Can we get down from this peak?

So why care about peak oil? Somebody will just provide new sources of energy and we'll all be okay, right?

Wrong. This is why.

First, energy companies are not in the business of providing energy. What a whacky communist idea that is. They are in the business of making as much money as possible. They've been well aware of peak oil for decades (they are mostly American and are fully aware that the US had its peak a while back). But peak oil does not mean no oil. It means less oil.

What is economics? Why does it exist? Economics is the study of how scarce resources can be allocated. Why scarce? Surely there are lots of resources. The reason is that we can't all have everything we want just like that. There are limits on how much we can share out (mostly the obvious physical limits). Economics tells us how we can make work into shares of resources. You don't need to be an economist though to appreciate that if something is rare but people desire it, it will be costly. For instance, gold, which in times past had a rather limited supply, but is pretty and a good store of value (because it does not tarnish readily and consequently won't depreciate), has always been expensive enough to be the byword for riches.

So I'm BP or Exxon. What does peak oil mean for me? It means that demand for my major product is increasing, while the supply is not. So the cost will go up. Hooray! I can make tons more profit from it.

But peak oil is bad for the rest of us because we need a cheap source of energy. Really, really need it. The relative luxury we enjoy now is down to oil: I won't go into boring detail of how and why; let's just agree that it is. Without it, we will struggle to maintain our lifestyles. So we are a market, right, waiting to be served by the energy companies?

Well, yes, from our point of view, we are. We demand cheap energy, so come on, supply us. But from BP's point of view, if they make more money from lower-volume sales of oil than they can from higher-volume sales of cheaper energy, they are not going to bother with windpower, even if it is marginally profitable. It's as simple as that. If I have a hundred units of capital to invest, and can make two hundred back from expensive oil, and a hundred and ten from cheap energy, I am not investing in wind.

Okay, you might say, there's little incentive for the energy companies to invest much in research, but surely someone else will want to serve that market? True, as oil rises above a hundred bucks a barrel, other sources of energy will become competitive, but who is going to produce them? No other method currently produces large amounts of energy cheaply, and research into production methods to make the other sources cheap enough is very costly. Remember what we are asking for here: someone to invest a huge amount of money so that they can create a product that is cheap! We're saying invest money so that you can make thin profits. Oil was easy. It just sits there in the ground. You drill and bang, there it is. It requires investment but you can produce oil with fairly low-grade technology (and you are doubtless aware that the Middle East has been in the forefront of oil production as much because its oil is easy to acquire as because it has so much of it). The profits from early production allowed research into technology to increase production, but that process was powered by the easy profits oil brought. Other energy sources do not offer easy profits. They could, perhaps, once the technologies involved are mature. (But consider this: if someone can make solar cells, they make a one-time sale to you of the cell, then you make your own electricity, so again, it's great for you that there should be cheap photovoltaic cells but the cheaper they are, the thinner the profits for manufacturers and the more likely that my investment does not provide the return I hoped for-- if I am Exxon, what do I see in this process: I spend a shitload of money inventing cheap solar power, and someone in China makes the cells cheaper than I can). This last point is important. Exxon profits hugely from peak oil. As demand grows, oil will become ever more costly, but the slope of price will likely outpace the slope of increased costs, as oil becomes more difficult to extract. But if someone is churning out cheap, efficient solar cells, oil is no longer a valuable commodity. The thing we want, remember, is not oil as such; it is cheap power.

These then are the reasons energy companies have not rescued us from peak oil, and will not do so, and why no one else looks much like doing so. Energy companies could pour money into the technology (and they are doing some water-treading research, so that they are capable of keeping pace with the market as it develops) but they don't figure to make as much from it as they can from oil, and worse, any technology that produces cheap energy will be replicable by people who can do it cheaper, so they will simply be cutting their own throats to create it. And others simply cannot do it. The technology for extracting cheap energy from the available resources is extremely expensive, and the road to cheap power is not short. You are looking at a long-term investment of an enormous amount of money into a product that is not certain to make money, partly because, again, any technology that can create cheap power is likely to be easily replicable. Alternatives are simply enormous projects, which are far beyond the scope of anyone who doesn't already have a very large amount of money, and those people, just like the energy companies, already have more certain profitable uses for their capital.

What people who insist that markets can correct problems like this often ignore, or are too ill informed to figure out, is that while in theory someone will gladly meet a demand so long as it makes money, and certainly, there is money to be made in energy, they will not surrender currently profitable activities to do so. They also ignore that capitalists do not on the whole work on the long term. They do not think about how they will make a profit in fifty years. They think about how they will make one next year.

The problem for businesses, I'll repeat for the slow learners, is not that they can't fulfil the demand for cheap power. Of course, they could. A big company could invest a ton of money in solar power or some other source of cheap power and create cheap solar cells. But they would find monopolising that cheap source of power impossible, because even if they tried to keep the technology secret, the risk of someone stealing it would be high, and governments, under pressure from their power-hungry citizens, could force them to allow competition. (Contrary to popular belief, businesses hate competition, because if no one else supplies what you supply, but demand outstrips supply, you are going to make a great deal of money, but if someone else supplies it so that the market finds an equilibrium, then you are not. What people who urge free markets do not always grasp is that volume is great for the consumer but not so great for the business: a business's ideal market would be one in which there isn't quite enough of whatever people want -- the sort of market we will soon have for cheap energy.) The energy companies are among those rich enough to do it, but they have even less incentive: they would be destroying the conditions that will be creating their enormous profits in the next 30 or so years. Yes, after that the oil will have more or less run out and that will make it impossible to profit from it, but they will simply switch their operations to something else they can readily profit from.

The answer is quite simple though. We need someone who is willing to make huge investments without the pressure of needing to recoup them in profit. Someone who has our interests at heart and can undertake enormous research projects that can produce results reasonably rapidly. Now where can we find someone like that?

posted by Dr Zen @ 9:37 am