My topic today is outside the daily scope of economic news. While many overlooked details are too small to be seen, this is an example of the opposite. We don't normally perceive this trend because many of us have lived our entire lives inside it.
My story starts in the mid 1950s with a geophysicist named M. King Hubbert. (He didn't like to be called Marion.) He published a surprising prediction concerning not simply existing proven reserves, but even those to be discovered in the future. He used a mathematical model some people ridiculed as hopelessly inadequate for the task.
The problem was that his prediction of an all-time peak in U.S. domestic production in the late 1960s came true on schedule. Soon after 1970, U.S. imports of oil started a familiar climb. Imports of oil were paid for with a troubling shift in the balance of trade which remains with us.
The subtle point about Hubbert's model is that many details do not matter. The model is robust with respect to many alternatives. The central idea is that people motivated by profit will seek out the deposits easiest to exploit early on. As costs climb it will become worthwhile to exploit more difficult deposits. In addition to costing more, these will be harder to bring into production, taking more time. The end result is that proven reserves follow a pattern of growth and decline which allows an estimate of the ultimate amount of oil to be recovered even before you reach the peak.
Part of the reason people have trouble with this is that they don't normally think in terms of rates. The peak is not the point where oil runs out, it is the point where efforts to add to proven reserves fall behind the rate of consumption. You still have reserves, but you can only increase production rates for a limited time without being brought back down to the rate at which new reserves are discovered.
Yes, the model is oversimplified. You can get around it if you are allowed to ignore economics. You can also defeat it by behaving more intelligently. No, we have not made the changes necessary to invalidate the predictions. On the whole, people have behaved as if they were too dumb to beat Hubbert.
According to Hubbert's original model we are now close to the global Hubbert peak.
When questioned in the 1970s, Hubbert thought that OPEC might slow the arrival of that peak by raising prices and forcing conservation. He had no idea of the dramatic changes in demand about to appear in China, India or Russia. Prices have gone up, but demand has stayed high.
You may have heard about dramatic discoveries which will rewrite projections for future oil production. It helps to note that Hubbert did not know about the North Slope in Alaska, or the Overthrust Belt in the "lower 48". Even so, his predicted peak for U.S. oil production was never exceeded.
On a global scale there is no obvious potential for dramatic major discoveries that do not involve radically different technologies. Developing and deploying such technologies takes time. Don't expect a smooth transition between the global Hubbert peak and some endless future supply of energy.
Sometime in this decade global production will reach a rate it cannot sustain, let alone exceed. Demand will not suddenly slacken. The predictable result will be price instability leading to spikes. These will collapse when those with proven reserves temporarily increase production to grab immediate profits.
This will have major economic impacts both short-term, from the cost of such spikes, and long-term, from increased uncertainty. No existing economic control mechanisms are adequate to cope with the dramatic shift to a situation where supply becomes inelastic in response to constantly increasing demand.
This is the larger context in which the economic crisis of confidence starting in 2008 is now playing out.
A personal note: My introduction to Hubbert peaks came via Dr. Owen M. Phillips and his "The Last Chance Energy Book" published in 1979. I knew Dr. Phillips, though I could never approach his level of brilliance. He promoted a dangerous tendency in me to break down barriers between academic disciplines, and taught me to look at the big picture before I got lost in details. His use of dimensional analysis to find simple relations hidden in impossibly complicated physical problems became a mainstay of my intellectual toolbox.
One measure of the man is the vision he possessed, and the humility with which he conveyed it. When he was arguably the world expert on ocean waves he confessed that he could not sit watching the ocean for more than a few minutes without seeing something he could not explain. I have never since looked at water waves the way I did before.
At the time he published this book the U.S. energy crisis, and its economic consequences, were still fairly new. The title was then considered whimsical, at least by Physics Today. Today, sitting near the global Hubbert peak, I don't find it whimsical at all.
My story starts in the mid 1950s with a geophysicist named M. King Hubbert. (He didn't like to be called Marion.) He published a surprising prediction concerning not simply existing proven reserves, but even those to be discovered in the future. He used a mathematical model some people ridiculed as hopelessly inadequate for the task.
The problem was that his prediction of an all-time peak in U.S. domestic production in the late 1960s came true on schedule. Soon after 1970, U.S. imports of oil started a familiar climb. Imports of oil were paid for with a troubling shift in the balance of trade which remains with us.
The subtle point about Hubbert's model is that many details do not matter. The model is robust with respect to many alternatives. The central idea is that people motivated by profit will seek out the deposits easiest to exploit early on. As costs climb it will become worthwhile to exploit more difficult deposits. In addition to costing more, these will be harder to bring into production, taking more time. The end result is that proven reserves follow a pattern of growth and decline which allows an estimate of the ultimate amount of oil to be recovered even before you reach the peak.
Part of the reason people have trouble with this is that they don't normally think in terms of rates. The peak is not the point where oil runs out, it is the point where efforts to add to proven reserves fall behind the rate of consumption. You still have reserves, but you can only increase production rates for a limited time without being brought back down to the rate at which new reserves are discovered.
Yes, the model is oversimplified. You can get around it if you are allowed to ignore economics. You can also defeat it by behaving more intelligently. No, we have not made the changes necessary to invalidate the predictions. On the whole, people have behaved as if they were too dumb to beat Hubbert.
According to Hubbert's original model we are now close to the global Hubbert peak.
When questioned in the 1970s, Hubbert thought that OPEC might slow the arrival of that peak by raising prices and forcing conservation. He had no idea of the dramatic changes in demand about to appear in China, India or Russia. Prices have gone up, but demand has stayed high.
You may have heard about dramatic discoveries which will rewrite projections for future oil production. It helps to note that Hubbert did not know about the North Slope in Alaska, or the Overthrust Belt in the "lower 48". Even so, his predicted peak for U.S. oil production was never exceeded.
On a global scale there is no obvious potential for dramatic major discoveries that do not involve radically different technologies. Developing and deploying such technologies takes time. Don't expect a smooth transition between the global Hubbert peak and some endless future supply of energy.
Sometime in this decade global production will reach a rate it cannot sustain, let alone exceed. Demand will not suddenly slacken. The predictable result will be price instability leading to spikes. These will collapse when those with proven reserves temporarily increase production to grab immediate profits.
This will have major economic impacts both short-term, from the cost of such spikes, and long-term, from increased uncertainty. No existing economic control mechanisms are adequate to cope with the dramatic shift to a situation where supply becomes inelastic in response to constantly increasing demand.
This is the larger context in which the economic crisis of confidence starting in 2008 is now playing out.
A personal note: My introduction to Hubbert peaks came via Dr. Owen M. Phillips and his "The Last Chance Energy Book" published in 1979. I knew Dr. Phillips, though I could never approach his level of brilliance. He promoted a dangerous tendency in me to break down barriers between academic disciplines, and taught me to look at the big picture before I got lost in details. His use of dimensional analysis to find simple relations hidden in impossibly complicated physical problems became a mainstay of my intellectual toolbox.
One measure of the man is the vision he possessed, and the humility with which he conveyed it. When he was arguably the world expert on ocean waves he confessed that he could not sit watching the ocean for more than a few minutes without seeing something he could not explain. I have never since looked at water waves the way I did before.
At the time he published this book the U.S. energy crisis, and its economic consequences, were still fairly new. The title was then considered whimsical, at least by Physics Today. Today, sitting near the global Hubbert peak, I don't find it whimsical at all.
