Oil supply

on Oct 30 in Oil Exploration, Peak Oil tagged by Trevor Hicks

I love this article, it’s an excellent little narrative about just how difficult deep water drilling is.  It’s valuable insight when you think about the future of oil supply.

I want to comment briefly on Peak Oil, I enjoy reading about the future of oil supplies, but I find it kind of curious to see so much effort expended trying to prove one way or the other when or if there will be a peak in oil production capacity.  I’m not sure why that really matters.  It’s kind of like how our government and media seem obsessed over GDP numbers.  What we really care about is the well being of the population, not some accounting metric that is heavily influenced by international capital flows and whether consumption is is current production and inventory.  Same for peak oil, I don’t care whether 2005 was really the peak or not, what affects our lives and economy is the price of oil. The prevailing price today would have seemed absurdly high even 10 short years ago. Is this an anomaly, a new normal or a portent of further increase?  I’d like to see the debate focused more on those terms.

While I’m on the topic, I also want to revisit a comment on the terminology that is so frequently abused in the media regarding oil issues. Don’t get me wrong, I’m no pedant, but I think the repeated misuse of terms like oil supply and demand really hinder the public’s understanding of the underlying issues. First, note that supply and demand are NOT numbers - they are curves showing the relationship between quantity and price. We cannot measure supply or demand, they are inferred from the movements in other data. What is measurable are oil production, price and inventory. Consumption is derived very simply from those other numbers.

The problem with being imprecise about these terms is that it obscures just how central price and expectations about future prices are to decisions regarding investments in additional capacity, in tradeoffs between capital costs and efficiency and consumption patterns for governments, businesses and individuals.

Treating price as an arbitrary number imposed on the world by greedy producers leads to really poor policy from government across the spectrum from emissions control, ‘price’ gouging rules and decisions to subsidize various fuel sources. Individuals underestimate their financial risks regarding their commitments to consume energy at certain levels when they buy cars and choose how far to live from work and how large of a house they want to heat and cool.  This leads to irrational demands on government to insulate people from the consequences of their own decisions and punish the ‘greedy’ entities who failed to maintain some price equilibrium or status quo that should never have been expected in the first place.

Price is so central to the proper functioning of any market that government should fiddle around with it at its great peril. The root cause of most problems in American health care today is the fact that 90% of all consumption decisions are made completely independent of any thought to price. My biggest frustration with the reform in the air is that the Democrats seem determined to even further insulate Americans from price information and the consequences of their individual decisions. This reform will make our system much, much worse for that reason.

OK, I drifted a bit on the topic here, sorry about that.