History Should be the First Checkbox | OutPut by Rig Lynx – OutPut
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History Should be the First Checkbox | OutPut by Rig Lynx

History Should be the First Checkbox | OutPut by Rig Lynx

Some years ago, an academic colleague referred to an older economist as ‘a historian,’ which was clearly intended as an insult, given the fetishism among American academic economists for higher-level mathematics.  I can’t count the number of time economists have said to me that they simply cannot read the American Economic Review anymore because the math is impenetrable to them

But academic economists, by eschewing the study of history, sometimes go astray.  Some economists have generated quadratic curves to explain long-term oil and gas prices, arguing that from initially high costs (and prices), economies of scale and progress cause costs (and prices) to decline, until depletion becomes the driving factor and sends costs rising exponentially.  This can be seen in the Figure below, which shows U.S. oil prices over the long term, seeming to validate the argument.

The author from BP data.

Oil Price in 2016$

Someone with a passing view of history might note that the lowest point of prices occurred at roughly 1930, or during the Great Depression.  (How that is overlooked by some economists is an interesting question.)  And a historian (or old fogey) might realize that U.S. natural gas prices were under federal price control for several decades, explaining the low prices in the 1950s and 1960s (and subsequent shortages).

Similarly, when former Energy Secretary James Schlesinger told a peak oil conference that the debate was over and the peakists had won, the matter was hailed by attendees, with one commenting, “The “Peakists” have won the intellectual debate, but the political order will not respond.”

Old fogies (like your humble narrator) would sigh and point out that in 1979, Schlesinger said he didn’t think oil production would ever pass the then-65 mb/d level (production now is about 95 mb/d).  A little knowledge of history goes a long way.

Another ahistorical mistake occurs when people describe the so-called “Red Queen” problem, named after the Red Queen in Alice in Wonderland who tells Alice, “My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.”  Producing fields experience decline, and that capacity must be replaced in order to simply maintain production, let alone increase it.  Observers without experience find this shocking and often suggest it is an insurmountable problem.

Advocate Joe Romm, in slamming my foolish belief that peak oil was not a serious concern, said“The IEA’s work makes clear that for oil to stay significantly below $200 a barrel (and U.S. gasoline to be significantly below $5 a gallon) by 2020 would take a miracle “” or rather 6 miracles see “Science/IEA: World oil crunch looming? Not if we can find six Saudi Arabias!” See also “Merrill: Non-OPEC production has likely peaked, oil output could fall by 30 million bpd by 2015,” which noted, ‘Steep falls in oil production means the world now needed to replace an amount of oil output equivalent to Saudi Arabia’s production every two years, Merrill Lynch said in a research report.’”

Of course, if these many pundits had been around a few years more, they might have known what President Jimmy Carter said in his speech on energy policy in 1977:  “…that just to stay even we need the production of a new Texas every year, an Alaskan North Slope every nine months, or a new Saudi Arabia every three years. Obviously, this cannot continue.”

Except it has continued, oil prices are unlikely to see $200 again without a major supply disruption, and peak oil demand has now become the new fashion amongst the punditry, few of whom admit to having been completely wrong about peak oil supply.

Any number of pundits have re-published the IEA’s iconic graph, which breaks out the needed capacity additions to show how much is needed to offset production decline in existing fields or reserves.  This is shocking to those who are novices and don’t realize that such graphs have been published for many years, and are nothing new, just as the quotes about needing a new Saudi Arabia every x years have been made for decades, without heralding a peak in oil production (or even market tightness).

IEA World Energy Outlook 2008

Capacity Needs By Category

But the other error involves not noticing that this type of graph always begins at the present:  past capacity additions to offset depletion are not shown.  Also, by showing cumulative capacity needs instead of annual, the graph misleads the incautious into exaggerating the challenge.  Few if any of those publishing the graph or lamenting the Red Queen problem acknowledge that the challenge is not new, but has been present throughout the history of the industry, and has been regularly overcome.  There is no history, only future.

Original Article Here

 

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