Friday, October 8, 2010

Peak Oil Won't Cause Collapse

Oil production in any region follows a bell-shaped curve. In any region, the rate of oil extraction increases, after the initial drilling, until it hits a peak, and then inevitably declines thereafter. This is true for any given oil well, and may be roughly true for all oil in the world as well.

Peak oil refers to the point at which half the oil in the world has been used up.1 At that point, we've extracted half the oil which which will ever be extracted, or which can be profitably reached. Thereafter, we will face inevitable declines in oil production as time goes on. Once oil has started to decline, little can be done to reverse the trend in the long run. We cannot increase the rate of extraction, because it costs more and more money just to extract the same amount of oil. Even if we furiously increase the rate of oil extraction, using any means necessary, all we accomplish is to make extraction faster now but even more difficult in the future, because we drained even more oil out of the ground. Once oil starts to decline, we are on a downhill path, basically without exception or reprieve. We will run out of oil, albeit gradually, and nothing can be done about it.

We may be nearing the peak of oil production for the world. After that, oil production worldwide will start its slow, inevitable decline. Some experts claim that oil has already peaked, in 2005, while others claim that oil will peak more than a decade in the future. Either way, peak oil is relatively imminent.

Some commentators think that peak oil spells doom for our civilization. They have an argument, which runs as follows. Our entire industrial civilization relies upon oil: our cars run on oil, our trucks run on oil, our tractors run on oil, and so on. As oil becomes scarcer, which it will after the peak, we will become increasingly unable to provide fuel for essential machinery like tractors. We will find it more and more difficult to sustain long-distance transportation networks for goods, or provide fuel for our supply chains. Our industrial civilization will start to falter. Goods will become scarcer, and the essentials of life will become harder to come by. This could lead to "feedback loops" in which people could rebel, wars could break out, and so on, which could damage our oil infrastructure still further. Even if peace is maintained, reduced oil supplies mean that we'll have less oil to spend on transporting oil from the middle east to us. Yes, even oil extraction and transportation depends on oil, which means that a decline in oil supplies will make us less able to extract more oil in the future, further accelerating its decline.

Our civilization must collapse, doomers say, as oil supplies dwindle. It's a fact, implied by laws of physics and mathematics. As oil supplies decline, food supplies will also decline, since industrial agriculture is dependent upon oil.

We cannot transition to alternatives, because those alternatives require oil to build them and supply them, when oil is already running out. Not to mention, it would take decades to transition our infrastructure to alternatives, when peak oil is already upon us. It's already too late to transition to alternatives, because we needed to start decades ago. Now that peak oil is upon us, we face only one prospect: collapse.

Or so goes the argument. This argument (which I'll call the "oil doom argument") has gained tremendous influence. While still a fringe argument, it has convinced thousands of people. It has inspired many people to prepare for doomsday, to hoard food, to practice survival skills, to relocate to rural areas and live off the land, and so on, all in preparation for the coming collapse. The oil doomer argument has also inspired hundreds of books, websites, lectures, documentary movies, blogs, and so on, with ominous-sounding names such as "die-off", "twilight in the desert", "life after the oil crash", "a world made by hand", and so on. The oil doom argument has even gained the attention of the NY Times, which published a long article about it. The argument has even convinced a few scientists, and at least one Congressman.

Oil doomers generally believe their argument is unquestionably correct. They believe that the decline and collapse of our civlization is absolutely inevitable, implied by physical and mathematical laws. They generally think that anyone who denies it, is "in denial", using the perjorative psychological sense of that term.

There's one problem, however. The oil doom argument is wrong. It's totally wrong, from beginning to end. It relies entirely on incorrect assumptions, as I'll point out. Without those assumptions, its conclusions no longer follow.

Below I'll present an analysis of the oil doom argument. I'll show that it's mistaken, and I'll present a more realistic picture of our probable immediate future.

Analysis of the oil doom argument

The oil doom argument relies upon an incorrect assumption. It relies upon the assumption that our economy will sacrifice the most important uses of oil first as the supply of oil declines. In fact, our economy will sacrifice the least important uses of oil, at every stage of the oil decline. As a result, we won't begin to sacrifice things like tractors or oil transportation infrastructure until our oil supply has already declined by 80% or more, which won't happen for six decades at least, according to the most pessimistic projections. In other words, we can withstand declining oil supplies for decades with no collapse, and with no major interruptions in basic industry, even if we make no preparations, and even if we do not make any transitions to any alternatives. Oil declines would cause alterations in our standard of living, but they would not cause industrial or agricultural collapse.

The reason our economy will sacrifice the least important usages of oil first, is because consumers demand what is most important to them, which causes producers to sacrifice production of what's least important when they must choose between several options. That in turn causes suppliers to shift production, and so on, through a widening network until it reaches the whole economy. Agents in the economy communicate via prices, and everyone sacrifices what's least important. Consumers have some choice about this, but producers do not: any producers which sacrifice essential things, or which manufacture things deemed unnecessary in a new economy, will go out of business. You can see this easily during a recession. When the economy contracts by 10%, does our supply of food decline 10%? No. The first things that go away are jewelry stores at malls, which die off right away in every recession then come back. As another example, look at what happened during the late 1970s. When our supply of oil declined by 15%, quite suddenly, did it cause 15% of the tractors to stop running? No, it caused a recession and some annoyance, but no collapse of our transportation infrastructure, and no starvation.

Again and again, doomers wrongly assume that we'll sacrifice the most important uses of oil first. Let me provide an example. The following quotation is taken from the website, which is one of the premiere doomer advocacy websites:

"Within a short time of global oil production hitting its peak, [the prices of oil will reach] up to, and possibly over, the $200 per barrel range... With oil at or above $200 per barrel, gasoline will reach $10 per gallon... This will cause a rapid breakdown of trucking industries and transportation networks which have all been built and financed under the assumption fuel prices would remain low. Importation and distribution of food, medicine, and consumer goods will grind to a halt as trucking and shipping companies go bankrupt en masse."

Again, this wrongly assumes that we'll sacrifice the most important usages of oil (like food, medicine, and shipping) first. Of course, we won't begin to sacrifice food, or its production or distribution, until oil supplies had declined by more than 90%, because food is the most essential thing to us, and we spend less than 10% of our oil on food and its distribution.

As a result, declining oil supplies won't cause the imminent collapse of our civilization. But that's hardly reassuring. Perhaps peak oil will cause a gradual decline and collapse, if not an immediate one. Maybe we'll shut off the tractors in 80 years, when oil is almost out. Maybe we're doomed to protracted collapse, with gradually declining living standards until we starve, decades in the future.

No. As oil becomes scarcer, we'll gradually replace it with alternatives which have become relatively cheaper. We'll replace SUVs with hybrids, and eventually, we'll replace hybrids with battery-electric cars. The transition away from oil will be entirely automatic, the result of basic market mechanisms. It will not require any preparation or forethought on the part of everyday consumers. All that will be required, is for consumers to respond to higher oil prices. As oil becomes more expensive, alternatives will become relatively cheaper, and consumers and firms will transition to alternatives at that time, merely by following economic incentives.

Some commentators claim that it's already too late for us to transition to alternatives, because peak oil is already upon us, and it takes decades to transition away from oil. However, they've wrongly assumed that we must complete the transition away from oil before declines begin. That's their second mistaken assumption. In fact, we only need to transition away from oil quickly enough to offset declines as they occur. In other words, if we want to offset a 2% yearly decline in oil supplies, we only need to reduce our oil consumption by 2% per year after the peak has occurred. We could accomplish that easily. For example, we could switch 4% of our car fleet to hybrids the first year, then switch 4% of the remaining non-hybrid fleet every year thereafter. (Hybrids get twice the mileage, so switching 4% of them per year will result in a 2% decline in oil consumption, which is the same rate as the oil decline). In other words, switching 4% of our car fleet to hybrids is sufficient by itself to offset declining oil supplies of 2% yearly, for 25 years, without any reduction in personal travel and without any preparation beforehand by consumers. Switching 4% of our car fleet to hybrids is hardly a daunting task, since we already turn over our car fleet much faster than that, without any special inducement. Of course, this strategy requires automakers to design hybrids beforehand and to start mass manufacture of hybrids before the peak occurs. But they've already made that preparation.

Of course, other consumers of oil (like shipping companies) would also have to reduce their oil usage by 2% per year, starting after the peak has occurred. But they also could accomplish it by transitioning only a small fraction of their fleet per year to more-efficient technologies. Shipping companies also have obvious alternatives to their conventional propulsion, which they will start using when it becomes economically sensible to do so. The only usage of oil which has no obvious alternative is aviation, but that is not required to prevent industrial collapse.

If anything, automakers and others have responded too aggressively to the prospect of oil declines. Chevrolet and Nissan started working on plug-in cars years ago, in anticipation of more expensive fuel, and it looks like they prepared too soon. Plug-in cars won't be strictly necessary for decades, since regular hybrids would suffice for a long time after the peak. Furthermore, plug-in cars won't become cheaper than hybrids like the Prius (on a TCO basis) until gasoline costs more than $8/gallon, which doesn't appear imminent. Bear in mind that we shouldn't start switching from hybrids to plug-in cars until gasoline costs $8/gallon (in 2010 dollars), making the arrival of plug-in cars extremely premature.

One objection to all this, is that alternatives (like hybrids) require an "investment" of oil, since we must use oil to power the machinery which mines the lithium for use in batteries. Since we're running out of oil, doomers say, we won't have enough oil to mine lithium for hybrid cars. Once again, this assumes that we'll sacrifice the most important uses of oil first. But the foundation for the next generation of our transportation infrastructure is more important than discretionary travel now, so we'll sacrifice discretionary travel. The reason is easy to see: when we pass peak oil, investment in alternatives will promise fantastic returns, even though manufacturing those alternatives requires relatively little oil. As a result, those alternatives will have enough money to buy the small fraction of oil they need despite declining supplies. As a result, we will respond to declining oil supplies by sacrificing a few SUVs, not lithium mining.


The oil doom arugment relies on two implicit assumptions, as follows. First, it assumes that the economy sacrifices the most important uses of oil first as supplies of oil decline. Second, it assumes that we must transition the entire transportation fleet to alternatives before the peak occurs. Both of those assumptions are false.

Doomers make those assumptions, over and over again, throughout the doomer literature. Watch out for it. Once those assumptions are dropped, because they're wrong, the doom-and-gloom conclusions found throughout the doomer literature no longer follow. Bear in mind that imminent collapse arguments require both of the aforementioned assumptions to be true, but neither of them are true.

In summary. Our civilization does not face collapse because of peak oil. Our civilization faces gradual transition to other forms of energy for transportation, that is all. The gradual transition will happen automatically, as a result of basic market mechanisms, without any preparation on the part of consumers.

This is not to say that peak oil will have no consequences. I expect that peak oil will cause a recession and modestly higher transportation costs. It will not, however, cause industrial collapse, nor will it cause starvation within the industrialized world.


1This assumes that the curve of worldwide oil extraction will be symmetrical, as the Hubbert curve clearly indicates, and as doomers assume. Whether this is true or not has no serious implications for the argument I'm making here.