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Dominic Schmelzer

Just one small comment. Ok, a question: Is it wise to believe BP? Evidence shows more that reserves are political and/or booking entities and not serious estimates of what is actually out there. Estimates of ultimate recovery range from ca. 2 tri. barrels (half of which has been recovered) and 5 tri. Who to believe? Funny that reserves are growing despite continuing production, while finds have been abismal (i.e. greatly decreasing) for decades...


The previous comment was written some time ago, but I'll answer it ...

You're making an incorrect assumption about resources. There isn't big tanks of oil sitting under the ground - in fact, we will never recover all the oil that is there. Production methods improve with technology and if oil prices are high enough, it becomes feasible to develop known but previously uneconomic resources.

This was one of the errors in the old "Limits to Growth" book: They assumed that if known world resources of (say) aluminum were some number, they were being optimistic to assume that the total possible amount of aluminum could be 5 times that number. In fact, aliminum is one of the most common elements in the Earth's crust. The issue is economics.


Argh, I hate those spelling/usage errors. ("isn't", "aliminum") Always proof before posting... *sigh*

Dominic Schmelzer

Funny that I would disagree about reserves being principally economic.

Lets approach the subject with the notion that The world is one big oil field. In order to consider how this oil field is going to develop and what kind of reserves (you use the word resources, which is technically different than reserves) are going to be found in it, we need to consider the development of very small territorial fields. For this we can pick any random smaller field found in this very large global oil field. Should we pick Pennsylvania, where the first well was drilled, or Ohio, which is still able to support a number of independent producers, or the entire region of North Sea Oil which was really only tapped into at the same time as Alaska? How about picking the whole US including any additions such as Alaska and the Gulf of Mexico (meaning that the field itself is a growing entity, which in reality absolutely no field can be)?

The 100-year long nr. 1 world oil producer, the US, peaked in production in 1970. Since then we have had many decades of technological advance plus the addition of the new fields in Alaska etc... Despite these events, the US has never been able to surpass the amount of oil produced in 1970! The price per barrel around 1980 was nominally more than 10 times the amount of 1970! Drilling activity was also likewise immensely more. But all possible effort could not make more (in absolute terms) come out of the ground!

Extrapolation: It does not matter what the Saudis are saying at any OPEC meetings. They are at their ultimate limits of production and will soon be faced with declining production, just like the North Sea has been doing since 1999. All the money in the world and all the technology in the world will not change the United States' peaking in 1970, the North Sea peaking in 1999, Saudi peaking in 2004 and world peaking (?). Technology and economics can postpone this event marginally and even flatten the fall after the peak, but they can not make the United States produce like it did between 1950 and 2000. We have returned to production rates of the 1940s, and all the economics in the world cannot change the fact.

I may agree that ultimately recoverable oil is somewhat elastic, but I know that the statistics are behind my argument 100%. Sooner or later, the oil field called the planet earth is going to peak. My conclusion, that the years 2004/5 will be the date of this event, may very well be wrong. But peaking in and of itself is an inevitable event.

Or are you going to try to tell me that we will be able to produce more oil in the good ol' 48 once we have enough technology or once the price has hit $1000 per barrel?

Dominic Schmelzer

Maybe this is more the thing that you're talking about:
The question remains, what really matters that oil is peaking? We'll move on to another energy supply sooner or later and not back to pre-industrial days. That's the economics of it. Cheers.


The reason there was a lot of activity in the 70's and early 80's was because of economics. Tax advantages abounded for that type of investment until they were taken away and then the oil field fell. It was economically cheaper then to find oil in Mexico and in Arabia land. Also new technology has given us the ability to drill deeper with lots of oil pouring out of the ground when a good well is tapped. But again, even with the promise of lots of oil yet to be developed and extracted, the economic package has to be enticing, plus the stability of that whole entity needs to be in place. We've been burned before and no one wants to be burned again. Oil always has been a risky adventure to find. Lots of money invested; a dry hole. Trial and error has always brought in the oil. What we're doing with the exploration of oil to see where the reserves are is what we've always done. In the mid to late 1900s I heard people talking about there wasn't any more oil in the world to get and then all of a sudden there was a glut.

Somehow, we keep going back to oil because it is so versatile and still relatively cheap and easy compared to any other form of energy being looked at.

Dominic Schmelzer

If there was so much activity in the '70s and '80s, why wasn't there more oil being produced in the US than in 1970? Even with the addition of Alaska (widening the field), it didn't happen ...


If I recall, there was a lot of activity all along until the tax incentives were cut. More oil could have been drilled for and produced. It wasn't a matter of not finding it but a matter of more companies getting into the oil field. It was still a risky business and many didn't make it successfully. In the early to mid 60s new oil fields were being discovered. That keeps happening even today. But with the economic climate the way it is, the stability isn't there. The oil field in this country is spending money against lawsuits by environmentalists - especially out West. The oil is there but it isn't easily extracted for many reasons. Economics, being the head of the beast. It is the umbrella for such factors as long and large investments, available workers, stability is volatile, politics, new double-hulled ships, number of refineries and type of refining needed, oil spills.

Even if Saudi Arabia were at its peak, there are other places on planet earth.


I'd like to add a further factor to those I listed above of why it appears to some that oil is peaked out. Investment is down for another reason. Skilled personnel in Saudi Arabia, for instance, aren't being protected and so people are reluctant to work there. The national oil companies in the Middle East need technical assistance and project management skills that only the international oil companies possess, but they can't work out deals with the internationals to acquire those human resources. National pride is a block to this and causes an ongoing skills shortage as well.

Dominic Schmelzer

Yes, it very much does appear that oil is peaking, meaning that it is not at all *running* out, and I do not say this because of $40-oil, which is still much less accounting for inflation than in 1980. Rather because it is an inevitability, and because new finds peaked in the 1960s. Of course the lag in production will be very drawn out - the peak in finds is already five decades back. It could just as well take ten decades, which it will if we believe IEA.

And I'm afraid I just don't believe them.

Daniel Schmelzer

I am willing to make a $1,000 bet with Dominic that oil production will not peak within the next 10 years.

Dominic Schmelzer

its yours. To be paid on Sept. 01, 2014.

btw. I would have done it for five years:-|


So, now that we're clear on which sides we're on (was it ever a question?!), the question is, what do we do about it? Just wait until prices quadruple (for a start) and then clean up the mess afterwards? Saying that oil production is going to peak next year or in thirty years (which was my opinion twenty years ago, btw) is not the same as saying "is an issue" and "isn't an issue". I agree that the issue will somehow in the end take care of itself. Yes, I, too, believe in the market, even if the lag time will be twenty-five years. I also think that good government would be putting high taxes on the commodity at question (as the Europeans love to do) and placing the revenues into R & D (like the Europeans don't like to do). IN the end I guess it's a question of political will. And only if all parties agree that it "is an enormous issue" can we do anything about it. That's the biggest reason why I won't let up, even after the bet has been made.
It just happens that oil IS AN ISSUE!

Daniel Schmelzer

I don't think we should do anything. Or rather, we should enjoy ourselves in the meantime. Let the market take care of the situation, as it has satisfactorily done with all other economic trade-offs that I can think of.

The best thing that government is able to do is not meddle in the market. As a matter of principle, I might support additional taxes to offset the socialized costs of the commodity, but as a practical matter that's a money jar I'm hesitant to open up to the politicians.


"I don't think we should do anything."

I think this is the real discussion and not the "when" that the event will or will not most probably take place. I think this attitude is extremely dangerous.

Yes, the market will take care of the situation, just like war takes care of many political situations. Good that it's only oil that we're talking about and not something more important.


Daniel Schmelzer

That's a nefarious straw man, DS. Energy markets are not war, even if they were more important than they are already. Energy is the domain of private enterprise (at least in our system in the US) and the other is the exclusive domain of government. Tell me why I should be worried about a problem that we as a society have given to private enterprise to figure out. Is private enterprise not up to the task?


Yes, Daniel, you should be worried because your tax dollars are still being buried in new freeways which will become useless if the optimists are not right


Now for something completely different:
Conclusion is that rising oil prices are good for world economic activity, as long as there are no “shocks” like in the 1970s (embargo, Iran). My own conclusion, however, is that there will be many “shocks” in the next years.

Second, forget my straw man and try to understand what I'm saying. Saying that the economy will take care of itself (is what you said) is saying nothing (is what I am saying:-). Saying that it is not the government's responsibility is only partially right. "Government" means management of the public sector. Management also has to do with analysis and preparation for coming situations and difficulties. The public sector should very well be prepared for falling oil production whether it comes in December or in December 2014. The government can (well said, Matt) quit subsidizing roads and anything that has to do with oil- and gas-based processes and subsidize research on “alternatives”, of which btw, we don’t have any (any serious ones, that is).

Remember Rich’s microwave (solar) energy from space? Who has the ability to even begin building such a system? Only the government. It is also a real goal for us in space, a motivation to at least double spending on the space program. Or let the private sector handle it with massive government subsidiaries...

Daniel Schmelzer

The writer's conclusion that high oil prices are good for the aggregate world economy isn't shared by many economists. Not saying he's wrong because of this, but at least he has a lot of explaining to do. Also, his thesis that the interest rate hikes of the early 80s were the cause of the economic problems rather than the fix of the problem is bizarre.

Regarding alternatives to the status quo, higher prices will produce a push for alternatives in the private sector. If prices aren't high, then why would you want the government to push for alternatives? Is it because you think you can see into the future better than the market? It would be a waste of time and money.

Regarding highways, construction and maintenance in the US is funded by user fees (gasoline taxes). There is a small government subsidy on gasoline-specific socialized costs that I wouldn't mind seeing retired through a small increase in the gasoline taxes. But overall, putting money into not-yet-proven-obsolete transportation methods is a smart thing to do. The canals in Ohio ultimately may not have been a positive investment, but at the time they were built, Ohioans did not know that railroads were right around the bend. A rational expected value of the investment in canals still would have been positive.

Regarding gov't funding of space-based alternatives, I'm surprised that you mention it, considering my views on gov't space programs. The thought that the gov't is the only entity able to do things on such a large scale is preposterous -- a relatively recent fiction with a short half-life. The government is the only entity that could spend so much on so little. A good goal for us would be to halve funding for the space program.

Also, large subsidies only distort the market and harm the industries they are intended to help. The US space market is totally FUBAR because of the government's meddling.

Dominic Schmelzer


Daniel Schmelzer

Yes. Screwed up beyond all recognition.


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