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04/27/2005 Archived Entry: "More on Peak Oil"

A few weeks ago I mentioned a new blog, The Watchful Investor, in connection with the Peak Oil theory. So you can imagine my surprise when the blog's author, Jim Waddell, contacted me and sent me a copy of his January "Under the Radar" newsletter.

In this issue he offers what is perhaps the most lucid and balanced discussion I have yet seen on the subject of oil. For example, he mentions the oil sands of Alberta and oil shale in the U.S., previously uneconomic to extract, as possible new resources...while noting that their development has only just begun (and only in Canada).

I thought his most telling point -- and one I had never considered -- is the impact of government-imposed price controls on the progression of the "Hubbert's Peak":

What if government succumbs to popular outrage over rising gas prices and implements price controls on gasoline? The free-market price mechanism breaks down. Gone are incentives to explore, to create new technologies, and to conserve. At that point, the doomsday scenarios begin to gain credibility. ... Without a high price, there is no incentive to increase exploration in the peaked country, or to use costly methods to wring out every last drop of oil. It is cheaper to rapidly abandon efforts in that country and use oil where it is more plentiful. Thus the down slope of Hubbert's curve can be very steep for a single country or oilfield.

Price controls shorten the "tail" of the curve. Which means that when we hit that point, the loss of supply and the rise in price will be that much more abrupt. And, if price controls are extended too long, it's conceivable that development of more expensive resources will be not sufficiently advanced to make up the shortfall.

I'm aware that there's a "Deep Hot Biosphere" theory that suggests that the supply of oil is actually limitless. I don't buy it, at least not yet; it sounds too good to be true. If the theory is supported by research from the former Soviet Union, I remember that Soviet science was a mixture of brilliant work (e.g. Korolev) and State-driven wishful thinking (e.g. Lysenko). I'm not ruling out the possibility, but I'm not betting on its actuality, either.

I have yet to read what Bjørn Lomborg (The Skeptical Environmentalist) has to say about world oil supplies, but I expect him to provide a well-informed counterbalance to the more apocalyptic oil theories. I wouldn't be surprised if he raises the same long-term possibilities that Waddell does.

As for Waddell, I now check his blog about once a week, and I've subscribed to his newsletter. I don't know the limitations of his blog software, but I hope he finds a way to make back issues of the newsletter available on-line.

brad