Thursday, July 09, 2009

Peak Oil Debate - The Fed Weighs In

From the Federal Reserve comes this article: Peak Oil Debate (PDF). It is 16 pages in easy to understand English that addresses the terms used and the variables surrounding the peak oil issue. Well worth your time reading if you need information on basic terms and scenarios. Really well done. The author does not propose solutions, but does make it clear why the same arguments can be used by both sides to reach opposing conclusions.

She makes this note regarding investment when prices are relatively low (the numbers are footnotes):

Low energy prices, generally thought to encourage economic growth, can also have longer term negative effects as they discourage efforts toward conservation and efficiency and impede future production projects.17 Delayed investment spurred by soft energy prices could create an environment of lagging supply and price spikes.18 This risk is particularly apparent in the case of nonconventional and alternative resources, which tend to be relatively expensive to produce.19 Fatih Birol, the chief economist at the IEA, estimates that about $100 billion in projects were either delayed or canceled in 2008 because of a combination of low oil prices and credit accessibility issues (IEA 2009).

Those delayed investments are crucial to our energy future. You are not going to "drill baby, drill" if it is not going to be economically viable, i.e. turn a profit. This will bite us in the future once prices make such investments viable. We will be back to $4/gal gas or higher, which may result in people getting out of their cars again, resulting in lower demand, and again a drop in prices as supply inches up and investments are again cut back or otherwise delayed. I foresee a self-reinforcing cycle that may limit our ability to "grow" our way out of this recession. We must find a smarter approach if we are going to get people back to work. Doing so may involve a radically different approach to how we live and the lifestyles we adopt. I don't know if we are willing as a society to make such a change.

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