When engineers ignore economics, Part 375

One of the many side effects of the collapse in the oil price is a proliferation of nonsensical articles on the subject.  Today I stumbled across this in LinkedIn.

It must be hard for the world to have sympathy for an oil and gas industry that has been so extravagant and wasteful.

Why yes, it must be.

The Hubbert curve is a logistic model showing the theoretical depletion of worldwide resources over a two hundred year period.  It has a steep ramp up to peak production, followed by a drop and then, rapid decline.  The curve is symmetrical, or at least would be were it not for the many external influences such as regulation, political upheaval, changes in demand levels, enhanced recovery  and premature abandonment.

In other words, the curve is subject to change at any point due to unlimited external factors and therefore utterly useless save for an object over which academics can while away the hours pontificating.

This is peak theory.

Oh yes.  I wondered what happened to Peak Oil as the price tumbled.  Turns out it was down the back of the sofa.

It is not because of sudden enlightenment or visionary leadership that the industry has been forced to look at its inefficiencies but a matter of survival and the need to keep investors onside in a commodity war.

Companies need to make money to survive.  Who knew?

Cheap energy can stimulate growth but it also stimulates consumption and waste.

Why is consumption bad?  Maybe the pensioner shivering in her flat thinks being able to consume more is a good thing?  And who defines what constitutes wasted energy?  Presumably those paying the market rate for energy have half an idea what value they place on it, and optimise their consumption according to their own needs.  Why does this chap think he knows better than they?

As a global market we are squandering a finite resource by selling it below the intrinsic energy value.

Intrinsic energy value?  What pseudo-Marxist bullshit is this?  He’ll be espousing the labour theory of value next.  The value of oil is defined only by what somebody is willing to pay for it.  That’s it.  Nothing else.  Allowing pensioners to heat their homes more cheaply is not squandering a resource.

It threatens the development of ‘green’ energy because, the cheaper hydrocarbons are, the less viable the alternatives.

So the switch to “green” energy will make energy more expensive.  I’m glad that’s finally settled and we can put all the propaganda about magic windmills to bed.  But I’m yet to understand why expensive energy is better than cheap energy.  Is everyone that rich they can afford to pay the premium?  That’s not what I read in the papers.

Hubbert illustrates that rapid decline is inevitable and if we are not ready for it, it will lead to social and political upheaval, possibly war and most certainly, global energy poverty.

There is an oil oversupply driving the price through the floor so we should worry about a shortage which will usher in the three horsemen of the Apocalypse?  Okay.

If nuclear power is too dangerous and hydrocarbons are all bad, how do we power the vessels for maintaining offshore windfarms and tidal generators in the future?

The “if” in that sentence is doing an awful lot of work.

This brings us to a key point; the production of energy requires energy.  We need it for every stage of a project from concept, through to manufacture and on to installation-execution.   During the life of any development, production values follow its own ‘Hubbert’ curve, so at end of life the business case becomes more challenging as returns diminish.  If we are forced to abandon inventories and prematurely decommission the hardware, most of those resources will be lost to us forever.

You rarely hear stonemasons bewailing marble left behind in abandoned quarries, even as new ones are opened up.  There are good reasons for this.

If the energy required to re-establish the infrastructure outweighs the recoverable energy it can never be viable at any price. That is a net loss to the world.

He’s just described the Cornish tin mines.  Oddly, nobody cares about them.

Where are these most fundamental risks being prioritised? The answer is nowhere, with the traditional hierarchy of shareholders at the top, oil companies below and everything else disposable and only existing to serve their purpose.

Except most of the world’s hydrocarbon resources are not controlled by private oil companies answerable to shareholders but by governments, who really don’t give a shit.

Yet is it really acceptable to dismantle the industry, its knowledge base and abandon the people who work in it, to satisfy a global game high stakes poker?

Cry me a river.  The world’s population should shoulder the burdens of record oil prices indefinitely in order that a handful of people lucky enough to work in the industry can continue to reap the rewards?  You take the rough with the smooth, same as in any industry.

Can we really progress as a species like this?

Slimming down bloated oil companies by firing a few thousand diversity coordinators and financial compliance officers is not going to threaten humankind’s survival.  Nor is forcing managers to make timely decisions and shoulder responsibility occasionally.  But if you’re an Audi dealer in Aberdeen?  Then I agree.  That species is threatened.

There are lots of articles in the media predicting a return to higher oil prices; they are convincing theories about a low oil-price-triggered bounce in demand or reduction in supply.

I think he’s just discovered supply and demand curves.  The good news is he finds them convincing.

As much as we need a higher valuation on our precious resources, this is not the way we need to do it.

Ye Gods, we can’t just leave it to free markets and individual choices! There would be wastage, inefficiencies!  We need a panel of experts who can…wait, what?  What’s that? The Soviet Union ended in humiliating collapse?  When?  Nobody told me!

Increase in demand accelerates depletion.

Yes, oil is a finite resource, we get it.  But the stone age didn’t end because we ran out of stone.

As for supply, a high oil price that does not result from a political solution, means that we have either killed off sectors of our industry forever, or there is a military war in key producing regions.

Perhaps, but a high oil price is often a sign of stupid, dumbfuck political meddling in the industry in the form of taxes, regulations, local content legislation, nationalisation, outright theft…(cntd. page 87).

Regardless of the advancements we might make with exploration and production technology, it’s undeniable that one day there will be no more.

I repeat: the stone age didn’t end because we ran out of stone.

Yet in theory at least, what we do have control of is when that end-date might be and that is by optimising our efficiency in extraction and not leaving anything behind unnecessarily.

In theory.  Which assumes we ignore economics to concentrate only on extracting the maximum amount of oil regardless of cost.  Which probably won’t work out so well.  Or, if we’re going to consider costs, then the prevailing market rate is probably the one we should use.

The market share competition is a race to the bottom and the bigger issue is how we will possibly make the transition into alternatives if we force ourselves into global energy poverty.

The market share competition is a dick-waving exercise between Saudi Arabia and Iran, with various tin-pot kleptocracies doing their utmost to preserve the revenues on which their leaders’ personal lifestyles depend.  Short of invasion and occupation (which went oh so well in Iraq) I’m not sure there is much we can do about this.

We must make our remaining resources last and look to carbon capture methods and cleaner ways of using it; the alternative is to  burn it all before we learn how to keep the by-products out of the atmosphere.

We?  Who be that, then?

We must look at how to make the alternatives viable now, realising that the pay-off for that is in the future.

Yes, let’s make energy artificially expensive now in order to benefit future generations.  Many of whom won’t be born because their would-be parents died shivering in the dark.  If renewables were not commercially viable at $100+ per barrel, trying to make them so when oil is below $30 is a level of economic stupidity rivaled only by Nigerian fuel importation subsidies.

The question is whether we will be there with sufficiently mature technology to meet it, because to get there requires hydrocarbons.

Whatever the question, top-down meddling with the oil price is not the answer.  Ever.

Now a museum.  For good reasons.


5 Responses to When engineers ignore economics, Part 375

  1. dearieme says:

    What a stupud ficker he must be. Or she. Or a eunuch, of course; mustn’t forget them. I don’t know the PC pronouns for eunuchs.

    • Jake Barnes says:

      He is a bit of an idiot, yes. I posted a link to this post on the comments underneath, and he deleted it. I wonder how many others he got like it?

      He’s going to have to develop thicker skin if he wants to keep writing articles. He’s like a lot of guys who stray outside their area of expertise with some far-reaching insight: they don’t realise that the same ideas have been espoused a million times before on the internet, and destroyed every time.

  2. Surellin says:

    Paul Erlich, call your office.