importing iron ore now, locking in futures prices.) Morrow also mentioned that China's infrastructure investment (such as canals) would make it 15% cheaper to transport goods using very large container ships and making it feasible to relocate manufacturing facilities to the cheaper inland area.

Randall, on another note, are you a deflationista or an inflationista... For example, you noted that an oil shock might decrease demand (and presumably the velocity of money and demand for credit.) If you are speculator is it usually profitable to bet against the herd (who are currently chanting inflation) and bet on something not so obvious (higher oil prices = deflation not inflation).

But, in general, we all know peak oil is bad, not only because of higher oil prices, but because Mexico will implode. Also, Mexico will be used for wage arbitrage instead of China is oil prices are high due to carbon emissions costs or peak oil. I wonder if the US public will get so upset that Obama will eventually have to revoke NAFTA. Going against free trade (and immigration) is one way to gain support in this political atmosphere, but I am surprised no politician has openly done that.

Brian Hayes said at May 24, 2009 4:06 PM:

Sorry if I do not serve your specifics, yet I don't think I was being unreasonably abstract answering your probe. In sum I said power demand cannot shrink across the board (excluding locales) and our response to a permanently increasing power demand is already many sided.

I said there are many players, many new players coming to energy and power markets, and that demand cannot be framed by alternating a commodity, i.e. liquefying natural gas. In otherwords, another familiar dominance of one or another energy source is unlikely. Too many links to argue, there's already a rapid and required increase in diverse energy options that I think will have the effect of sustaining trade as well as answering power demand (including locales).

To reply to spinning, I laughed at life when I looked at this wonderful piece by Robert Neuwirth, a journeyman on population: "We must be careful not to overstate the case. Let us not forget that in this situation it must be noted: nothing could be further from the truth. Because, as they say, it is the exception that proves the rule. Of course, rules are made to be broken and so, in this case, we must make allowances. For the time being, all we can state with certainty is that, given this set of assumptions, all things will be equal. Context is everything. Thus, this is not the final word on the subject. And yet, because of the foregoing doubts, we must be doubly sure. So, in light of current developments and taking stock of all our cultural preconceptions, the conclusion is neither obvious nor buried. ..."

Stuart Keir said at May 24, 2009 5:30 PM:

There are so many variables. Rising oil prices mean rising prices of everthing, but especially fuel. So the thing that people will cut down on the most is fuel. This would mean traveling less, staying home more. Do you use more electricity when you out then when your home? Businesses and industry will pass rising fuel prices on to the consumer increasing the price of everything else, including electricity supply, eg, vans and trucks servicing, maintaining, building electrical infrastructure, oil used in the direct production of electrical components and wiring. So it seems fuel goes through the roof, everything else, food, clothing, electricity, everything, without exception increases in price to some degree. How much spare money does the average person have per week or month, "the average" person doesn't have much spare so it seems all of this will be eaten up by price increases and people will be forced to do away with luxuries to make ends meet. Maybe they will stop using air cons, eating out, junk food, etc etc. But wait, when they stop consuming won't that destroy the economy........mmmmmmmm........will civilisation collapse altogether.........does a cave man use less electricity then a 21st century man...........yes........I believe electricity consumption will decline. There I have answered your question

menomnon said at May 24, 2009 6:21 PM:

The US (to everyone's surprise) is self-sufficient in natural gas at prices slightly more than current. And at prices that we did see in 2008 (and levels to which I'm sure we'll return).

See "Marcellus Shale" gas - and other (huge) shale gas finds. Shale gas has its problems. E.g. uses a lot of water and water is on its way (soon or now) to be a very large problem. But I think the US will find ways to overcome such problems.

Combine that with a) most new electrical generating plants use natural gas and b) the carbon impact of natural gas is 1/4 that of coal and 1/2 that of oil (the energy is in the hydrogen bonds - and natural gas has the most bonds per atom of carbon) - and this seems a pretty good and realistic (imo) option.

Then if you can get cars - and transportation in general - to run of electricity. The biggest gating factor there being (I believe) better batteries. And better batteries are being worked on feverishly.

Randall Parker said at May 24, 2009 6:30 PM:

menomnon,

Yes, of course we can generate enough electricity from natural gas, coal, nuclear, wind, solar. I do not see electric power generation capacity as the rate limiting factor for a shift away from oil. In fact, my concern is that the current level of demand for electricity won't even be maintained after oil production has peaked.

What I'm asking: Can electricity substitute for oil fast enough that the economy does not continually contract for years on end? Right now I do not see we are ready for Peak Oil. We might be ready 10 years from now. But I do not expect we'll be ready this year or next year.

So can we substitute fast enough? How? Are there easier ways to cut oil usage that do not involve a move from gasoline cars to electric cars? Maybe by building only compact cars we can buy ourselves a few years to get ready for a move to electric cars?

menomnon said at May 24, 2009 7:01 PM:

Hi Randall - in the very short term it seems to me the most obvious solution is essentially conservation. Smaller cars; less energy per unit of GDP (as you pointed out); etc. US energy per unit of GDP (or the other way round) has already - since the 70s - been improving. But it needs to improve more.

So (here in CA) when oil prices skyrocketed last yr (2008) some bought Priuses and got rid of their SUVs. But many bought Prisues and kept their SUVs. The Prius for commuting and the SUV for the weekend.

Seems to me (looking at the local roads and highways) that with gasoline back at $2 or $2.5/gal (or is that already in the, um, rear-view mirror?) many went back to their SUVs full time (indicating what their true preference is). When oil skyrockets again they'll go back to their Priuses. For a sedan the Toyota Camry Hybrid is good (that's what I bought in 2006 - but didn't have an SUV prior to that). The choices now are even wider including a Ford Fusion Hybrid that actually looks pretty good.

I'm sounding over-optimistic though. When push-comes-to-shove it'll probably get ugly, at least for while. The main question then: to what extent will the social fabric break?

Aki_Izayoi said at May 24, 2009 7:15 PM:

"I'm sounding over-optimistic though. When push-comes-to-shove it'll probably get ugly, at least for while. The main question then: to what extent will the social fabric break?"

I think it already has.

Michael L said at May 25, 2009 4:12 AM:

Randall,

for some climate change fanatic trying to argue against the obvious see here http://www.autobloggreen.com/2006/09/06/a-poor-argument-for-coal-liquefaction . Note that he is not even trying to argue against the statement that synthetic gas is something like $35 per barrel (!!). Instead he is telling cock-and-bull stories about carbon sequestration, climate change etc. Well, thing is, when the Asians will be doing it, I don't suppose they will waste much effort on such nonsense. And as you can see here http://en.wikipedia.org/wiki/Coal#World_coal_reserves Russia, China and India account for something like 40% of world coal reserve - all of it, as you might imagine, safely outside the political control of the Climate Industrial Complex.

Moral of the story is, the entire problem is purely made up, it is a lie advanced by ideological enemies of modern civilization. Or maybe by enemies of the current political setup of that civilization, whatever the case may be (recall how heavily reliant on nuclear power is the obsessively "green" Europe). In any event, in countries that have governments that actually care about national wellbeing they will have no trouble implementing the substitute technologies, such as coal liquefaction. And maybe they will even sell some gas to us too :)

Engineer-Poet said at May 25, 2009 7:47 AM:

On some nits:

it might not matter since container ships are more efficient than trucks (I wonder about trains).

IIRC, river barges are more efficient than trains.  Container ships are probably more efficient yet, depending on cruising speed.

Going against free trade (and immigration) is one way to gain support in this political atmosphere, but I am surprised no politician has openly done that.

Some pols have... and have been completely ignored by the press.  Both our major parties and media are owned by elites which want open borders, damn the public.

And back to the biggie:

Can coal-to-liquid prevent an economic decline brought on by declining oil production?

In a word, no.  I've read that not even Sasol is still doing CTL; cleaning up coal is so expensive, they are doing GTL instead.

The cost of coal-to-liquids is around $100,000 to get 1 bbl/day; to get 1 mmbbl/d requires roughly $100 billion.  Canadian tar sands are around $60 (for conventional tech; toe-to-heel air injection [THAI] may be cheaper and yield a better product), so we'd see tar sands exploding (again) before we saw CTL going anywhere.  All you have to do is look at what's happening in Ft. McMurray to see the future; tar sands expansion is going nowhere, with projects going into mothballs.

There are also the twin issues of credit and investment horizons.  If you can't get the credit (or sell the equity) to build a plant, you cannot build it.  If your investment can be destroyed by circumstances before you can get the plant operational, you cannot get investors.  It's also obvious that if the economy collapses under fuel prices before CTL is economical, it can't get built either.

The USA imports around 12 million bbl/day of crude, so replacing the product with CTL would require on the order of $1.2 trillion investment in plants (plus the coal mines, water projects, etc.).  If the product of these plants is worth $2/gal wholesale ($84/bbl), that $100k investment will yield only about $31000/year in gross revenue.  Contrast this with Project Better Place, which claims it can replace the fossil-fuel infrastructure with battery-swap stations for less than 10% of the annual expenditure on fuel.  Batteries allow us to use solar PV, wind and nuclear interchangeably with coal and NG.

The future of ground transportation is electric.  Everything else is a waste of effort.

menomnon said at May 25, 2009 8:24 AM:

@Engineer-Poet: "Both our major parties and media are owned by elites which want open borders, damn the public."

That's because huge amounts of money have been made - by our own 'elites' (in addition to major countries overseas). And presumably more remains to be made so, in theory, the borders will remain open. Still the export led model seems to have had its first major breakdown since it was originally conceived

This seems a pretty unique point in history. Various interests - around the globe - will want to stuff us back into the status quo ante, but I'm not sure it even _can_ happen.

Just as I'm not sure we're going to be able to go back to the status quo ante in energy (at some point there will _no_ 'road' back). A very unique time in history. Very fraught but with opportunity provided it can be grasped.

Randall Parker said at May 25, 2009 9:39 AM:

E-P,

$1.2 trillion is less than 10% of a single year's GDP (currently about $14 trillion) for the United States. That's within the realm of affordability if the production cost is low enough. My question: What's the cost per barrel of CTL oil produced? $100? $150? $200?

I do not see coal availability as a rate limiting factor. We have more coal mining capacity than we are using and that can be scaled up given high enough prices for coal.

Economy collapsing: Well, that's exactly what I'm trying to puzzle out. How fast can we scale up substitutes?

Take the electric car: How long does it take to build a new lithium battery factory? I'm thinking electric motor production can be scaled by orders of magnitude in a few years.

But there's an economy-depressing effect due to lots of liquid fuel burning equipment (cars, trucks, etc) becoming obsolete long before they wear out.

menomnon said at May 25, 2009 10:14 AM:

It interesting to consider that a much larger use of lithium could run into a wall in the form of the fact that half-or-more of the world's reserves are in Bolivia.

Before there was Jarod Diamon's _Collapse_ there was Jospeh Tainter's _The Collapse of Complex Societies_ where Tainter proposes that the collapse of large civilizations is essentially one of the decline in marginal returns of complex solutions to complex social problems. In other words, there's a point at which increasingly complex solutions to large social problems break down.

All of which may not seem to be of immediate and practical importance. However how a problem is conceptualized greatly affects what solutions are sought. As in the role that neoclassical macroeconomics plays (and played) in regards to the current economic mess.

Engineer-Poet said at May 25, 2009 11:56 AM:

there's an economy-depressing effect due to lots of liquid fuel burning equipment (cars, trucks, etc) becoming obsolete long before they wear out.

Nah, we can get plenty of use out of them while the battery inventory scales up.  One way is with the Poulsen Hybrid.

jim said at May 25, 2009 12:59 PM:

In a severe economic decline, the current nature-worshiping green elite ruling class (Obama, Pelosi, McCain, Gore etc) will be crushed by an angry public. Coal-liquefaction will be quickly ramped up. We'll get a few years of serious suffering, but we'll at least off the current insane eco-religion suicide path we are on now -- and the eco-elite will be recognized as the enemies of humanity that they are. So at least some good will come from the needless suffering ahead of us.

Randall Parker said at May 25, 2009 1:27 PM:

E-P,

I read the Poulsen FAQ and could not tell what it does for fuel efficiency. They seem at too early a stage to tell.

pond said at May 25, 2009 2:03 PM:

Wow! Great post, fascinating comments. I would expect readers of this blog to be more-educated than average; and it seems that people can't even imagine Peak Oil!

Before you put it in such simple and eloquent terms, I would have expected: less oil means higher oil prices, means greater use of substitutes. But you have made me go 'Whoa!' and I am reluctantly driven to agree with you.

It's not so simple though as 'less oil = more demand for substitutes' or 'less oil = all energy is costly = declining standards, less demand for all energy' -- all such curves are saw-toothed, and we'll see energy prices bumping up and down, and economic activity dropping, stabilizing, dropping. On the whole though, your thesis seems plausible, and it reflects what has been happening over the past 10 months.

On the other hand, seeing the long term trends through the lens of short term trends has proved unreliable in the past.

Interesting times.

Randall Parker said at May 25, 2009 2:43 PM:

pond,

I was surprised by my own conclusions. I was analyzing companies that do coal extraction and it occurred to me that demand for coal for electric power generation could decline even as Peak Oil really bites. I wrote the post to see if there's some flaw in my reasoning.

I see a couple of reasons I could be wrong:

1) Coal-to-liquid could take off very rapidly. I want to learn more about the financial costs and construction times for CTL plants.

2) Costs could drop for conversion of existing cars to electrical power.

It comes down to the costs and time to market for substitutes.

Randall Parker said at May 25, 2009 3:31 PM:

E-P,

People will have a few choices when faced with $5 per gallon gasoline:

1) Convert a car to a pluggable hybrid or pure electric car.

2) Pluggable hybrid, or pure electric car.

3) Buy a new conventional hybrid.

4) Buy a smaller car.

5) Cut out optional travel.

6) Reduce need for mandatory travel: Move closer to work or choose a job closer to home or telecommute.

Only the first 2 items increase demand for electricity. I'm guessing in the first few years of 3+% decline in yearly oil production most people won't opt for choices 1 and 2. At the same time, deepening recession will reduce buying power and so people will cut back on electric power usage at home and companies will cut back as well. So at least in the first few years after the peak I'm expecting declining electric power demand.

Am I wrong? What do you think?

Engineer-Poet said at May 25, 2009 6:19 PM:

There's a flip side of that coin, which is that $5/gallon gasoline means similar-priced propane and heating oil; electricity at 10¢/kWh is equal to #2 heating oil at around $3.20/gallon in an 80%-efficient furnace, and much less with a heat pump.  I would expect electric demand to go up considerably as people shifted to electric heat, ceteris paribus.  (Of course, other things are rarely equal.)

I also noted the lack of figures at the Poulsen site.  I'm assuming that this is because the actual benefit depends so much on the particular vehicle, the driving style and the specific measures taken to integrate the two drivetrains.  However, what if manufacturers designed vehicles for a Poulsen option?  Mount the wheel motors on the axle proper in place of the rear brakes, perhaps with low-profile wheels and tires to make room inside the wells.  The torque path goes through the axle, eliminating the external torque arms.  Put in bulkhead pass-throughs for the wiring.  Integrate the control system via CAN messages.  That's a way that cars can be turned into plug-ins with relatively little redesign.

Randall Parker said at May 25, 2009 6:52 PM:

E-P,

With the exception of the Maritimes, Quebec, and Maine just about all of the US and Canada are summer peaking in electricity demand (Alaska's probably an exception too). Heat pumps: Sure. But not everyone will be able to afford them. Plus, there's time to make and install them.

Conversion options for cars: I wonder how hard it would be to convert a hybrid Ford Fusion to pluggable. Ford could do it a more easily than a third party. The problem is that you really need to be able to rev the software in the power train ECU (e.g. a Ford PCM in the Fusion) and change its calibration to make best use of the bigger battery and plug-in.

When buying a hybrid it makes sense to pay attention to its top speed under electric power. But will the car makers offer upgrade options?

I'm skeptical of third party conversions because of the control systems. The calibration done well requires source code.

Engineer-Poet said at May 25, 2009 7:48 PM:

Low-power assists on the non-driven axle don't require much in the way of integration.  What do you need besides "push when the throttle is depressed (roughly proportional until the torque limit is reached), regenerate when the throttle is lifted or the brake depressed, and follow traction-control and ABS signals"?  When the mfgr integrates the hub units, it could include a gateway to the powertrain to do the appropriate massaging of the commands for the best tie-in.

jb said at May 26, 2009 5:52 AM:

My theory.

Peak oil hits - oil prices jump sharply, and future prices jump even more. We go into a sort of "super contango" (kind of like what we're in now). The uncertainty and fear cause a significant recession (kind of like what we're in now). We see a general decrease in consumption and use of electricity, etc. Demand for oil drops below the peak, and prices start to drop. The recession causes innovation in cost-savings, which, in a fair number of cases, translate into reductions in demand for electricity & energy (like what we're seeing now).

With a new, lower cost structure, the economies start to grow again. Oil prices shoot up rapidly, as people can extrapolate from the growth that we'll hit the peak again soon. The rising oil prices dampen the economy somewhat, and reduce demand a bit. But the price is still high, and that makes the oil-sand and oil-shale production to be more economically viable, and they ramp up production. Simultaneously, people are driving more fuel-efficient vehicles, new nuclear, solar and wind projects are getting the go-ahead, and so forth.

What we see is probably a long cyclical trend of oil prices, up and down, more or less symmetric to the economy. What I can't tell is whether the oil-sand/tar/shale production can meet or exceed the reduction in traditional oil wells. If it can, Peak Oil will turn out to be an illusion. If it can't, I think we'll see a great plateau - a production max that "everyone knows", and the price and consumption of oil fluctuate around that level of production & consumption. In any case, the price will be pretty high, even in a downturn.

But at some point, fusion becomes commercially viable. Whether or not this particular fusion plant is the "right design" or not, the concept-becomes-reality signal of fusion power is huge - like the steam locomotive, the telegraph or the airplane - it represents a paradigm shift for humanity - the future is now - we have moved out of "the age of oil". Almost overnight, people start to switch to all-electric solutions, because, in "the future", we do not use gas, i.e. It becomes unfashionable. I'm assuming we continue to have growth in our battery tech along the way.

the price of oil plummets, as demand begins to fall, even though we have significant economic growth. Ultimately, we turn off many of the pumps, leaving many, many years (decades?) worth of oil still in the ground.

Nick G said at May 26, 2009 12:58 PM:

Randall, here are some thoughts.

An oil supply decline will probably cause a long recession

This depends on the region. The world as a whole grew just fine 2004-2008 while oil plateaued. High oil prices shift income and wealth from importers to exporters. As long as the petro-dollar recycling function works, everybody does fine, except that, of course, importers pile up huge debt: exporters have to accept that. I kind've think they'll be smart enough to do so, especially as they recognize that their salad days are limited.

Our recent problems came from a breakdown in the petro-dollar recycling function, due to flaws in the mortgage/CDO system. If the petro-dollar recycling function is fixed, via substitution of sovereign borrowing, then we may weather future price jumps much better.

coal doesn't look like a big winner post-peak either. Am I wrong about this?

I agree, at least for the US, where the biggest reserves exist. There's too much opposition to coal.

I do not see supplies of electricity as the rate limiting factor for moving away from use of oil

I agree. We have way too many sources of electricity, at least in the US. On the other hand, other places, like S. America and Japan, generate a lot of electricity from oil: it's 25% of world oil consumption. They need a separate analysis.

incentives for cleaner electric power sources are less important than incentives for shifting demand from oil to electricity.

Incentives and fuel taxes would be good, but we also need regulations, like CAFE and other efficiencies.

electric power consumption is declining more than economic activity? Why?

We're in the middle of a bank panic, something that was common before New Deal bank regulation. In such a situation, capex drops like a rock, and that affects manufacturing disproportionately. Manufacturing is a big consumer of power.

Will rising transportation costs pull down the whole economy or will people rapidly shift to living closer to work and will rail expand quickly to substitute for trucks?

See my first comment. Also, carpooling is by far the most effective short-term substitute for commuting fuel consumption. If comuting gets too expensive, just put in an order for a Prius or Volt, and carpool in the meantime. Simple.

Can coal-to-liquid prevent an economic decline brought on by declining oil production?

I agree with E-P: CTL is way too risky in an anti-coal environment.

What's the cost per barrel of CTL oil produced? $100? $150? $200?

Production is pretty cheap: IIRC, it's less than $15/bbl, even including coal. The capex is the problem.

there's an economy-depressing effect due to lots of liquid fuel burning equipment (cars, trucks, etc) becoming obsolete long before they wear out.

Actually, more demand for new vehicles would stimulate the economy.

just about all of the US and Canada are summer peaking in electricity demand

IIRC, some of the US south, also, esp Florida, have winter peaks, due to old electric heating. This could change, with a regulatory push to air heat-pumps.

Randall Parker said at May 26, 2009 6:02 PM:

Nick,

You raise an interesting point: some countries still get a substantial portion of their electric power from oil. However, it looks like Japan only gets 11% (at most) of their electricity from oil:

In 2005, Japan had about 178 GW of conventional thermal electric generating capacity. The country has a large number of oil-fired power plants, although much of this capacity is primarily reserved as extra capacity to meet peak demand, as approximately only 11 percent of electricity produced in 2005 was from oil-generated. While the use of oil in the power sector has declined, natural gas use in the electric sector has risen substantially. Natural gas-fired power stations are increasing in Japan and roughly 24 percent of electricity is natural gas-fired. Coal remains an important fuel source and is used in a number of power-generating facilities. Coal-fired power generation accounts for approximately 25 percent of electricity in the country, although the Japanese government has encouraged the use of less polluting technologies. Nonetheless, coal is still widely used in power generation, as imports come from outside the Middle East and allow the country to diversify its sources of energy imports. Domestic coal production came to an end in 2002 and today Australia provides nearly 60 percent of coal imports in Japan. New, clean coal technologies are being pursued in the power sector, however, in efforts to meet environmental targets.

25% of world oil goes to electric generation? You got a source for that? That number sounds way too high. None of the major industrial countries use much oil for electric power.

CTL in an anti-coal environment: $200 per barrel oil will change mainstream attitudes toward coal in a hurry.

Capex for CTL: If E-P is correct in his numbers then we can afford the capex. A couple of trillion dollars isn't so much in an economy that produces $14 trillion of goods and services per year.

Getting back to my original question: I still do not see electricity-using equipment coming on stream fast enough to substitute for oil burning equipment at the rate at which oil supplies will decline.

The last 4 years of oil plateau: Yes, but that was a plateau and look how high oil prices hit. Imagine a decline in oil supply year after year. Much more severe in effects.

Randall Parker said at May 26, 2009 6:05 PM:

Nick,

Those practical Japanese are going nuclear in a big way:

Japan's first commercial nuclear power plant started operation in Ibaraki Prefecture in 1966. As of December 2007, Japan has fifty-five reactors operating around the country, usually accounting for around one-third of the country's total electric power output. By fiscal 2016, the nuclear output share is expected to reach 41 percent. Currently, there are two plants under construction, as well as another eleven that are in the advanced planning stages.

Our percentage of electricity coming from nuclear power is going to fall since our plants are aging. The Japanese are going in the opposite direction.

Engineer-Poet said at May 26, 2009 7:34 PM:

Quoth RP:

Capex for CTL: If E-P is correct in his numbers then we can afford the capex. A couple of trillion dollars isn't so much in an economy that produces $14 trillion of goods and services per year.

That does assume that we can also mine the coal, obtain the necessary water and dispose of all the waste products.  Given how the TVA is doing now, I am inclined to doubt this.

If we can switch the transport infrastructure to electric for $1e11, we would be fools to spend $1e12 just to continue a system with the same long list of negatives (and maintain a market in which OPEC can compete, when we should freeze them out).  It would be ten times as foolish to do this if we have less than 50 years of economically recoverable coal on hand, because we'd be unable to amortize the CTL investment before we had to replace it anyway.

Quoth jb:

But at some point, fusion becomes commercially viable.

You really need to look at LeBlanc's LFTR presentation.  LFTR appears to be what fusion has always promised, and we can build it today.

The simplicity and small size of LFTRs would make it feasible to build them in factories and ship them on trucks.  The main problem is getting the fissiles to start them, but if we go into our spent LWR fuel we have more than 350 tons of plutonium to work with, of which perhaps 2/3 is fissile.  If we went that way we could leapfrog both Japan and France.

Randall Parker said at May 26, 2009 7:48 PM:

E-P,

I share your desire to move to cleaner forms of energy. However, I'm also trying to predict what will actually happen. If at $200 per barrel of oil a big profit can be made from CTL then I expect we'll see CTL plants getting built.

Sure, people can shift more toward electric-powered transportation. But some very substantial amount of transportation will still get done by burning liquid fuels. If the market prices of liquid fuels in 2015 are high enough to make CTL competitive then I expect to see CTL unless governments ban CTL.

Will governments ban CTL? Maybe some will, but not all. Imagine China sucking in even more coal imports and using some of that coal for CTL.

So at what price of oil does CTL become cost competitive?

Engineer-Poet said at May 26, 2009 8:28 PM:

If at $200 per barrel of oil a big profit can be made from CTL then I expect we'll see CTL plants getting built.

I doubt very much that oil prices can stay at $200 long enough to build CTL plants; the economy will contract until oil prices drop, keeping CTL uneconomical.  Also note the law of receding horizons; the price of steel and other inputs to oil production skyrocketed last year, and are only down to sanity again because of the recession.  CTL requires many of the same inputs and will suffer the same consequences.

Randall Parker said at May 26, 2009 8:36 PM:

E-P,

It isn't clear to me that we'll have a general return of high commodity prices when oil production starts declining every year. If the economy contracts every year I'd expect lower commodity prices excepting oil. You disagree?

I'd prefer that the economy remains strong enough that capital expenditures for capital for energy substitutes remains very strong. This would mean high commodity prices. But it would also mean that we'd be adapting more rapidly to declining oil prices. But I'm not confident things will develop that way. I'm thinking more along the lines of weak demand overall as oil production declines. I'd like to hear why you might think I'm wrong.

Okay, if $200 per barrel isn't sustainable then what is sustainable for the price of oil once oil productions starts dropping 3+% per year?

Also, what do you expect will be the yearly global oil production decline rate? 3%? 4%? 5%?

Nick G said at May 26, 2009 11:33 PM:

Randall,

25% of world oil goes to electric generation...That number sounds way too high

Yes, I think I was thinking of regions, like S. America, that are unusually oil dependent for elec generation. Fun facts to know and tell: the US uses more oil for generation than Japan, in fact more than anyone else http://www.nationmaster.com/graph/ene_ele_pro_fro_oil_sou_kwh-electricity-production-oil-sources-kwh . About 5M bbl/day worldwide goes to generation, about 6.3% of oil ( http://www.eia.doe.gov/oiaf/archive/ieo06/excel/figure_26data.xls ) and roughly 7.5% of generation.

Did my analysis of the current credit crunch make sense to you?

cancer_man said at May 27, 2009 1:32 AM:

Embarrassing.

Randall doesn't understand energy trends or economics 101.

Engineer-Poet said at May 27, 2009 5:30 AM:

Nick G:  Note that US production statistics include petcoke and waste oil under petroleum (see note 2).  In other words, when the Wabash River IGCC plant is burning Venezuelan petcoke instead of Illinois #6 coal, it counts as "petroleum", and ditto if a powerplant co-fires with waste oil.

RP:  I have no idea what the sustainable oil price is.  I'm not even sure it can be denominated in dollars, rather than other commodities.  There's also the issue of credit; if there is no credit and little or no surplus to invest, you won't be building any massive CTL system no matter how cheap steel is.

If oil prices surge high compared to other things and transfer lots of wealth to oil producers, they are going to have most of the available investment capital.  Do you think they're going to spend it competing with themselves?  Most likely it will go to local consumption, including more of the decreasing production of oil.  Look at Caracas and Dubai.

Nick G said at May 27, 2009 11:53 AM:

Randall,

Capex for CTL: If E-P is correct in his numbers then we can afford the capex. A couple of trillion dollars isn't so much in an economy that produces $14 trillion of goods and services per year.

True. The real question is the risk perceived by investors, for such large, long-term projects. I anticipate some construction, but probably not more than 1Mbb/day in the US.

Getting back to my original question: I still do not see electricity-using equipment coming on stream fast enough to substitute for oil burning equipment at the rate at which oil supplies will decline.

You have 2 questions: how fast will elec demand rise, and how easily can we find substitutes for oil. I agree - elec demand won't rise quickly: a completely elec vehicle fleet will only increase elec demand by 17%, and that will be over a couple decades. OTOH, I/C oil consumption will outbid consumers, and commuting has easy substitutes.

The last 4 years of oil plateau: Yes, but that was a plateau and look how high oil prices hit. Imagine a decline in oil supply year after year. Much more severe in effects.

I was addressing the fact that the ratio of GDP: oil rose by 20%. World GDP growth didn't slow down at all until the financial system broke down.

We do have a benchmark: from 78-82 the US managed to grow slightly, while reducing oil consumption by 14%, IIRC. OTOH, simple ratios don't tell the whole story: elasticity of demand can change dramatically if we as nations and individuals decide to make it so. It's just a matter of deciding to - look at what a clear national consensus did in WWII.

Our percentage of electricity coming from nuclear power is going to fall since our plants are aging.

Uprating of existing plants will likely give a substantial increase. Existing plants are likely to have very long lives.

So at what price of oil does CTL become cost competitive?

Probably $60/bbl, assuming decent interest rates and no CO2 charge.

Also, what do you expect will be the yearly global oil production decline rate? 3%? 4%? 5%?

Probably 2%. Peak Oil forecasts are always too pessimistic.

E-P,

US production statistics include petcoke and waste oil under petroleum

Interesting. Have you run across any detailed stats on that? I know that some places, like NE and Hawaii, do use straight fuel oil.

if we have less than 50 years of economically recoverable coal on hand

The US has 200 years of coal. All those stories about peak coal are looking at peak demand.

Nick G said at May 27, 2009 11:59 AM:

More on CTL:

It's very hard to predict. Environmentalists will fight coal very hard (creating perceived risk for investors), ethanol not so much.

China appears to be kind've limited on coal resources. I don't know about Australia.

Engineer-Poet said at May 27, 2009 3:51 PM:

World GDP growth didn't slow down at all until the financial system broke down.

GDP is just a measure how fast money changes hands.  You might have noticed that a lot of that money produced nothing except transaction fees, and a lot of the profits in finance were pure lies.

US production statistics include petcoke and waste oil under petroleum

Interesting. Have you run across any detailed stats on that? I know that some places, like NE and Hawaii, do use straight fuel oil.

You may want to check the state-by-state figures; I don't have the time.

if we have less than 50 years of economically recoverable coal on hand

The US has 200 years of coal. All those stories about peak coal are looking at peak demand.

Sorry, but you're way out of date.  Not only is the "200 year" figure based on long-obsolete usage figures, better analyses of recoverable coal suggest that much of what remains is not worth producing.  You may want to start here for an intro.

Nick G said at May 27, 2009 4:29 PM:

GDP is just a measure how fast money changes hands.

That doesn't make sense to me. I understand GDP as value added. Transactions without value added, no matter how fast, don't increase GDP.

You might have noticed that a lot of that money produced nothing except transaction fees

And what's wrong with transaction fees? The people who lent money got a service for their fees: a successful transaction. Quite a lot of money was loaned during the period in question, and we should keep in mind that only a small % was lost. Of course, this hurt intermediaries a great deal, because they were leveraged.

a lot of the profits in finance were pure lies.

No, the profits were real. What wasn't real was the disclosure of risk of future losses. Further, you may be overestimating the importance of the financial and real estate sectors to world GDP - for instance, it's not an important part of Chinese growth, and it's not even as large a % in the US and UK (the countries with the biggest FIRE sectors)as you may be assuming - you may want to look at the numbers.

You may want to check the state-by-state figures; I don't have the time.

I wasn't asking you to - I just asked if you happened to have run across them already.

Sorry, but you're way out of date. Not only is the "200 year" figure based on long-obsolete usage figures, better analyses of recoverable coal suggest that much of what remains is not worth producing.

That's incorrect. I've looked carefully into these recent analyses: they're based primarily on consumption figures that reflect declining demand for coal. They also use reserve estimates that take into account current coal prices and competing resources. The biggest thing they've missed is that Illinois Basin coal peaked some time ago due to cheaper western coal and sulfur problems, but there's about 150B tons of recoverable coal in that region alone - 150 years of US consumption.

See http://energyfaq.blogspot.com/2008/06/are-we-running-out-of-coal.html and
http://energyfaq.blogspot.com/2009/02/are-we-running-out-of-coal-part-2.html

Randall Parker said at May 27, 2009 7:04 PM:

Nick G, E-P,

Regards an anti-coal environment: You think sentiment will stay as strongly against coal once oil production is dropping every year, Asian countries are consuming more of what's available, and exporters are retaining more of what they make?

Even if Nick G is correct and production drops by only 2% per year the amount available to Western countries to import will drop more rapidly than that. People will scream at politicians for more of that liquid hydrocarbon stuff. Politicians will respond.

Capex and banks: I think Gail the Actuary makes a good point about the health of the financial system in a shrinking economy. Economic contractions cause more home mortgage failures, more commercial mortgage failures, more corporate bond defaults, more credit card debt defaults. The banks will be hurting as economic activity contracts for years.

Capex funding will still exist, funded out of profits by those with energy to sell. So capex will get funded out of cash flows. So I'm not as pessimistic as Gail.

E-P,

A probably more reasonable measure of oil price potential: % of GDP. Can it get to 8%? 10%?

menomnon said at May 27, 2009 9:43 PM:

Some interesting 'realtime' data:

http://paul.kedrosky.com/archives/2009/05/electrical_cons.html

Larry said at May 27, 2009 9:57 PM:

@Randall - "Will the aftermath of Peak Oil increase or decrease the demand for electricity, coal, natural gas?"

Peak Oil is a supply issue, not a demand issue. In a market system, supply shortages = high prices. In fact, if you substitute "high oil prices" for "declining production" and "declining supply" throughout, the discussion makes a lot more sense. So the better question is, if production declines by 1%, how high will gas prices go? We've seen before that rapid oil price increases do not stop electricity demand growth. Even during the original energy crisis, when supply declined by far more than 3%, US electricity demand never stopped growing. See http://www.eia.doe.gov/oiaf/aeo/electricity.html.

If we keep electricity affordable, then demand for it will continue to grow. We know we can do so with nuclear, natural gas and coal, so if the "greener" technologies remain problematic from cost or inconsistency, we'll do that. Of course, politics could prevent us from doing so. I.e., we could legislate/regulate ourselves into decline. But we'd never be that stupid, right?

"deglobalization"

This is likely to be temporary. The advantages are so huge (lower prices) that it will be hard to say no to, unless unions again become dominant.

"Does 1% oil decrease cause a .8% economic decrease?"

The short-term price elasticity of oil is pretty low. So a 300% price increase caused a 2-3% decrease back in the day, a day when the oil intensity of our economy was way more than double what it is today. If a 1% production decrease produced a 100% price increase, then we might see a 1% decline in the first year. But another 1% decline the following year wouldn't have the same effect, because the substitution process will have shifted into high gear. I.e., long-term elasticity is high. The only place where we don't have good substitutes is transportation. And since we already have the technology to substantially improve fuel economy, that is not likely to crimp the overall economy, either after the initial reset of (cheap oil) expectations.

@odograph - "an oil-scarcity recession"

We're not in an oil-scarcity recession. If we were, oil prices would be high.

@Heather - "the major de-industrialization that appears likely."

I wish I could short your ideas. There isn't going to be any de-industrialization. E.g., China is now - in 2009 - growing at 8% annually.

"We are not going to compete in manufacturing with China, India, Veitnam, etc. Our car industry woes demonstrate the trend."

We compete very well with other countries in manufacturing cars. Just not in Detroit. The competitive plants are run by non-UAW companies in the south. And until the crash, US manufacturing output was at an all-time high.

@Engineer-Poet - "The future of ground transportation is electric. Everything else is a waste of effort."

Yup.

@pond - "Before you put it in such simple and eloquent terms, I would have expected: less oil means higher oil prices, means greater use of substitutes. But you have made me go 'Whoa!' and I am reluctantly driven to agree with you."

Why, exactly?

@jb - "But at some point, fusion becomes commercially viable."

That looks many years away (go Polywell!) We don't need it to have affordable electricity, although when we do have it, electricity looks to be cheap indeed.

@Randall Parker - "Our percentage of electricity coming from nuclear power is going to fall since our plants are aging. The Japanese are going in the opposite direction."

If oil prices go back to last summer and stay that way, we'll start building nuclear and/or coal plants in numbers. Can't wait for Obama to endorse nuclear!

@Randall Parker - "I'd prefer that the economy remains strong enough that capital expenditures for capital for energy substitutes remains very strong."

If oil prices are very high, there will be plenty of capital to build substitutes for the crazy reason that substitutes will be a good way to make a fortune.

@Nick G - "About 5M bbl/day worldwide goes to generation, about 6.3% of oil ( http://www.eia.doe.gov/oiaf/archive/ieo06/excel/figure_26data.xls ) and roughly 7.5% of generation."

So, conversion to other fuels can really contribute to easing the pressure.

@Randall Parker - "You think sentiment will stay as strongly against coal once oil production is dropping every year, Asian countries are consuming more of what's available, and exporters are retaining more of what they make?"

That sentiment only exists in the US and Europe. Coal plants there will happen only if the shocks are so sudden that we literally don't have time to build other kinds of plants. I don't expect that, therefore no coal renaissance.

"The banks will be hurting as economic activity contracts for years."

If the economy continues to contract, it won't be because of commodity issues. It will as always be because of stupid government policies.

Nick G said at May 27, 2009 10:39 PM:

You think sentiment will stay as strongly against coal once oil production is dropping every year...

No, that's why I think some will be built, which is a change from the status quo, where none is getting built. But...these are large projects. Almost as large as nuclear power plants. The first one or two won't be started for several years, and it might be 10 years before the first generation is completed. There won't be much enthusiasm for more until the first wave is tested, so we're talking 15 years or more to get a somewhat larger 2nd wave.

I think coal as a source of process heat for ethanol is pretty likely.

the amount available to Western countries to import will drop more rapidly than that

True. OTOH, US production would stabilize in such an environment, so that overall US supply would still drop at the roughly 2% rate.

I think Gail the Actuary makes a good point about the health of the financial system

Gail's grasp of economics....Well, for instance, she just assumes that the grid and wind turbine manufacturing won't be sustainable, due to the lack of the magic oil.

%of GDP. I really don't think prices can stay over $200 - there are way too many substitutes, even in the fairly short term, around the world. Well, we import 4.4B bbls/hr. That's about $26 per 1% of GDP. So, that's about 8% of GDP.

Randall Parker said at May 28, 2009 5:36 PM:

Nick G,

I agree that Gail is far too pessimistic about the ability of the industrialized nations to continue to function post-peak. I think civilization can persist just because we had civilization when we were using a tenth per capita of our current level of energy consumption. We had rails and a continental market for many goods. Our total energy consumption won't drop that much.

CTL plant construction times: I do not see why they have to take that long. They seem more akin to oil refineries than nuclear power plants. I am curious to know how long it takes to build an oil refinery.

More generally: I intend for now on to pay a lot of attention to information about building times for all manner of large industrial projects. Oil refineries, ships, coal electric power plants, coal natural gas power plants, nuclear power plants, corn ethanol plants, lithium battery manufacturing plants, silicon PV plants, polysilicon plants, and other types of plants. How fast does it take to scale up substitutes? That's the key question it seems to me.

Nick G said at May 28, 2009 7:10 PM:

CTL plant construction times: I do not see why they have to take that long.

Any very large, unique on-site construction project takes a long time: trains, hospitals, etc. The inevitable change-orders, changing regulations, changing costs, all make it worse. The chemistry of a refinery or CTL plant, and the radiation of a nuclear plant, make it worse. In effect, these things are hand-made: big craft projects.

Modularity, standardization, and manufacturability improve things dramatically. This was the essence of the industrial revolution (energy helped, of course, but it didn't need to be fossil fuels: that just accelerated things).

Anything that can be manufactured on an assembly line can be ramped up very, very quickly: WWII is the obvious example.

My observation is that under normal commercial conditions that roughly 40% manufacturing> growth is pretty easily doable. That's the rate of growth of Priuses, PV, and wind turbines, over the last 10 years. That's a doubling time of 2 years: 10 years gives you 5 doublings, or 32x. 20 years gives you 1,024x, so very, very few things will take 20 years to get where they need to be.

It takes about 4 years to design any completely new vehicle, like the Chevy Volt. This is down from the peak of 5 years it took 40 years ago, when the growing complexity of vehicles bogged down the process. After that point, computerization began to speed up the process faster than growing complexity could slow it down.

Car manufacturers like a design cycle of about 5 years: long enough to amortize costs, short enough to stay competitive. This can be shortened if necessary, especially if the changes are evolutionary.

There's going to be a wave of PHEVs and EVs in late 2011/early 2012. These will be serious vehicles, and production will be expandable pretty quickly. Toyota has said they plan all of their models to be hybrid by 2020: I think 90% of all new cars could by PHEVs by then, with sufficient demand, though I think we (as a country) probably won't actually push that hard.

Micha Elyi said at May 31, 2009 8:21 PM:

The Obama approach to emphasize education at all skill levels is vital to the maintenance of an economy that will support a modern "middle class" standard of living."--Heather

The U.S. is already well into an education glut. Like all economic bubbles, the edu-bubble also includes a lot of misdirection of resources into unproductive and marginal-negative return applications. For instance, a Women's Studies degree adds nothing to economic productivity and likely reduces non-monetary social benefits. For a less radical criticism of education misspending, notice that California has plenty of lawyers and a shortage of nurses yet the University of California, Irvine campus added a law school recently, not a school of nursing, though lawyers neither sow nor reap, just suck.

If peak oil puts meaningful pressure on the U.S. economy's ability to feed the federal, state, and local governments, I expect as a secondary effect we'll see government-funded education begin to contract and the remaining spending be subject to harsh tests of education's purported productivity gains.

Clifford J. Wirth, Ph.D. said at June 2, 2009 8:35 AM:

According to independent studies, global crude oil production peaked in 2008 and is now declining terminally.

Within a year or two, oil prices will skyrocket as supply falls below demand.

Independent studies indicate that global crude oil production is now declining from 74 million barrels per day to 60 million barrels per day by 2015. During the same time, demand will increase. Oil supplies will be even tighter for the U.S. As oil producing nations consume more and more oil domestically they will export less and less. Because demand is high in China, India, the Middle East, and other oil producing nations, once global oil production begins to decline, demand will always be higher than supply. And since the U.S. represents one fourth of global oil demand, whatever oil we conserve will be consumed elsewhere. Thus, conservation in the U.S. will not slow oil depletion rates significantly.

Alternatives will not even begin to fill the gap. There is no plan nor capital for a so-called electric economy. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and mining equipment. The independent scientists of the Energy Watch Group conclude in a 2007 report titled: “Peak Oil Could Trigger Meltdown of Society:”

"By 2020, and even more by 2030, global oil supply will be dramatically lower. This will create a supply gap which can hardly be closed by growing contributions from other fossil, nuclear or alternative energy sources in this time frame."

With increasing costs for gasoline and diesel, along with declining taxes and declining gasoline tax revenues, states and local governments will eventually have to cut staff and curtail highway maintenance. Eventually, gasoline stations will close, and state and local highway workers won’t be able to get to work. We are facing the collapse of the highways that depend on diesel and gasoline powered trucks for bridge maintenance, culvert cleaning to avoid road washouts, snow plowing, and roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, large transformers, steel for pylons, and high tension cables from great distances. With the highways out, there will be no food coming from far away, and without the power grid virtually nothing modern works, including home heating, pumping of gasoline and diesel, airports, communications, water supply, waste water treatment, and automated building systems.

Documented here:
http://www.peakoilassociates.com/POAnalysis.html
http://survivingpeakoil.blogspot.com/

Engineer-Poet said at June 3, 2009 7:28 PM:

Nick:  A great deal of the US economy over the last 10+ years was the FIRE (Finance, Insurance, Real Estate) sector.  Construction may add value, but real estate just shuffles it around.  And need I detail just how much value has been destroyed by the financial sector?  The resources wasted in construction (enabled and abetted by the Ponzi schemes of finance) should now be counted as negative value created.  Those resources have been largely destroyed, and most are unrecoverable.  The only thing that was real were the commissions siphoned off by the industry (which should be counted as theft, and repaid as triple damages—including the lobbying fees and political contributions of the industry).

You may be right about coal, though I'd be surprised.  Many areas around the world have downgraded their coal reserves.

Coal is already used by some ethanol plants for process heat.  So much for "green" fuel.

Clifford:  The amount of oil required for road maintenance is trivial compared to the fuel used for travel on those same roads.  Further, using technologies like Bladerunner dual-mode trucks, oil required both for road maintenance and travel could be slashed (even eliminated, using catenaries for power and the rails as the return conductor).  Entire rail systems were created before we had ICE-powered vehicles, so it will be no trick at all to maintain them using only small amounts of fuel.  That fuel can just as easily be bio-oil or charcoal for gasogenes.

Nick G said at June 4, 2009 11:41 AM:

E-P,

A great deal of the US economy over the last 10+ years was the FIRE (Finance, Insurance, Real Estate) sector.

I think we're talking about two different things. You're talking about utility, quality & misallocation of resources, and I'm talking about the effect of peak oil on the ability of the economy to provide goods and services. You may be right about the utility and quality of the services provided by the FIRE sector, and the misallocation of resources of RE construction. Could we have chosen to produce more useful goods & services? Sure. We could have built renewable energy instead of unneeded housing; we could have provided needed childcare, eldercare, healthcare research and engineering education, instead of finance and law.

But, my point is simply that PO didn't slow down the world economy's provision of goods & services. Construction continued; bankers and lawyers continued to toil in their towers, everyone got to work. There was no hiccup at all until the credit crunch started. This breakdown is certainly indirectly related to PO - it was in part a breakdown in the recycling of petrodollars - but it wasn't a energy-shortage problem, it was a problem in the social "superstructure".

Many areas around the world have downgraded their coal reserves.

Sure, but the coal is still there. Countries have simply recognized that the remaining coal is unlikely to be mined, given the state of the industry and the competing resources. A good example: the UK still has an enormous amount of recoverable coal (I give sources in the two articles I gave), but imported coal and domestic oil & gas have been slightly cheaper, and the UK coal mining industry has been pretty thoroughly dismantled, in large part due to political conflict.

Engineer-Poet said at June 6, 2009 8:25 PM:

I'm talking about the effect of peak oil on the ability of the economy to provide goods and services.

So am I.  Are you not aware that some countries were losing their ability to provide electric power because oil was priced out of their reach?  They were out-bid, and their services (no matter how essential) wound up on the chopping block.

Could we have chosen to produce more useful goods & services? Sure.

My point is that the situation was increasingly "either/or" rather than "both/and".  We got the dishwashers living in McMansions and the enormous bonuses for risk-reshufflers at the same time that essentials elsewhere were being lost.  We might, if we had a government with a sense of morals, claw back the ill-gotten gains from the reshufflers (including sucking back their campaign contributions from the pols they bought), but both the wasted resources and lost time are irreplaceable.  When we look at what we need to survive going forward, the last decade or so is going to have big numbers in red on the spreadsheet.

But, my point is simply that PO didn't slow down the world economy's provision of goods & services.

I think you're quite wrong.  AAMOF, the steady growth of US wages against cost of living slowed about the time US oil production peaked.  In other words, it not only DID slow, it HAS BEEN SLOWING for almost 4 decades now.  What happened last year was the water heating up fast enough for the frog to kick, hard.

Randall Parker said at June 6, 2009 9:12 PM:

Nick G,

I'm with E-P on the effects of the big oil price run-up on the economy. Economist James Hamilton has argued that oil price shocks take the winds out of an economy. Read his Congressional testimony:

How much the price needed to rise in order to balance global demand with supply depends on how quickly consumers change their habits in response to a change in the price of oil. The historical experience has been that even very large oil price increases cause relatively little immediate change in the quantity of oil consumed. The response of consumers to energy price increases over 2004-2006 was if anything even smaller than those historical estimates. One reason for that smaller response may be that energy expenditures as a fraction of total spending by U.S. consumers had fallen from 8% in 1979 to 5% in 2004. The reason that we were purchasing about the same quantity of gasoline despite the increase in the price was that many of us could afford to do just that.

By June of 2008, the price of gasoline had reached $4/gallon, driving the energy budget share back up to 7%. While some people had been ignoring $3 gasoline, $4 definitely got their attention. The resulting abrupt changes in spending patterns can be quite disruptive for certain key economic sectors and seem to be part of the mechanism by which the earlier oil price shocks had contributed to previous economic recessions. The kinds of economic responses we saw between 2007:Q4 and 2008:Q3 were in fact quite similar to those observed to have followed previous dramatic oil price increases.

You can also read his research paper "Causes and Consequences of the Oil Shock of 2007-08".

I think he makes a pretty strong case.

Nick G said at June 8, 2009 12:53 PM:

E-P, Randall,

You're missing my point. Sure, the US has been hurt by oil shocks, now and in the past. My point is that the world economy is different from regional economies.

From 2004 to 2008 the US and oil importing countries suffered increasing damage, as income and wealth were transferred from importing countries to exporting countries. The economies of importers slowed down, the economies of exporters sped up. Governments, companies and households in importing countries had trouble covering their budgets, and had to borrow from exporting countries, using t-bills, commercial paper, and mortgages & CDO's. Importing countries suffered inflation, domestic investment bubbles (think Dubai), currency exchange problems, and the terrible, onerous task of deciding where to invest their money.

Here's the numbers:
GDP Oil
1994 5.3% 2.2%
1995 5.3% 2.3%
1996 5.6% 2.2%
1997 5.7% 3.1%
1998 3.5% 1.9%
1999 5.0% -1.2%
2000 6.9% 3.8%
2001 4.6% -0.1%
2002 4.5% -1.0%
2003 5.7% 3.4%
2004 7.7% 4.3%
2005 7.6% 1.9%
2006 8.2% 0.0%
2007 7.6% -0.0%

We see that in 98 and 01 that the world economy slowed, and so did oil consumption roughly a year later. In 2005 world oil production/consumption slowed and stopped, but world GDP continued on it's merry way. World GDP growth didn't slow down until the world's credit systems froze up, due to flaws in the structure of credit (sub-prime mortgages as bad collateral, flawed CDO design, etc.).

Ok, on to specifics:

some countries were losing their ability to provide electric power because oil was priced out of their reach?

Well, of course there were low-income countries, companies and households that suffered disproportionate problems. OTOH, I wasn't aware of electrical generation short-falls in any major countries. What were you thinking of?

the wasted resources and lost time are irreplaceable

I agree.

the steady growth of US wages against cost of living slowed about the time US oil production peaked. In other words, it not only DID slow, it HAS BEEN SLOWING for almost 4 decades now

Again, the US is an importer. We can expect to see harm from it's transfer of income and wealth to exporting countries. OTOH, I would note that average wage levels are deceptive: the entry of women into the labor force skews those numbers. I think GDP is much more helpful here.

Economist James Hamilton has argued

I'm very familiar with his arguments, and I agree with him. I don't see any significant conflict between his ideas and mine. Do you see any?

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