Re: Hubbert's peak

[Julio Huato <juliohuato@xxxxxxxxxxx>]

Let's be clear: Louis Proyect and I are the only list members who can
legitimately claim expertise in oil forecasting.  The rest of you are just a
bunch of amateurs.

But that's okay.  Louis will continue sharing his wisdom by Lexis-Nexing an
endless stream of well selected journalistic articles, and forwarding them
to the list under soothing thread names like "The End is Near," "See?  I
told ya this is it!," "Me and my friends have been right since we were
born," etc.  And I'll continue educating the patient readers with long
tirades where paragraph (b) refutes paragraph (a).  Read on and learn.

#1 At this point in time, is there an absolute amount of oil in the depths
of our planet, say, "the absolute reserve"?

Yes, of course.  There must be.  If we had an infinity ability to MRI-scan
our planet, we would know it for sure.

#2 Is global oil production near, at, or beyond its peak level already?  Is
"the known oil reserve" about to be exhausted?

Who the hell knows?  Michael Perelman, of course, but who else?

Questions #2 are very tricky, but their answers do NOT depend on the answer
to #1.  Forecasting oil reserves and oil production (and consumption) is NOT
the same as trying to figure out the absolute amount of oil on earth as of
today.  In fact, the latter has little if any relevance to the former.  This
is why.

The "known oil reserve" at a point in time is a variable -- NOT a constant.
In fact, it is the point estimate of a random variable based on assumptions
about some imputed probability distribution.  The assumptions depend on the
current state of the art in prospection, production, consumption,
technology, science, etc.  Whenever any of these assumptions changes (and
they change all at once and all the time), whenever new information pops up,
the estimates are subject to revision and updating.

Forecasting oil reserves and production/consumption is NOT a purely
technical-geological exercise.  In fact, for the time being, forecasting oil
production and consumption is tantamount to forecasting oil *supply and
demand*: the path of the oil market.  Nothing less.  Because, for the time
being, oil production and consumption is regulated by market incentives.

The path of the known reserves depends on the path of the market.  For a
given state of technology, geological prospection depends on the size of the
oil rents that can be secured by prospecting.  At the margin, changes in
geological prospection (like changes in supply) depend on expected excess
demand.  The current state of the oil market depends somehow on expectations
about the future path of the market -- sometimes very flimsy expectations
that add noise.  No wonder forecasting the path of the oil market
(quantities and prices) is a very tricky thing.

The oil market is global in scope.  If we are to believe the Oil & Gas
Journal or World Oil (as reported at the U.S. EIA's web site), then the
known reserves of crude oil as of 1/1/2003 were between 1 and 1.2 trillion
barrels, which at the going market price should be valued between 40 and 50
trillion USD, 4 or 5 times the U.S. annual economy.

Given the rents at stake, the oil market is competitive in a very complex
way.  The big guys play a game of strategy that involves not only bluffs,
negotiation, and short-run manipulation of quantities and prices, but also
the deployment of substantial amounts of other resources, including those of
a political and military nature.  Markets of this kind are highly
self-referential, which is to say, very hard to figure out.  (See Keynes's
General Theory, chapter 12.)

Moreover, since the oil market is closely linked to all other markets, oil
forecasting is premised on a broader forecast of the global economy, which
is also a pretty wild animal.  Even though aggregates tend to be more stable
than dis-aggregates (somebody here mentioned the law of large numbers or the
central limit theorem), the world economy is not ergodic.  Economic
forecasts tend to fail when they are most needed -- i.e., when they are
supposed to anticipate sudden changes in the direction of the economy.  We
see the failures of economic forecasting all the time.  Serious economists
know that long-run forecasts of the economy (like those at the base of the
10- or 15-year budget projections politicians use) are full of shit.
Forecasting how the economy will do in the next quarter or next year is hard
enough to do.

That said, as devastating as the non-ergodic argument is, we shouldn't be
entirely nihilist about predicting.  Pinning down the *precise* path of the
oil market (conditional on current information blah blah) may be beyond
human ability, because the market is self-referential or whatever.  But,
even under capitalism, social life has some measure of stability.  In a
loose ballpark sense, things can be and are anticipated.  But by whom?
Well, by people who are highly motivated to know and have the resources to
enter the serious guessing game.  (Politically, the left should be very
motivated to know, but we don't have the resources the bad guys have.)

As much bullshit as their valuations incorporate, as petty and short-sighted
as their incentives are, as stupid as they are, given the stakes of the
game, the players in the oil market are moved to spend serious cash to try
and ballpark the paths of oil reserves and markets, and to influence them if
and when they can.  So, if there are well-established stylized facts out
there (geological or otherwise), they know them.

Now, when I talk about market players, I'm not only thinking about
speculators bidding the price of oil futures in Chicago or New York, even
speculators with very deep pockets.  No.  I'm thinking of other big players,
those governments and big companies that have sunk substantial costs in
their pursuit of oil rents cum profits, governments and firms that have
installed and deployed a lot of hardware that can't be depreciated overnight
(and I include weaponry here) to fetch the biggest possible slice of the oil
rent cake.  They cannot easily cut and run.  Cutting and running would
entail huge loses.  These people are concerned about the medium and long run
for obvious reasons.  So, maybe the path of prices should be taken with tons
of salt, but the historical range of variation of these prices over long
periods of time has got to indicate something.

Whatever ability geologists have now to X-ray the depths of the planet,
however efficient the oil markets may be in the Sharpe or Fama sense of the
term, if any theory of value has any validity or relevance to understand
life at a human scale, then over time the depletion of oil underground (in
the face of insurmountable obstacles to technological progress in oil
production/consumption) must push the productivity of oil production to
zero, which is to say, push the value of a drop of oil to infinity.

Societies move.  We the people are not just passive toys to be played with.
If over time, we find ways (and we will) to internalize the full social
costs of oil production and consumption in the production/consumption
decisions -- say, via Kyoto agreements, fiscal incentives, or other reforms,
or by full-fledge socialism here and there or globally -- then that should
put an extra upward pressure on the oil price.  The social cost of oil
consumption is not that which is reflected in the price only.  We have to
include global warming, air pollution -- a host of other negative
environmental, social effects.  That higher price of oil, more reflective of
its actual social cost of production, has to slow down oil depletion and
induce innovation and substitution.

One thing should be clear, under capitalism, socialism, or generalized
East-Village commune nightlife, there is no way that a value approaching
infinity is not going to find expression in market prices and/or political
constraints.  Of course, the complete depletion of vital natural resources
riks human life altogether.  But the rapid depletion of oil or farm land or
clean air or drinkable water (assuming we are at that point) don't abolish
or alter qualitatively the social laws of motion of capitalism.  The
argument that quick natural resource depletion alters the laws of capitalism
only reveals a lack of understanding of how capitalism functions.

And since I'm at this, let me pose the burning rhetorical question that
doesn't let doctrinaires like myself sleep at night: Does Marx's fundamental
insights about the workings of capitalism (say, the law of labor value, the
law of surplus value production, the formation of production prices, the
formation of rents) require revision in order to deal with the rapid
depletion of natural resources?  Those who claim that it does haven't
pondered Marx's insights duly.

Assume the absolute oil reserve is a constant, and it is economically
relevant in an immediate sense.  Then the absolute oil reserve is a natural
constraint like the law of gravity, the laws of thermodynamics, the number
of hours in a day on earth, or the number of chromosomes in a cell's
nucleus.  We humans are known to strive to understand nature and play judo
with them.  Our getting around natural constraints is what social production
is really all about.  We are animals who turn natural constraints into
technical challenges.  Producing is taking pieces of nature and, according
to nature's own laws, turning them into things we can use.  Production and
consumption are subject to social laws, to economic incentives (economic
compulsion, self-interest, the whip of competition; and extra-economic
compulsion, politics, class struggle).  Production and consumption are not
acts of nature; they are social acts.  IMO, David has been right in
emphasizing this, as he's been in exposing the reactionary ideological and
political uses of apocalyptic environmental and demographic scenarios.
(Wait...  Did I write David?  Scratch that, I meant to say sartesian.)

Forget civilization, it is clear that the rapid depletion of natural
resources -- if irreversible or not reversible in a reasonable period of
time -- goes against sustaining the biological basis for human life on
earth.  Looking forward, it is dangerous for the human race as a whole.  But
here and now, as the recent events in Haiti and the Dominican Republic show
it, it is mostly dangerous for the world's poor, because they are poor.

Rapid natural resource depletion is a crucial reason why internalizing the
full social benefits and costs of overall production and consumption by
means of communism is increasingly necessary and urgent.  Consequently,
these problems should be the basis for a lot of propaganda against the uses
and abuses of capitalism.  But good political propaganda needs to be based
on well-established factual information.  Forecasts and journalistic essays,
on the other hand, must be managed with due caution.  The actual,
well-documented faults of capitalism are large enough to move people and
persuade reasonable minds.  If we get to be perceived by the public as
wolf-crying crackpots, we'll only hurt the cause.

You are welcome.

Julio

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