The Marginal Barrel

I just read an interview with an oil industry analyst named Steve Kopits. He’s the guy who pointed out that 4 of our last 5 recessions happened just after our national expenditures on oil reached 4% of GDP.

Kopits talks about a concept that is new to me – peak oil price.

When we think about supply and demand, we generally think in terms of a simple relationship with price. All other things being equal, if supply goes down, price goes up. When price goes up, demand goes down. Of course, there is such a thing as price elasticity. That is, if you are truly dependent upon something a 10% price rise won’t result in a 10% fall in consumption.

Oil has shown itself to have a very elastic price. Oil cost $25 a barrel back in 2000. Now it costs more than four times that much (Brent price $110), but you don’t see a drastic drop in consumption.

Enter the marginal consumer, the marginal barrel, and carrying capacity. The marginal barrel is that highest priced barrel of oil that blends in with the rest of the world supply and holds up the world average price. The marginal consumer is the world’s poorest consumer, or the consumer for whom there is a less appealing but plausible alternative to oil waiting for use. Carrying capacity, in Steve Kopys’ thinking, is the maximum price that a particular country will tolerate before cutting back on consumption.

According to Kopits, the U.S., Europe, and other western industrialized nations hit carrying capacity at around $110 a barrel. China has another $10 or so to go before it starts losing its taste for the stuff. Some poorer countries have hit their limits already.

The upshot is that although supply is constrained, the price has hit a wall. Enough people, countries, and industries will grudgingly conserve or switch to prevent oil prices from rising drastically. Here in the U.S. gasoline consumption is down 3% from last year. This could be partly due to the recession, but partly because we have hit our carrying capacity.

By Kopitz’s estimation, just as world oil production has hit a bumpy plateau, so too has the price of oil. It will come to rest north of $110, but this will make more consumers retreat from the market.

Nota Bene: Increasing wealth, increasing efficiency, and inflation will all tend to raise the nominal carrying price of oil. The price will creep up along with our efforts to be more efficient, simply because a mile of driving or a day of 68F in a house will cost the same.

This is when, paradoxically, the most energy efficient economies become the greatest users of oil. (The formal term is Jevon’s Paradox) It is a huge advantage. Oil is an unparalleled commodity, as both energy and chemical feedstock. The city, state, or nation with the highest efficiency, and therefore cost tolerance for oil, will be able to take advantage of its conveniences after other entities have been forced to use lower quality compromises. The same holds true for any other energy source.

I’d like to see my home state of Vermont put more emphasis on energy efficiency. Right now we are the fifth most energy efficient state in the U.S. I’d like to see us beat out Massachusetts for the top spot. Then I’d like to see us pour it on and open up an unbeatable lead. It would put us in an enviable economic position as all energy sources approach their limits.

(Just in case you are interested, I now have a Twitter account, @MinorHeretic. Nothing serious, just photos of the natural world and minor absurdities. A break from all the grim stuff.)

O’Donnell, Birol, and Rao

I don’t have an overarching theme this time, just a few unrelated items for your perusal.

First, a post mid-term election suggestion for President Obama. In the spirit of bipartisanship, he should bring Tea Party favorite, failed senatorial candidate, and former anti-Onanism campaigner Christine O’Donnell into his administration. Her new position: anti-masturbation czar. Given the Republican House and the barely Democratic Senate, she should have her hands full (oops, sorry) for the next two years.

It’s going to resemble Northern Ireland in the 70s up on Capitol Hill – nothing but bomb-throwing and invective until both sides sink to their knees from simple exhaustion. Don’t expect anything substantive from them till after January 21^st, 2012. I’ll be happy if they just keep the government open for business till then.

On the energy front, Fatih Birol, the chief economist for the International Energy Agency, has said it. In an interview with National Geographic, he said “The age of cheap oil is over.” This wouldn’t be a noteworthy statement from James Kunstler or, for that matter, myself. An army of commentators have pointed out the limited nature of our planetary oil resources and the flattening oil production curve. The IEA, however, has been a locus of cheerful optimism, consistently projecting robust increases in production – which they then have to walk back when production disappoints.

In its latest report, the IEA even validates peak oil, and puts the peak of conventional crude production in the past. According to their report, conventional crude oil, the kind we drill for and get out of the ground as actual oil, peaked at 70 million barrels a day in 2006, and will never hit that point again. This doesn’t mean that “oil” production peaked in 2006, the quotes signifying the ersatz nature of a percentage of our supply. Tar sands, heavy oil, natural gas liquids, and biofuels will make up the difference, according to the IEA. The problem with these sources is that they consume more energy in their production than conventional crude, and cost more. In the case of tar sands, there is also the devastation of the environment around the production area to be considered.

The IEA doesn’t predict a total liquids peak until 2025 at the earliest, with production peaking at 99 million barrels a day. Consider their record of optimistic overshoot and plan accordingly. Really, it is a stunner when this organization even acknowledges the concept of peak oil, much less putting a date on it.

On the happy side of life, there is http://www.ribbonfarm.com . A man named Venkatesh Rao, who is an information systems wonk at Xerox, writes said blog. Venkat seems to possess, like Marvin the Android, a brain the size of a planet. His writing centers around the intersection of human behavior, business organization, and morality. With digressions, of course. He is always interesting, and sometimes mind-blowing. There are essays of his that I have reread three times just to get the last bit of juice out of them. This bit you are reading right now took longer than usual to write because I got sidetracked by rereading an essay on the concept of legibility.

I would especially recommend his essays on the Gervais principles of organizational behavior. (Parts One, Two, Three, and Four) He uses the popular sitcom The Office as a basis for exploring the essentially dysfunctional nature of the modern cube farm. I was about to start citing some other essays of his, but I wouldn’t know where to stop. Venkat also has an email list called “Be Slightly Evil,” wherein he explores the superior morality of being, well, slightly sociopathic. 

Venkat’s blog makes me say “I never thought of it that way,” and sometimes, “That is an utterly new concept for me.” Do a few mental warm-up exercises and drop by.



The Oil Ceiling

The expression “glass ceiling” is probably familiar to most of my readers. It refers to that invisible barrier of unwritten rules that prevents women and minorities from being promoted past a certain level. Being an energy wonk, I am interested in an analogous concept I’ll call the oil ceiling.

I recently read an interview on a site called Energy Bulletin with Steve Kopits. Kopits is an energy analyst with a well-respected international consulting firm. He came to the study of peak oil almost accidentally while preparing documents for an investor prospectus. The interview is well worth a few minutes, but here is a major point for me:

Question: Could you tell us about your views on the US oil price threshold for recessions?

Kopits: The US has experienced six recessions since 1972. At least five of these were associated with oil prices. In every case, when oil consumption in the US reached 4% percent of GDP, the US went into recession. Right now, 4% of GDP is $80 oil. So that’s my current view: If the oil price exceeds $80, then expect the US to fall back into recession.

Right now the price of oil is bumping along in the mid 70 dollar range, with occasional excursions into the red zone. As the economies of China and India continue to expand, expect their oil demand to increase proportionally, even as world oil production stagnates. $80 per barrel oil plus some speculative overshoot is predictable.

It seems that our economy is hitting the oil ceiling. The U.S. being such a profligate consumer of oil, sucking up 25% of the world supply, we can’t get around this barrier. The situation seems set up for an endless cycle of recession, partial recovery, a resulting run up in oil prices, and recession again.

I looked around for numbers on the Vermont economy and found that our State GDP is around 25 billion dollars. Our energy expenditures are just over a billion, much of that being oil products, and 90% of that going out of state almost instantly. That puts Vermont right at the 4% limit. Could we be bumping our heads on the oil ceiling as well?

What this tells me is that in order to avoid a perpetual sawtooth graph of economic performance we need to gear up for energy efficiency. In chemistry and economics a process is limited by the scarcest necessary element. That element will be energy. The economic winners of the future will be localities with the lowest energy inputs per unit of productivity. The most prosperous populations will be those with the lowest energy use per capita. Parallel to this, the economic winners will be the places that make the fastest and most coordinated switch to renewable energy sources.

Part of this process will be the simple, usual efficiency practices such as weatherization and industrial efficiency programs. The promotion of public transportation will be important. All this is commonplace.
 
The real differentiator, however, will be the rethinking of mobility and community itself. Some of this is in the realm of municipal, regional, and state land-use planning. People will need to work, shop, and entertain themselves near to where they live. For many people this is presently impossible. In the future it will be a necessity. This requires the rezoning of towns and cities and a coordinated long-term plan for localized economic development. It would help to strengthen our communication network so that people can telecommute – it may become the default for information workers. We will have to reverse the long-term trend of emphasis on increasing mobility in favor of a focus on access. We’ll have to stop thinking in terms of how to move ourselves to something or move that something to us. We’ll need to have what we need on a day-to-day basis close at hand.

Vermont is already one of the least energy intensive states, but we’ll need to do more. The less oil we need per capita and per dollar of GDP, the higher the price of oil (and coal and natural gas) can go before it starts to drag down our economy. If we manage this well enough, oil price at which Vermont suffers can be higher than the price at which other economies go into recession and bring the price of oil back down. I suppose it is selfish, but my thought is that an energy efficient Vermont economy could be prospering while the rest of the world bangs its head on the oil ceiling.

Singularity and Twilight

There is a school of thought in the computer world that is advancing the concept of what they call a technological singularity. The proponents of this concept point to the accelerating pace of computer speed and capabilities and state that there will be a point in the near future where computers gain a kind of consciousness and start to improve themselves. They call this point a singularity in reference to the gravitational singularity of a black hole. A black hole is a collapsed star so massive that gravity doesn’t allow even light to escape and common physical principles don’t apply. This departure from predictability is the essence of the appropriation. Once computers start advancing their own development the speed and direction of that development would be unpredictable. Some proponents of the theory claim that we will reach this singularity within the next 25 years.

There are doubters, of course. Some point to the recent slowing of the rate of increase in computer speed. Some question the basic principles of the argument and accuse the proponents of misleading themselves about the limits of electronic computation. I have a diametrically opposite opinion on the long-term future of computation in our society.

There is another limit on the evolution of computing power and on the widespread use of digital electronic technology in general. That limit is discretionary energy. The development of computer technology has occurred in an economic environment rich in discretionary energy. From the Second World War onward the worldwide production of coal, oil, and natural gas has been increasing and the supply has been far more than sufficient for the basics of human life. For decades we have been using these resources with absurd inefficiency, spending them on recreational mobility, and engaging in non-essential activities such as space exploration. In such a glut there is plenty left over for processor chip manufacturing and facilities full of servers and routers.

Our access to complex electronics and computing power is striking. Many children have cell phones, each device containing more computing power and memory than the mainframe computers of 30 years ago. The devices are affordable even to the relatively poor. Personal computers are common, if not universal. Even more significant are the electronic devices we no longer really notice: the automatic door opener and scanner at the supermarket, the programmable timer on the coffee maker, the smoke alarm, and the cordless phone. Even less visible and more important are the electronics that control our power grid, coordinate our transportation system, and speed our industrial production.

All this electronic intelligence relies on set of interlocking conditions. It is hard to know where to start, given the complexity of the connections. There were the initial scientific discoveries that were, in turn, augmented and speeded by the technological developments they enabled. There was the demand of early adopters, including the space program and the military that jump-started the consumer market, which then had its own early adopters. There was the ramp up into mass production. Then there was the export of high-tech manufacturing to countries with despotic governments and the resulting low standards for workers and the environment. This interaction of technological development, mass demand, and cheap mass production brought the price of electronic computing into a range that the ordinary consumer could afford. It also enabled product designers to include intelligent features in what were previously manual devices.

Underlying this all is discretionary energy. It is this energy that offers masses of people in the industrialized world the prosperity to be a mass market for electronic consumer goods. It is this energy that allows the mass international shipment of these electronic goods. It is this energy that allows industrialized agriculture to displace peasants into the cities of the third world, where they are available to cheaply produce electronic devices and the discrete elements that make up these devices. It is this energy that is available for the mining, transportation, and processing of the materials that go into these devices. Even the cheap plastic casings for all this electronic bounty are made from petroleum products.

The earth is no longer making fossil fuels, and therefore the supply is declining as we consume it. It is a geological fact that the annual production of oil fields, natural gas fields, and coal mines slows as they age. Many observers, myself included, conclude that the world is presently on the long bumpy plateau of peak production that precedes irreversible decline. So what happens when the supply of fossil fuels no longer meets all our superfluous needs? What happens when it no longer meets even our most basic needs for food production, heating, medical care, and the manufacturing of the basic necessities of life? What happens when the supply of diesel fuel and natural gas based fertilizer declines and the sons and daughters of third world factory workers make a desperate return to the land?

Part of Norse legend, as envisioned by Richard Wagner in his Ring Cycle operas, was the idea of Gotterdammerrung, literally the twilight of the gods. The balance of the world is lost, the rope of the Fates is broken, and the gods themselves go up in flames. I can foresee an Elektronikdammerrung, a twilight of electronics, when humanity no longer has the necessary supply of energy and materials to make them or the prosperity to drive demand. The huge chip and transistor factories in Southeast Asia will go to ruins. Like history running backwards, electronics will devolve from mass consumer goods to luxury consumer goods, and then to the vaults of universities, military bases, and government agencies. Computers will be lovingly tended by teams of specialists. More prosaically, people will open store doors by hand and time their coffee with windup devices, communicating the everyday events of their lives with letters and the landline telephone.

Eventually, without our present widespread use and facing the time and energy demands of post-petroleum agrarian life, our descendants will be faced with the decision between parts for the mainframe computer and the wheat harvest. Given the complexity of manufacturing processors, perhaps the industry won’t sustain itself below a certain level of mass demand. A period of electronic cannibalism will ensue and run its course. One by one, the last lights of the computer age will wink out.

I’m not a modern Luddite. Let’s face it, this piece was written on a computer and you are reading this on my website. I like my electronics and rely on them for business, personal communication, and recreation. However, I do not make the historical mistake of thinking that the way we live today is the way we will live forever. Nor do I make the similar mistake of thinking that the path of our society is onward and upward forever. The graph of human history is a series of rising and falling lines, with civilizations increasing in complexity and demand on their environments until they collapse. It would be arrogant to assume that we are exempt from the laws of physics, biology, and geology. I used to enjoy a vision of our future as a secular version of the Amish, augmented by a veneer of electronics, as a best case scenario for a post-energy-glut world. I now have a rougher, sparer vision, formed by what I know about the limitations of our resources and our species itself. If we are careful our descendants will still have the knowledge we have gained in our period of technological bounty. Perhaps they will be able to use much of it with only (I shouldn’t say “only”) their minds and their hands.