From: ems@michael.apple.com (E. Michael Smith)
Newsgroups: sci.energy,sci.environment
Subject: Re: Running out of oil  ->THIS DECADE<-
Date: 13 Aug 92 22:49:45 GMT
Organization: Apple Computer Inc, Cupertino, CA

In article <1992Aug13.145346.951@vexcel.com> dean@vexcel.com (dean alaska) writes:
>In article <1992Aug11.165457.5065@nmt.edu> houle@nmt.edu (Paul Houle) writes:

>>	This is a very good point.  As we deplete our oil reserves,  the
>>remaining oil will be harder to recover and the price will go up.  

"All else being equal" which it never is...

>>(Also,
>>the more dispersed that newly discovered reserves will be and the more
>>effort required in exploration.)  

On what do you base this presumption?  Last I looked, the major increases
in production were comming from improved methods and exploration
technology *IN EXISTING FIELDS*.  (PBS special on oil production a 
couple of years ago.)  Yes, some was from new finds in small dispersed
fields.  Yes, some was from new major fields such as North Slope.  MOST
was from new wells right next to old wells and different recovery methods.
There was little 'exploration' cost for this oil, but more 'exploitation'
cost...

>>In the simplest economic analysis,  sooner
>>or later the price of motor fuel (or any other petroleum product) will
>>rise above the price of alternatives (i.e. methanol from coal or biomass,
>>electric cars powered by wind/solar/coal/nuclear,  whatever.)  

In a somewhat less simple analysis, one sees that each of these 
alternatives has a different cost structure and will start to be used
by different consumers at different price levels and for different
reasons.  That is why methanol is being phased in today in California,
why Propane has been used for a few decades now as motor fuel and is 
almost mandated for 'lift truck' fuel indoors, why CNG is in wide use
by utility company vehicles and gaining use by some fleet owners, etc...

This gradual adoption will continue until EVENTUALLY it starts to 
creep over into the main stream Joe Car Customer product...

>>In reality,
>>external costs and costs related to infrastructure change complicate this,
>>but the idea is that sooner or later oil becomes uneconomic.

Change that to:  'oil becomes less economic for some types of uses by
some customers at some times' and you start to get somewhere.  Oil 
will NEVER 'run out'.  Period.  End of discussion.  No smiley.  Yes,
I mean that.  Honest.

Oil will gradually have fewer and fewer uses and higher costs than 
the alternatives for some uses and more difficult extraction techniques.
It will not run out, since there is noone who has a way to clean every
last sand particle in the ground squeeky clean!  I would expect that
the last users would be R&D folks paying most any price to bring up 
a few drops of that antique fuel source for historical analysis ;-)

>The various posts about the price of oil rising usually assume some form
>of supply and demand leading to a relatively gradual increase in price.
>It seems to me that with a large percentage of the reserves in a
>relatively unstable region that politics will have the largest effect
>and supply and demand curves will be a second order effect.  

Right on the money!

>Saudi Arabia
>has been able to keep prices low even though both Kuwait and Iraq are
>out of the picture.  

For the poster who was paranoid that a 3.1 billion bbl hit would rock
oil prices, note that Iraq was a (roughly) 10 billion bbl producer and
dropped of the world market with hardly a ripple.  Why?  Those Saudi
wells ... 

>I assume this is a thank-you note for our efforts
>in the Gulf War but that is another issue.  

No, it isn't 'another issue'.  It is a CENTRAL issue.  As long as the
House of Saud is 'in our camp' we have no problem with oil prices.  As
soon as the House of Saud falls, our private parts are in the grinder.
We rented them our army because they have been nice to us (after Nixon's
fiasco) and because Saddam was making noises about wanting to have all
the Middle East oil under his personal control and squeezing us in
said meat grinder.  They are paying that rent both in pledged cash and
in stable oil prices.  This suits both of us just fine, since we want
stable oil prices and safe oil fields, and they want stable customers
and safe home turf.  For as long as this relationship exists, there will
be no dramatic rise in oil prices and no dramatic interuptions of supply.

How long the relationship can exist is 'another issue'...

>The smooth curve assumed
>for supply/demand models would provide time for alternatives to replace
>oil but I think large discontinuities in the curve is more likely.  

There are a couple of alternative scenarios, all of 'equal' likelyhood
(i.e. there is little data to suggest which is more likely.)  One
scenario is the disaster scenario.  It takes many forms.  (The fall of
the House of Saud, Victory of a Saddam,  Bozo the President Pisses Off
the House of Saud, ...).  These would result in 'large discontinuities'
rather like we saw when the 'oil shocks' hit during the Nixon years.

Another class of scenario is the peaceful transition class of scenario.
This is prefered by BOTH the US and the House of Saud.  In this scenario
we continue to be good customers for their oil sending them lots of 
cash and they keep prices stable at a 'reasonable' level.  (i.e. they
don't price the dope so high that the user feels compelled to rip them
off to get it or, GASP, quit cold turkey and take the withdrawl pains.)
They use the cash to buy little things, like EXXON and coal fields.
Then, when the oil runs out, they continue to make money off their
investments and off the coal conversion processes.  We continue to have
plentiful motor fuel, they continue to be astoundingly rich and powerful.
Everybody is happy.  

There are some extraordinary forces fighting to make BOTH class of scenario
happen.  I, for one, wouldn't want to bet on wether Saddam or the House
of Saud would come out the winner.  Then there is Iran ...

So what's a peon to do?  (I presume that we are all out of the circles
of power...).  Pay.  You can pay for oil.  You can pay for gas.  You
can pay for development of alternatives that are not yet cost competitive.
But you will pay.  You might also consider having a vehicle fleet that
can run on a variety of fuels so that any major discontinuity that came
along could be absorbed (i.e. a CNG/gasoline dual fuel car.  Oil shock
comes, you use CNG ...) buy you will have to pay for that insurance.

The good news?  We went through a major discontinuity during the embargo
years and learned alot about how to handle them.  The Saudis learned as
well.  They learned about inflation and what a sick US (and European)
economy meant for their investments.  They lost billions of $$$ on 
investments even while they were getting billions on oil.  Then the 
econobox conversion of our fleet hit and the oil market collapsed into 
(the most hated word in Arabia) 'glut'.  The producers with few 
investments, like Libya, still want higher prices.  Those with many
investments want lower.  That is the major conflict in OPEC.  Lucky
for us, the most investments are in the hands of the major reserve holders.

IF major discontinuities hit, there would be much more rapid institution
of alternatives.  I also, in my more paranoid moments, think that much
of the push for methanol fuel development by the 'Big Three' and the 
Government has to do with establishing a highly visible alternative
that would help enforce price disipline by OPEC.  i.e. it isn't to 
cut oil consumption so much as it is a way to dampen the price swings
a zelous OPEC might otherwise promote.  In either case, methanol 
production could be easily ramped up.  As could ethanol production.
As could CNG conversions.  As could ...  Many of these technologies
are sitting on the shelf today, where in the 1970's they were just
bright ideas.

>The
>large rises will increase economic dislocation and the large drops will
>make the development of alternatives more difficult for the marketplace.

That economic dislocation is exactly why I think there WONT be large
price rises.  Saudi learned it's lesson.  We learned to support the 
House of Saud.  Unless the House of Saud falls (and we seem to be 
willing to provide all the military power it takes to assure that
doesn't happen) or we piss them off (far more likely, but suicidal)
there should be no economic dislocation from price hikes or drops.

Saudi oil will be priced at just the point were MOST alternatives
are not economical for MOST uses, as a good monopolist ought to do.

(There is another strategy which says to raise the price most of 
the time, but drop it just often enough to prune the alternative
providers when they start to show a profit.  This strategy isn't
really available to the Saudi's.  First, it would mean market
dislocations (see 'investments' and 'glut' above ...).  Second,
the political system would be a quick boot from the public to
'Do Something About It'.  People will take high prices that
are stable, but will bitch mightily with price instability at
a lower price point.  Then they vote for legal processes to 
stabilze prices by instituting alternative fuels...)

Look for stable oil prices rising gradually from $20/bbl to $40/bbl
over the next 30 years in real terms (barring a revolution in Arabia).

-- 

E. Michael Smith  ems@apple.COM

'Whatever you can do, or dream you can, begin it.  Boldness has
 genius, power and magic in it.'  -  Goethe

I am not responsible nor is anyone else.  Everything is disclaimed.