Friday, February 06, 2009

How a Schoolboy Howler Fueled the Peak Oil Fallacy and Caused a Global Recession

For want of a nail the shoe was lost.
For want of a shoe the horse was lost.
For want of a horse the rider was lost.
For want of a rider the battle was lost.
For want of a battle the kingdom was lost.
And all for the want of a horseshoe nail

As the old proverb above tells us a small oversight, or error in an initial condition (or measurement or metric), can cause substantive exponential errors or results later with an effect on both scientific method, and behavioral responses to the arbitrary axioms.

This is well known with the butterfly effect

The butterfly effect is a phrase that encapsulates the more technical notion of sensitive dependence on initial conditions in chaos theory. Small variations of the initial condition of a dynamical system may produce large variations in the long term behavior of the system. This is sometimes presented as esoteric behavior, but can be exhibited by very simple systems: for example, a ball placed at the crest of a hill might roll into any of several valleys depending on slight differences in initial position

As the heading of this essay says a simple arithmetic error in Global oil reserves, and the “Malthusian Prophecies” of peak oil, have caused irreparable damage in the short to medium term in three interconnected areas.

For ease of understanding we will divide them by classification.

1) The global economy
2) Vehicles and mechanisms for anthropogenic climate mitigation.
3) The energy technology complex( r&d) process and mechanism development and transformation.

These are an interrelated complex system, and are coupled so we can not “tinker “with one part of the complex without causing an equal response in another. The issue is rather simplistic, the effects widespread. For ease of explanation we will create a simple model.

Global Oil reserves are depleting- oil price rises-investment into oil sector-oil price rises furher-investment into short term substitutes (biofuels etc)-price volatility in energy sector-speculators enter markets-energy prices rise-investment into unsound and costly short-term substitutes –substantive cost inflation enters energy technology sector-energy commodities prices rise further-speculation bubble arisies-global inflation rises-gdp starts decreasing etc. .

First let’s examine the first primary or stationary part of our model above the statement that “global oil reserves are depleting”

They are but not in the short term .Not now ,not 5.15,25 years but they will stay reasonably high well into the 22nd century.

In 2006 Richard Pike Chief executive of the Royal Society of chemistry published an interesting paper.

The June issue of the authoritative journal Petroleum Review will publish an article by Royal Society of Chemistry chief executive, Richard Pike - a career petrochemicals industry executive - in which he claims that the world's oil reserves have been, and are still being, grossly underestimated, with profound implications for the global environment this century and possibly beyond.
Dr Pike, formerly an international senior manager with one of the world's biggest oil companies, writes that widely-accepted, but nevertheless flawed, calculation practices are employed to estimate world reserves and he goes on to suggest the way that oil reserves should be calculated. The first is typically based on a simple addition of proven reserves while the second should be based on a more sophisticated probabilistic analysis which may be up to twice the size.

...Addressing the consequences of the mistaken methodology he writes:
"Rather than there being general agreement on the quantitative limits of these resources, which would encourage all parties to address remedies and also seek out alternative energy routes, the relative abundance of oil recognised by individual producers themselves may inhibit this search.
"Despite transparency and innovative approaches by some of the leading oil companies, the overall global response has been inconsistent and uncoordinated."
He added: "There is also anecdotal evidence that some countries are under-reporting proven reserves to maintain a high oil price. Altogether as a result, the world is under-stating the environmental challenge facing generations to come, and appears unprepared for the difficult compromises that will have to be made.
"For more coherent global energy and environmental planning, it will be essential to use estimates that reflect proven plus probable reserves, and address issues of openness and confidentiality that this raises."

Indeed as we stated here on both the issues st the g8 in St Petersberg on transparency in may 2006.

The known hydrocarbon resources and the existing investment and technological capabilities are sufficient to ensure the reliable and affordable supply of adequate amount of energy in the foreseeable future . This, however, will only come through an efficient system of global, regional, and local markets, in which the role of governments would be to set the rules, defend and protect key energy facilities, insure against market failures, stimulate technological innovation, and - importantly - ensure environmental sustainability of energy development.

Sustainable global energy security requires security of demand as well as of supply, which in turn implies a need for more transparent and predictable activities at the level of statistics and energy policies. This tremendous objective will be achieved through further producer-consumer dialog, fair distribution of investment risks, mutual openness to capital. More transparent, predictable, and stable energy markets are key to success.

We also commented then on the speculators.

The secretary general of the Organisation of Petroleum Exporting Countries (Opec), Rilwanu Lukman, says the world oil market is held captive by the derivatives markets. The old rules of supply and demand have been distorted, he says, by the creation of what he calls "paper barrels" of oil.

The physical ("wet barrel") market is awash in oil. Saudi Arabia, the world's top exporter, had to cut production from 9.5Mbpd level of the past 2 years down to 9.1Mbpd (-400,000 barrels per day) since April-06, because it can find no buyers for it, The Wall Street Journal quoted Oil Minister Ali Al Naimi as saying on 5-Jun-2006.

All "demand" keeping prices at these absurd levels of $70+/bar is happening in the futures derivatives markets, off which real physical oil is priced. Derivatives is what OPEC calls "paper barrels", with open contracts just in NY futures market being ~1.6 BILLION "paper barrels". Nearby month futures contracts in NYMEX and ICE trading about ~250 million "paper barrels" per day (vs ~80 million barrels per day world production).

Richard Pike has recently revisted this with regard to Climate change mitigation.

The much-heralded Climate Change Act, given Royal Assent last week, which aims to reduce annual carbon dioxide emissions by 80 per cent by 2050, sets the right agenda for the UK and the science community, says Richard Pike, chief executive of the Royal Society of Chemistry.

But, he warns, on a worldwide basis, where emissions are fifty times the UK figure, current international plans will remain an unfulfilled fantasy because of mathematical errors in basic assumptions and a global underestimate of the true challenge ahead. His concerns are published in the December issue of the journal Significance, published this week by the Royal Statistical Society.

Dr Pike said: "This is an extraordinary challenge that must begin with the right facts. The RSC is sending a copy of the Significance article to the mathematics department of every secondary school, to expose the 'schoolboy howler' in statistics that is misleading governments everywhere, and compromising our ability to address the potential catastrophe that lies ahead."

"Getting this right will enable us to focus collectively on the science to deliver, safely and securely, the solutions we need. It is this that will inspire youngsters to see these as great career opportunities."

The paper is here

Over the next few posts we will examine the issues of the complex and the economics,technologies and simplistic solutions.

As we can see from the above simple gauge model the oil and energy bubble was the accelerant that fueled the Global meltdown.

These a issues of global significance and yet you will not see them in the mainstream media


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