Debunking ‘Lower Oil Supply Will Raise Prices’

We often hear the statement, “When oil supply is lower, oil prices will rise because of scarcity.” Now, we are getting to see firsthand whether oil prices really do rise, as oil supplies become more scarce.

Figure 1. Figure from the OPEC Monthly Oil Market Report for August 2019 showing world and OPEC oil production by month.

Figure 1 shows that world oil supply hit a peak in November 2018 and has declined since then, mostly because of a decline in OPEC’s production. So, total oil production seems to be down for about eight months, relative to the peak in November 2018.

Despite this big cutback by OPEC in its oil production, prices have not responded as OPEC had hoped:

Figure 2. Average monthly spot Brent Oil prices, based on EIA data.

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Rethinking Renewable Mandates

Powering the world’s economy with wind, water and solar, and perhaps a little wood sounds like a good idea until a person looks at the details. The economy can use small amounts of wind, water and solar, but adding these types of energy in large quantities is not necessarily beneficial to the system.

While a change to renewables may, in theory, help save world ecosystems, it will also tend to make the electric grid increasingly unstable. To prevent grid failure, electrical systems will need to pay substantial subsidies to fossil fuel and nuclear electricity providers that can offer backup generation when intermittent generation is not available. Modelers have tended to overlook these difficulties. As a result, the models they provide offer an unrealistically favorable view of the benefit (energy payback) of wind and solar.

If the approach of mandating wind, water, and solar were carried far enough, it might have the unfortunate effect of saving the world’s ecosystem by wiping out most of the people living within the ecosystem. It is almost certain that this was not the intended impact when legislators initially passed the mandates.

[1] History suggests that in the past, wind and water never provided a very large percentage of total energy supply.

Figure 1. Annual energy consumption per person (megajoules) in England and Wales 1561-70 to 1850-9 and in Italy 1861-70. Figure by Tony Wrigley, Cambridge University.

Figure 1 shows that before and during the Industrial Revolution, wind and water energy provided 1% to 3% of total energy consumption.

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Why stimulus can’t fix our energy problems

Economists tell us that within the economy there is a lot of substitutability, and they are correct. However, there are a couple of not-so-minor details that they overlook:

  • There is no substitute for energy. It is possible to harness energy from another source, or to make a particular object run more efficiently, but the laws of physics prevent us from substituting something else for energy. Energy is required whenever physical changes are made, such as when an object is moved, or a material is heated, or electricity is produced.
  • Supplemental energy leverages human energy. The reason why the human population is as high as it is today is because pre-humans long ago started learning how to leverage their human energy (available from digesting food) with energy from other sources. Energy from burning biomass was first used over one million years ago. Other types of energy, such as harnessing the energy of animals and capturing wind energy with sails of boats, began to be used later. If we cut back on our total energy consumption in any material way, humans will lose their advantage over other species. Population will likely plummet because of epidemics and fighting over scarce resources.

Many people appear to believe that stimulus programs by governments and central banks can substitute for growth in energy consumption. Others are convinced that efficiency gains can substitute for growing energy consumption. My analysis indicates that workarounds, in the aggregate, don’t keep energy prices high enough for energy producers. Oil prices are at risk, but so are coal and natural gas prices. We end up with a different energy problem than most have expected: energy prices that remain too low for producers. Such a problem can have severe consequences.

Let’s look at a few of the issues involved: Continue reading

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Seven Reasons Why We Should Not Depend on Imported Goods from China

It seems to me that the situation in China is far different from what most people think it is. Even if we would like to depend on China, we really cannot.

Reason 1. When we depend on goods from China, an amazingly large share of the world’s industrial activity gets concentrated in China.

The five largest users of energy in the world are China, the United States, India, Russia, and Japan. The International Energy Agency shows total energy consumption as follows for the year 2016:

Figure 1. IEA’s estimate of energy consumption (total fuel consumed, or TFC) by sector in 2016 for the top five energy consuming nations. Mtoe is million tons oil equivalent. Source: IEA. Non-energy use is the use of fossil fuels as a material to create end products that are not burned. Examples include medicines, plastics, fertilizers, asphalt, and fabrics.

When these countries are compared, restricting our analysis to the portion of energy used by industry, we find the rather disconcerting result shown in Figure 2:

Figure 2. Chart by the International Energy Agency showing total fuel consumed (TFC) by industry, for the top five fuel consuming nations of the world.

China consumes more fuel for industrial production than the next four countries listed (United States, India, Russia, and Japan) combined. Of course, we don’t know exactly the corresponding amounts for other countries of the world, but we can observe that if a country is concerned about its CO2 emissions, the easiest way to reduce these emissions is to send heavy industry elsewhere, such as to China or India. There are likely many countries that are primarily service economies, thanks to the option of outsourcing most industry to other countries.

Much of the discussion I have read regarding sending industry elsewhere has been in the direction of, “As advanced as our economy is, we don’t need heavy industry; service jobs will substitute. Industry can be developed at lower cost elsewhere. Everyone will be better off with this arrangement. The invisible hand will provide jobs and goods and services for everyone.” In addition, corporations saw the possibility of adding customers from around the world. Not too many thought about the real-world problems that might result. Continue reading

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Why it (sort of) makes sense for the US to impose tariffs

Nearly everyone wonders, “Why is Donald Trump crazy enough to impose tariffs on imports from other countries? How could this possibly make sense?”

As long as the world economy is growing rapidly, it makes sense for countries to cooperate with each other. With the use of cooperation, scarce resources can become part of supply lines that allow the production of complex goods, such as computers, requiring materials from around the world. The downsides of cooperation include:

(a) The use of more oil to transport goods around the world;

(b) The more rapid exhaustion of resources of all kinds around the world; and

(c) Growing wage disparity as workers from high-wage countries compete more directly with workers from low-wages countries.

These issues can be tolerated as long as the world economy is growing fast enough. As the saying goes, “A rising tide lifts all boats.”

In this post, I will explain what is going wrong and how Donald Trump’s actions fit in with the situation we are facing. Strangely enough, there is a physics aspect to what is happening, even though it is likely that Donald Trump and the voters who elected him would probably not recognize this. In fact, the world economy seems to be on the cusp of a shrinking-back event, with or without the tariffs. Adding tariffs is an indirect way of allowing the US to obtain a better position in the new, shrunken economy, if this is really possible.

The upcoming shrinking-back event is the result of too little energy consumption in relation to total world population. Most researchers have completely missed the possibility that energy limits could manifest themselves as excessive wage disparity. In fact, they have tended to assume that energy limits would manifest themselves as high energy prices, especially for oil.

The world’s networked economy doesn’t work in the simple way that most researchers have assumed. Too much wage disparity tends to lead to low energy prices, rather than high, because of increasing affordability issues. The result is energy prices that are too low for producers, rather than too high for consumers. Producers (such as OPEC nations) willingly cut back on production in an attempt to get prices back up. The resulting shortage can be expected to more closely resemble financial collapse than high prices and a need for rationing. Trump’s tariffs may provide the US a better position, if the world economy should partially collapse.

Let me try to explain some pieces of this story. Continue reading

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