How to Address Contrarian Arguments – part III
Posted by Luis de Sousa on February 8, 2007 - 10:43am in The Oil Drum: Europe
Topic: Economics/Finance
Tags: economics, Magic Hand, markets, oil depletion, oil prices [list all tags]
On this third installment of the Contrarian Arguments series we’ll address the "Markets Will Solve It" claims.
A regular economist will tell you a fable like this:
If a shortage of potatoes occurs either by lack of supply or by growth on demand the market price will rise. This new higher price will signal to the farmers a need to produce more. Supply will rise, meeting demand, lowering the price and bringing the market back into balance.
Let’s see what’s wrong with this apparently correct logic.
Warm Up
In spite of the mathematics behind it and the historical data supporting it, Peak Oil is often dismissed on the basis that (free) markets avoid such phenomena. The so called Market “Magic Hand” purportedly guarantees that the right amount of a commodity is traded at the best price. The “Magic Hand” will take care of any occurrences that momentarily disrupt this balance.
From a regular economist’s point of view Oil is like any other good or commodity subject to the same rules above. As you might suspect it isn’t so. In the next lines we’ll see why and what is the real role of Markets and Prices in Oil Depletion.
The Basics
For starters we’ll use that old Price vs Quantity graph (if you never heard of it I think you’ll understand anyway, but you can learn more about it here or at Wikipedia). On the yy axis is represented the Price, on the xx axis is represented the Quantity traded for the good or commodity in study. To represent Demand a curve with downward slope is used - the higher the price the less consumers can by, as price lowers consumers are willing to buy more of the good. Supply is represented in an opposite fashion – the higher the price the more goods producers are willing trade, at lower prices producers will not be willing to sell as much.
In real life Demand and Supply are not linear, hence called curves, but for didactic purposes are usually represented as straight lines. These two curves meet at a specific point - the equilibrium. If the Demand and Supply curves used represent the market correctly, the equilibrium point determines the price and quantity traded of the good in question, as seen below:
Market Equilibrium. On an unconstrained Market, price and quantity traded are set by point where Demand and Supply meet.
Now imagine that consumers really like this particular good, or become more dependent on it, in that case they’ll be willing to buy more than before. This case is modeled by shifting the demand curve to the right. As seen in the next picture a new equilibrium point will unfold, where more goods will be traded, but at a higher price.
The Demand curve shifts right to reflect a new will from consumers to buy more of the same good.
More goods traded at higher prices, this means profits for producers. This new profitability will make the market attractive for new producers that will make more goods available to trade. This new movement in the market can be modeled as a right-ward shift of the Supply curve.
The higher price set by the right shift of Demand triggers in its turn a right shift in Supply.
On a free market (without price or quantity regulations) after these two moves the final price will be the same as the initial. Such is the market “Magic Hand”. In a market with perfect concurrency (goods are not differentiable from producer to producer) goods are sold at the lowest price possible, and producers get virtually zero profits over base costs, benefiting consumers the most.
In the case of Oil this kind of movements happened constantly for about 20 years, from the mid 1980s up to 2004, where global demand for Crude plus NGL moved up from 57 Mb/d to 80 Mb/d. During that time Oil prices moved very little, apart from the 1990/1991 period with the invasion and subsequent liberation of Kuwait. Sometimes one tends to forget about this little detail, Oil demand has been a monster growing relentlessly.
So the regular economist might be right to some extent. Before moving on give it a little thought: is the present Oil market a free one?
Prices and Reserves
Among the financial and economic communities there seems to exist a hidden belief that Oil Reserves are set by prices. If prices go up by growing Demand then Reserves should follow, in order to allow Supply to match it. Even if Reserves grew with prices, it’s the flow of Oil to the market that has to grow in order to meet Demand. It’s really hard to understand why such belief exists or what created it, because there’s no physical or logic reason to think that way.
Unfortunately some institutions not only fail to dismiss such naive beliefs but even seem to propagate them. Following is a graph produced by the IEA that leads one to believe in some sort of link between prices and recoverable reserves:
IEA’s Reserves ties with Prices.
Hopefully the IEA has already made its act of contrition with the last World Energy Outlook, acknowledging energy supply problems in the next decade. But what the economics and environmental folks remember is that nonsensical graph.
The amount of oil found at a certain reservoir was formed dozens of million years ago, it’s a physical reality impervious to what happens above ground in the market. Whatever the price of a barrel of oil, whatever the amounts of money oil companies hold, the amount of oil remaining in a reservoir is the same. Pretty obvious, but hard to understand for some.
One could remotely argue that it is the money that oil companies hold that make it possible for the exploration of a certain reservoir. But that money only represents the availability of surplus energy to produce more oil, what really makes a reservoir producible is the energy profit that it will yield. As we shall see in the next section, the price of oil (and in tandem the money resources that oil companies may hold) are just mechanisms to set which reservoirs are more profitable and should come on stream first.
Money and Oil Flows
If it is the net energy that determines the amount of oil recoverable from a reservoir, what’s the role of oil prices? Actually they have a very important role, they set at each point in time which reservoirs should be on production, pushing those with higher EROEI first and leaving those with lower EROEI for last.
To illustrate this effect let’s use another parable: imagine there are two different energy sources available for exploration in an imaginary country (it could be Melnibone if you like):
. Energy Source A producible with an EROEI of 1:10 at a maximum rate of 10 energy units per time frame;
. Energy Source B producible with an EROEI of 1:2 at a maximum rate of 20 energy units per time frame.
In the beginning there’s one energy unit available got from human hard work, and energy demand of 9 energy units. Although with larger reserves, energy source B does not provide enough profit for the current energy demand given such low input, so in the market it’ll have a prohibitive price. As for energy source A its market price will be lower and affordable, for it fulfills the entire energy needs of the imaginary country. If supply keeps steady we have equilibrium, were at each time frame 10 energy units are produced, 1 to produce energy in the next time frame and 9 to meet demand.
A possible scenario where energy production gets started from source A, covering a Demand of 9 units per time frame.
Now imagine that demand rises to 12 energy units per time frame. Energy source A wont suffice, energy source B has to come on stream. In this case equilibrium will be achieved by producing 10 energy units from source A and 6 from source B. In order to achieve this new equilibrium a period of turbulence will be underwent in order to raise the energy inputs needed to put source B on stream – this is where the price comes in to play. Until the new equilibrium is found the price will go up reducing demand and opening space for higher investments in the following time frame. After the new demand of 12 energy units is fully met the price will come back to its original value.
A possible scenario where a new effort has to be made to bring source B on stream. After a period where total surplus diminishes a new Demand of 12 units is finally covered.
Take now a new scenario where energy source A goes in to depletion, diminishing 10% per time frame. The price will go up again to make possible the coming on stream of the full production from energy source B. But after the depletion cycle is over only 10 energy units will be available for trade, the price will remain high to keep Demand low.
A possible scenario for source A depletion. A new effort is made to bring source B into production but in the end the original Demand of 12 units cannot be met.
Prices basically set the order by which Society uses the energy sources available, putting those with higher EROEI at front. In light of this one can draw an interesting postulate:
A new energy source will come on stream on an unconstrained market if and only if all other energy sources with higher EROEI do not entirely cover current energy demand.
By doing so prices and markets guarantee that Society uses energy in the most profitable way possible. The only problem is when the energy sources with higher EROEI are finite.
Another point worth observing is that the Market is in itself an Agent of Depletion. It is the market that makes the low hanging fruit go first, producing the declining EROEI phenomenon observed in part I of this series.
The Regular Economist
If a shortage of potatoes occurs either by lack of supply or by growth on demand the market price will rise. This new higher price will signal to the farmers a need to produce more. Supply will rise, meeting demand, lowering the price and bringing the market back into balance.
What the regular economist doesn’t tell you is that the farmer will need more oil to produce more potatoes. It’s that simple. As long as enough energy is available the farmer can continue to adapt production to the signals sent by the market.
Now imagine that energy supply constraints prevent the farmer from acquiring more than some amount of fertilizers or diesel fuel, he won’t be able to meet a possible surge for potatoes. The same with Oil, energy surplus has to be found to produce more of it, or else rigs will falter, access to reservoirs will not be possible, etc. This is the major difference from Oil (and energy sources in general) to other commodities: more Oil (energy) has to be invested to produce more Oil (energy).
Conclusion
Although we don’t see the Market’s Magic Hand has been working quite well for the last century, making sure that Supply meets a breathtaking surging Demand. Major exceptions happened in 1973 (OPEC embargo) and in 1980 (Iran-Iraq war) but even then the Market prevailed, bringing things back to normal with time.
This “Magic Hand” is itself assuring that depletion will unfold by guaranteeing that energy sources with higher EROEI are explored first. That way net energy keeps falling to the point where production can no longer tackle demand, eventually peaking and entering in decline. Once energy scarcity unfolds there’s little the Market can do about it, for to generate a higher supply of energy more of it has to be invested.
Traditional Economics fails to grasp this reality for it deals with energy like any other good or commodity. The mainstream economic thinking does not acknowledge energy as a propelling factor of growth, even less as the major factor doing it. Researchers like Robert Ayres, Charlie Hall, R. Kummell et al. have been trying with some success to estabilish this link between energy, money and economic growth, but that’s a story for another time.
Previously on the Contrarian Arguments series:
Luís de Sousa
TheOilDrum:Europe
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If I recall Economics 101 the upward sloping supply curve takes account of 'diminishing returns' so that it doesn't shift as shown in the third diagram. However I do agree the market seems to have a kind of inbuilt shortsightedness. A guy on TV discussing house prices said supply and demand is OK but not affordability, which like EROEI is a factor not explicitly shown on the supply and demand graph.
Somebody needs to look at the embodied energy capital requirement for the low EROEI future, especially grid generation. This implies a nontrivial fraction of current fossil energy should be set aside eg to smelt and fabricate aluminium for wind turbines. My guess is at least 10% instead of which we are using it all up having a good time.
Hello Luis,
This sentence from your Conclusion may need a correctional edit:
This “Magic Hand” is itself assuring that depletion will unfold by guaranteeing that energy sources with lower EROEI are explored first.
Don't you mean higher ERoEI?
Thanks for the tip, it’s correct now.
Economists say more than a) higher demand generates a higher price that in turn produces more of what is demanded. They also say b) that higher prices curb demand, and c) that higher prices encourage substitutes. So, in looking at the oil market as prices rose to last summer's peak, the response a) was weak, old field decline/depletion prevented higher production, but b) we have seen demand destruction in some parts of the world, which accommodated higher consumption in china and some exporting countries, and c) we have seen various substitutions, eg traditional ng taking the place of oil in those electrical generating plants that accommodate fues switching, and newer substitues, eg ethanol and tar sands. Turning back to a), it seems clear that in the absence of higher price some e&p, eg ultra deep water, would not occur... so, even as production stagnates, it should be conceded that production is nevertheless higher than it would be if prices were still at 25/b.
I have long thought that PO'ers and economists talk past each other, a pity as both have some things to teach the other.
Being both an engineer and an economist I can vouch that for the most part each profession sees the other as short-sighted fools. Pity indeed.
Hellasious and jkissing:
Those folks that I referenced on the Conclusion are trying to do just that, bring Economics and Engineering/Environments together. Also I used the term ‘Regular Economist’ because there are Economists out there that acknowledge these problems; I have the luck to know some.
The connection between energy, economic activity and money is organically obvious.
In a comment to Robert Rapier's recent request for alternate energy policy recommendations "If I were a global dictator", I offered this: tie money supply growth with renewable energy production growth. Properly done, nothing else is required policy wise. No tax revisions, no incentives, no CAFE regulations, no pollution agreements - nothing. It will all be done through this "simple" measure.
If anyone has questions on this, fire away...
A bright remark. Although to be done correctly it has to relate to exergy not plain energy, and that’s all but easy.
By exergy I take it you mean the thermodynamic definition, yes? Excellent remark and ultimately that is the theoretical limit one would strive for, but from a practical standpoint I really don't think you need to get nearly so complicated.
Equivalent renewable-source BTU or KWh will do just fine for a long time. Just the transition alone from a purely fiat currency to one backed by "green" BTU will take decades.
I call it the "Greenback"... But if we used your exergy suggestion we should call it the "Carnot(e)".
(smile)
Regards
That is hilarious! Thanks... gave me the best laugh of the morning.
:-)
Hi H,
Okay, so I have a question: Could you please expand and explain?
For example:
1) renewable energy prod. growth - you mean what and who exactly?
2) Who counts the "production growth"?
3) No money supply growth allowed otherwise? How do you stop it? Who stops it?
4) Can this be done unilaterally, eg. by the US only?
And so forth.
Hello Aniya,
The first two questions are pretty simple, really - solar, wind, geothermal, fusion,...the list is pretty long. It could also be defined as non-fossil and non-fission. Who counts? The same people that count it today..power cos., national and int'l agencies.
Now as to the other, more complicated questions:
(3) If you want true sustainability, no money supply beyond that will be allowed. But there has to be a very long transition period, too. Eventually, imagine a currency that is backed by say, 1 Greenback = 100 000 "green" BTU. This is not so far-fetched as it sounds: the US dollar today depends on oil for its global reserve status. Who and how stops money supply? The same people who regulate it today: central banks.
(4) Yes it can, and that is very intriguing because it IS feasible, by comparison with a single, global currency. It could happen thus: say today the split in production between "black"/"green" energy is 95%/5% and that production (in BTU) is rising 5%/20% respectively.
The "strictest" money supply policy would only allow M3 to rise by only 5%*20%= 1%. That would be so restrictive right now it would immediately throw the economy into a deep recession.
The "loosest" policy would be 95%*5% + 5%*20% = 5.75%. This would accomplish nothing.
A "transition" policy would be something like this: (1/2)*95%*5% + 5%*20% = 3.375%, i.e. you "penalize" black energy by 50%. At the very start of the transition period that "penalty" could start at 5% and rise gradually.
Monetarism with a twist..."green" monetarism.
Regards
Excellent article!
Ironically, nineteenth century British economists worried a great deal about running out of coal and worried a lot about the consequences of running out of coal. They understood that energy is fundamental and not "just another commodity."
Where cornucopian economists go wrong, in my opinion, is in their unwavering belief that good substitutes for oil exist or soon will be found. This issue comes down to technology: Are there good substitutes or are there not? My own opinion (and I'm an economist) is that for many uses there are no good substitutes for oil and natural gas. To some extent we may be able to substutute electricity generated from nuclear power for oil and natural gas--but this is not a quick or easy or complete substitution by any means. Biofuels have limited potential as substitutes for oil. Solar and wind power are more silver BBs, but again are not a quick or easy substitute for oil. Unconventional oil will help as will coal-to-liquids, but these are slow, difficult, and high-cost technologies with significant environmental concerns. Call them tarnished silver BBs.
The Econ 101 graphs work only where good substitutes exist. I think this is the essence of the issue: If there are good substitutes for oil, then Peak Oil is nothing to worry about. Because, in my opinion, there are only difficult and expensive substitutes for oil, Peak Oil is a Big Deal that will transform our lives.
"Because, in my opinion, there are only difficult and expensive substitutes for oil, Peak Oil is a Big Deal that will transform our lives."
1) I mostly agree -- depending on how we define the word "transform". I am certainly no "doomer", but finite resources are a constraint. Accordingly, I have already begun educating my boys on PO, its implications for the future, and for the types of job openings likely to be in demand in 10 years when they finish college.
2) This implies that the price of oil will rise faster than inflation in the years to come. If we add geopolitical concerns on top of this, we get that we all should be hedging this risk by owning domestic reserves in our portfolio. The energy index funds contain exposure to refining and the drillers, but there are a few publically traded firms that are more narrow.
3) I hope those who post here that truly believe in peak oil have been investing what funds they have accordingly. There's an old saying that goes roughly as follows, "If you want to know what someone believes in, flip through their checkbook". (A variation of "preferences are revealed through choice" phrase so often used by those in econ departments.) I hope the more vocal posters here are investing according to their beliefs.
Sonic - I adopted this very strategy last year, dumping many higher risk oil and mining stocks, to focus on companies with reserves concentrated in the OECD. Encana is I believe 100% N America, but the list of companies not exposed to political risks is pretty short. Quality exploration potential and growing production tends to be outside the OECD. So you got to balance growth prospects against safety.
I invest in small US e&p's with positive net and growing reserves. To sort, I try to extrapolate future net and compare with present EV,
reserves/ q production x q net/EV; the result should be at least 1.0; not many are.
Of US e&p's I have found 3 above 1; ard/gpor/gmxr
The first two are oils, the latter ng... imo the potential for increase in NA ng price is much higher than for world oil.
"imo the potential for increase in NA ng price is much higher than for world oil."
Many people agree with you that the odds of, say, a near-term 2X price increase is greater for NA nat gas than world oil. I don't know, but I am certainly not going to take the other side of your position.
Both oil & nat gas prices concern me. With my electricity mostly coming from NG, I have been one busy person lately: I've doubled my attic venting (all passive), added some radiant barrier stuff (if interested, see savenrg.com), and will soon add some solar shading on a few windows to reduce the a/c bill this summer. (If I install any more compact flourescents in the house, I think my wife will slug me.)
- Sonic
Which savenrg.com product did you use, the chips or the membrane?
I used something similar to the membrane: it's a major hassle to install (I got the stuff I used on an "inventory clearance sale"). The RB chips are FAR easier to install, but pricey. The TCM product, due to it being multi-layered, is not adversely affected by dust when placed over the attic insulation. Dust accumulation is not a major problem in my attic. Therefore, a single-layer, double-sided product (like the one I installed) installed over the insulation should perform well for many years -- at least I hope it will.
Best I can tell, dust problems are most prevalent for attics with powered gable fans: they seem to draw the dust in on one side of the house and deposit it along the way to exit fan. For these, the two savenrg products would work best.
The next house that I build (assuming it's in the South or Southwest) will be wrapped in the multi-layered TCM product. I also hope to avoid placing the a/c units & ducting in the attic. Homes with such setups (like my current home which I did not build/design) get a triple penalty from attic heat: the heat eventually seeps through the insulation, the insulation acts as a heat sink so that heat continues to radiate in after sundown, and the a/c ducts get super-heated. Just wonderful. When I moved into my current home, the attic would hit 120-130 when the outside air temp hit 100: that meant I was trying to get sub-80 degree air out of my a/c unit at a time when the ducts were 120-130. Surprise, surprise -- it took a very long time to get cool air out of ducts and into the house.
My experience (via electric bills normailized for avg temp) is that increased attic ventillation is a first order magnitude effect as is sealing the ducts for leaks: I lose less cool air due to leaks and have less of a temperature loss through the ducts since the ducts (& attic) are no longer 120-130 (just a chilly 110+!).
I found the radiant barrier to be a second order effect, but only if the attic is ventilated properly. RB installed over the insulation reduces the heat sink effect of the insulation by eliminating it from absorbing any radiant heat directly (it still gets heated by other means, hence the need for excellent ventilation to keep the attic relatively cool). A faculty member at Texas A&M has a study/note on RB placement -- something I'd like to quote right now, but can't seem to find. NOTE: In some cases, adding RB to a poorly ventilated attic can actually make the a/c bill worse, especially if the RB is installed up on the rafters.
Thanks for your words Don, I guess you got the main problem:
Substituting Oil is not solely about technology. Alternatives do exist on that basis, but what none other source seems to provide is the colossal energy flow that Oil allows.
You are correct that technology is not the only problem in finding substitutes. Another problem is that the "Great Transition" away from oil will require truly humongous investments in nuclear energy, wind power and other alternatives. Oil infrastructure is already in place, but to find the funds and get the land, skilled labor, and capital (including energy, a special kind of capital) and management together is a prodigeous task.
How well will market forces work to facilitate this prodigeous task? Most economists think it will work fast and with great power. I am concerned about the dynamics, the time lags, the nuts and bolts of making the Great Transition away from oil, and while I grant the power of market forces I also see their limitations.
If I were dictator of the United States I'd implement a World War Two type of mobilization and put half of all resources into dealing with Peak Oil using the command mode of organization. I think five years of such effort would do the trick, because with wartime priorities we could build (for example) hundreds of nuclear power generating plants in five years.
With business as usual, I expect major disruptions and serious hard times coming--and coming pretty darn quick, i.e. within the next few years.
In reading economists theorizing one frequently sees words and phrases such as "eventually the market comes into balance..." and "in the long run..." implicitly ignoring what goes on during the transition between one 'balanced' state and the next. If the doomster's dieoff occurs, the market will indeed come back into balance through demand destruction of the worst sort. Wasn't it Keynes who quipped "In the long run, we are all dead."
I'm admittedly fairly ignorant of the current state of economics thought (I read Heilbroner and others in the 60s), so I'll pose the question, "does educated economic thinking take the 'transition' into account as to how long in might be, how difficult it might be, what the human cost in suffering might be.", and so on. You seem to indicate that the answer to this is a qualified 'no' which leaves me more skeptical of the academic discipline of economics than ever.
Most of economics at the undergraduate level is comparative statics and has nothing to say about dynamics (the path from one point to another) at all--or there is sometimes a very simple growth model.
At higher levels of economics the problems of dynamics are well understood. Keynes was a prominent advocate of looking at the costs of change as well as the benefits from the final position; he was a practical man who understood the real world as well as he did economic theory. However, economics is only as good as its assumptions. A key assumption of most economists is that there are ALWAYS substitutes lurking out there--real or potential ones that will be developed in response to higher price.
The education of most economists is deplorable. They learn economics and math but not much else. Although engineering is essentially applied economics ("An engineer is somebody who can do for a dollar what any damn fool can do for five dollars.") few economists can or do communicate with engineers. Indeed, outside of their specialties, most economists are woefully ignorant: They become captives of their elegant mathematical models and quite unable to think critically about the quality of their premises.
Now, having said all this, I do not mean to include all economists within my sweeping generalizations. The great economists of the past were also great critical thinkers--Keynes, whom I've already mentioned, Alfred Marshall and the other great nineteenth century economists, Kenneth Boulding and others.
To some extent I blame the writers of economics textbooks. To make a complex subject intelligible to undergraduates they oversimplify. Premises are left hidden and seldom are examined deeply (or at all, for that matter). The logic of economics is powerful, but its assumptions are often questionable. Most questionable in the context of Peak Oil, I think, is the question of the availability of substitutes for oil and natural gas.
For example, many economists seem to assume that because coal-to- liquids technology exists, and because coal is abundant, then there can be no Peak Oil problem, because coal-to-liquids (or some other and better) technology will save us. In a weird way, the economists are sort of right: If we could get effective carbon sequestration at reasonable cost, then (by itself) coal-to-liquids or coal-to-gas technologies could defer the harsh consequences of Peak Oil for several decades. In other words, oil production will probably not diminish faster than coal-based substitutes could be developed; the financial constraints are formidable but not insurmountable, and the binding constraint of not enough engineers could probably be relaxed in half a dozen years, if we really put our minds to it.
But for now carbon sequestration is a dream, not an on-the-shelf technology, and for now we have too few engineers--and most of them are not far from retirement.
For engineers there is no substitute.
If we could get effective carbon sequestration at reasonable cost, then (by itself) coal-to-liquids or coal-to-gas technologies could defer the harsh consequences of Peak Oil for several decades.
But if carbon sequestration is skipped, then CTL would defer PO even better, no? I'm afraid that is what will happen, and the climate will be ignored, since today's crisis takes precedence over tommorrow's even-bigger crisis.
Even if carbon sequestration technology existed, it would not be actually used if and when an energy "crisis" is upon us, because carbon sequestration necessarily uses up a significant fraction of the energy output, i.e., it lowers the EROEI, net energy output, and profits. Without stringent enforcement it would be turned off - and will the political will for such enforcement be there when CTL is not quite meeting the "demand" for liquid fuels?
And thus it (sequestration) will be ignored for most part. I'm finding it hard to believe that coal will not be that magical substitute turned to as oil and NG get more difficult to deliver to the customer.
Reminds me of a favorite physics problem. Lean a ladder against a wall and then imagine that the bottom starts to slip, how fast does the person (say, 3/4 of the way up the ladder) fall. The important thing to realize is that it's actually two problems. At some point the ladder stops touching the wall, and then it behaves in an entirely different manner, the guy just falls as if there were no ladder at all. The important thing is to realize when "the wheels fall off" of the original equations, and figure out the consequences of that.
Long story short, scientists learn early on that equations are only valid in certain domains, and you have to be careful to consider what happens when the situation leaves the domain in which your equations are valid. It seems that economists don't think this way. When the earth holds infinite (or effectively infinite) oil then the economic models work, but at some point it is clear that no matter the price production will be zero, so the model breaks down somewhere. The important thing is to realize where that boundary is, and account for it. Economists don't bother with such trivialities, so their equations become insanity at some point.
Reminds me of the extensive work put into divisia for EROEI calculations, but clearly nobody ever asked "why are we doing this.", because it is not in general a terribly useful thing to do, no matter how interesting the math. Let me just pose it in this way, if I ask how many barrels of ethanol the US can produce, I expect an answer in barrels of ethanol. EROEI is a dimensionless quantity, so in order to produce the answer, given an EROEI, you need to multiply by.... barrels of ethanol. Given EROEI, you can only compute the answer if you already knew the answer, not terribly useful it seems. Try it yourself and you'll see that EROEI is not useful for computing the answer to this problem. No matter how you go about calculating the answer it always ammounts to just throwing out the EROEI and computing from first principals. Given that, why bother with the EROEI at all if you'll just throw it out whenever you're asked an actual question of relevance?
With all due respect Slaphappy, I believe you mischaracterize the position of most mainstream economists. Few scientists, including economists, would argue that standard models begin to break down at boundary conditions.
What is important to remember is that under any reasonable oil depletion scenario there will be a non-trivial amount of oil being produced 50, 75, or even 100 years from now. So while you are correct in theory that the models will eventually break down, econometric modeling is in fact a very useful tool for analyzing and predicting the possible effects of peak oil and its after-effects even decades after peak.
I've only ever seen two things come from these models.
1) We'll always find more oil, so it isn't a problem. If the price goes up, there's oil to be had.
or.
2) The price of oil will diverge towards infinity as we pass the peak, and therefore everything will become arbitrarily expensive and we'll all die.
It's rare to see any argument that rests upon economic principals to not fall into one of those two camps, both of which are entirely unrealistic. Might as well be talking about dragons and unicorns at that point. Any argument that rests upon actual science (hmmmm, where are we planning to get energy, and is this a viable option) almost always avoids both of those pitfalls.
Slaphappy, I don't know what / who you've been reading. Most likely you are simply misunderstanding economists because neither of your two scenarios are predicted by economics.
What an economist will tell you is that we are currently seeing market forces at work. The high prices of the last two years has encouraged:
1) Increased efforts to pump conventional crude (with questionable results)
2) Increased production from non-conventional sources (tar sands, biofuels, etc.)
3) Increased efficiency and conservation, and in the long run, structural changes to the global economy to make it less dependent on oil.
The sum total of all three means that supply can be down slightly over the last two years without causing any major problems. If we've really peaked and supply continues to drop, prices will rise further, encouraging 1, 2, and 3 above.
None of this implies that either of your two scenarios will come to pass.
"good substitutes for oil exist or soon will be found" NOT.
I'm afraid I have to repeat your other admirers. It all has to do with substitutes. What does one eat in Ireland during the Potato Famine? Grass etc.. was a very poor substitute. Die Off (and move-off, of course, cause there was somewhere else to go) happened, und the pop. is still a little more than a third of what it was back then.
What do we substitute during an oil famine? Well..
"The Stone Age didn't end for a lack of stones". Clearly we'll find something better than oil. From an energy density point of view that would be ... let's see ... nuclear fission ... nuclear fusion ... antimatter. Hmm, Houston, we have a problem!
"What do we substitute during an oil famine? Well.."
We substitute busses and trains. We substitue the common sense NOT to live 50 miles from work but only five. We substitute solar and wind and well insulated windows for 3/8" panes of glass that were installed in the 1920s when the houses were heated with coal and wood.
We substitute smarts for desperation and a good sense of humor for doomerism. Once we do that, we'll be fine. Even you, my friend.
"Even you, my friend"
I just spend 70.000 Euro with a new roof (14cm of the best insulation you can imagine), solar panels to support the heater and hot water, new heater with an 800lt storage tank in the basement, windows, new facing insulation etc, etc, etc..
I ride the train to work every day.
I share a car with one of the neighbors and drive only when really necessary.
My point has nothing to do with an economy based on TRANSITION away from FF. This is doable. There will most certainly be JOLTS (discontinuity) to our system along the way, which our system MAY or may not survive.
Again: what substitutes do you use during a famine (electricity black-out, for instance) at the moment of the famine, when the UN can't come running to your aid. Have you ever experienced a famine?
Cheers, Dom living in Munich
Let me see... you are doing all the right things, yet, you are worried. Why is that? I am not questioning that you are worried, I am simply wondering why you are worried since you know the right answers already.
The "jolt" hypothesis as well as the "may not survive" hypothesis have very, very little in common with reality. What are your indicators that there will be serious jolts or that ther