Sunday, November 27, 2011

Debunking "Peak Oil" in all of its forms

The theme of this post is: it is unlikely that the production of oil and natural gas will peak in the next half century because an upward shift of the demand curve will likely offset any downward shift in the supply curve. The net effect will be a slight increase in oil prices, but largely no change in the rate of production of conventional+unconventional oil. There are plenty of economically-recoverable hydrocarbons reserves available for us to use in our power plants and transportation vehicles. And given that the use of gasoline currently has more benefits on average than environmental costs, I am led to the conclusion that it is unlikely that there will be a sharp decrease in the production of oil unless we invent a technology can achieve higher rates of return on investment than oil in all its diverse applications, such as cars, trains, planes and the production of plastics.

Those people who are making peak oil a big deal on the internet generally fall into one of the following camps:
1) Energy insiders like the former Matthew Simmons, who are pessimistic by nature (and tend to forget either about technology advancement, growth in demand, or the fact that proved oil reserves increase when the price of oil increases.)
2) Those who want us to stop using fossil fuels regardless of whether there is peak oil. This group is a) typically concerned about the environmental impact of fossil fuel use, b) probably unaware of the short-term positive economic impact of CO2 emissions, and c) possibly just anti-technology.
3) Those people who look at data from today's well, and conclude that decreasing oil output from many of today's wells implies the onset of peak oil in the near future.

When you take a step back from the peak oil paranoia and take a look at the data available on oil production and proved reserves, you can take deep sigh of relief. There's plenty of proved global reserves to meet current global consumption for the next 50 yrs. Now, this isn't to say that there won't be peak oil production for individual wells or for individual countries, it's just that there is plenty of global proved hydrocarbon reserves to supply today's demand for the next 50 years. And interestingly, global proved hydrocarbon reserves are increasing with time...not decreasing.
If you look at any one well, or even the output from whole countries, like the Mexico & England, there is often a peak in oil production. And this can have significant effects on the economy in those countries, but not on the overall global growth rate. It's important to focus on global statistics when making predictions about peaks in global production of oil. For example, as Saudi Arabia developed its oil fields in the 1950s and 1960s, they were able to produce oil cheaper than most oil produced in the US. So, the production of oil in the US reached a local maximum in 1970, even though there were and still are plenty of hydrocarbon reserves in the US. And now that the price of oil is significantly higher than the 1990s, production of oil in the US once again increasing.

The question is: what would cause the overall production of oil to peak?
Answer: a downward shift in both the supply and demand curves. Below are the reasons why I don't expect to see a downward shift in both the supply and demand curve.

Sunday, November 20, 2011

A tribute to Benjamin Franklin

This post can in no way do justice to Benjamin Franklin the husband, the father, the grandfather, the scientist, the diplomat, the run-away teenager, the philosopher, the printer, the governor, the friend, the socialite, the writer, the slave owner, the Deist, the vegetarian, the political aide, the apprentice, the slave trader, the engineer, the rebel, the author of "Poor" Richard Saunder's almanac, the frequenter of prostitutes, the abolitionist, and last, but not least, Benjamin Franklin the American.

I think that Franklin is still the Soul of Our Age. In other words, I'm saying that the era of Franklin has not yet completely ended. In many ways, we are still following directly in his footsteps, such as 1) Conducting scientific inquiry directed both towards practical problems and towards interesting questions about why the world is the way it is. 2) Honoring the virtue of public service, both in the government and in volunteer organizations. 3) Upholding religious tolerance (freedom to be a Deist, Christian, Jewish, Islamic, Buddhist, etc...) 4) Preserving freedom of the individual not to be a slave, the right to vote, freedom of the press, etc...  5) Holding individuals responsible for actions that harm society.
6) Admiring public and private virtue...while never being able to completely achieve that virtue 7) Focus on virtue not vice, and assuming that vice can be corrected through education.

Though, the Era of Franklin has for many years being slowly eroding away. The virtue of hard work is no longer universally held by people in the US. The Era of Franklin partially eroded in the 1920's with the Gospel of Consumption. The gospel of economic consumption was a direct attack on Franklin's focus on productivity and thriftiness. The Era of Franklin partially eroded in the 1930's with the advent of the welfare state, which Franklin argued against even before Adam Smith wrote the Wealth of Nations. The Era of Franklin again partially eroded in the 1940's with WWII and the Holocaust because here was definitive proof that there is evil in the world, and that evil can't be eradicated simply with education. And finally, the Era of Franklin partially eroded in the late 1960's and 1970's with the focus on individual happiness at the expense of hard work.

The question I have is: should we leave the Era of Franklin? Should we just leave it as an ornament on the Christmas Tree of Era's Past? (Like we do for the Eras of Julius Caesar, Frederick the Great, and Napoleon) Or should we defend the Soul of Franklin as our own soul, defending it from attacks by modernism, post-modernism, socialism, communism,  existentialism, and deep ecology?
In my opinion, we should defend and continue the Era of Franklin because his philosophy of hard work, religious tolerance, individual freedom, social responsibility, and scientific inquiry are the foundations of any good philosophy of life. More so, it has been when we're started to deviate from Franklin's philosophy of life that we have run into major problems, like the great depression.

Wednesday, November 16, 2011

What was the main cause of the 1929 Stock Market Crash? Ans: The shortening of the work week and a belief that consuming luxuries leads to growth

I've taken a look at the economic data from the mid to late 1920's (such as the prices of oil, coal, steel, wheat, etc...) in order to try to understand what was the cause of the stock market bubble that started in ~1927 and ended in 1929. From just analyzing the price data of individual materials, it's hard to see anything that stands out (i.e. no oil sharp increases in the price of oil or steel.) But when you look at the overall trends, you see a disturbing trend toward purchasing more and more items for personal pleasure, thinking that these items were helping to grow the economy. In other words, it appears that people in the US on average were consuming more and more luxuries while working less hours per week (all the while without the increase in productivity that could have justified the increased spending on luxuries and reduced hours.) And what's worse is that people convinced themselves that consuming luxuries was sustainable, i.e. we could afford to let people work less hours and pay them more because they will purchase more goods and hence get the economy going. This turned out to be a disastrous mindset, and a mindset very reminiscent of what happened in the 2000's. In the last decade, we convinced ourselves that a) a house is an asset that should increase in value with time [as opposed to a car or almost any other item] and b) our economy can grow even if the price of oil triples in a few years.

What I'm interested in is the answer to the following question: what allowed people (who were supposedly raised on the hard work ethic of Benjamin Franklin and others) to think that an economy can grow by just consuming more and more luxuries?

This post is devoted to looking into what were the main causes of the stock market bubble that burst in 1929. The goal of the post is to look at what did and what didn't cause the bubble and its eventual crash.

First, by looking at the price of oil during the 1920's, one sees that the general trend was a decrease in the price of oil, so we can't blame high oil prices for the stock market crash. Likewise, the price of both bituminous and anthracite coal was relatively flat throughout the 1920's.
So, what was going on?

a) Lack of Innovation
It appears that there was a lack of new technologies being introduced in the decade between 1925 and 1935 (the worse decade in the twentieth century as far as new production innovation.)

b) A Shorter Work Week
Many companies were allowing employees to have shorter work weeks. The typical work week decreased from 6 days per week down to 5 days per week.

Friday, November 11, 2011

How we could have avoided the 2008 recession & How to avoid similar ones in the future

Nobody likes a Monday morning quarterback or Captain Hindsight, but I think that it's important to discuss how we could have avoided the 2008 recession so that we can: a) get out of the economic funk we are still in, and b) to avoid or to minimize the damage from future bubbles that might arise.

In a previous post, I mentioned that the main cause of the 2008 recession was the high price of gasoline. This doesn't mean that there weren't other causes; it just means that we should talk about the disease (high oil and natural gas prices), and not just the symptoms (people foreclosing on houses because they were losing their jobs because of the high oil and natural gas prices.)

Sure, we hear about the housing bubble as major cause of the 2008 recession. But remember that we had a large tech stock bubble in the 2000's and we didn't have a massive recession in 2000, like the one in 2008. When you think about it for awhile, you're realize that a bubble alone can not be the cause of a recession. Let me explain this in detail.
    Let's image that we all own stocks in Company A. All of a sudden, the stock price of Company A starts increasing rapidly. If we think to ourselves "That's nice, but let's not act as if I'm now richer", then we will be okay when the price of the stock drops. The problem occurs when we convince ourselves "This is great, now I can take out a loan to go on a nice vacation."  In this case, when the bubble bursts, then you are left with a loan that you must (and should) pay back. So, the problem is not the bursting of the bubble; it's the mindset that the bubble was real and that this means that you can spend more money on luxuries than is justified based off your actual income.

What I think happened, between 1998 & 2000, is that people on average did not significantly increase their consumption of luxuries, even as stock prices of internet companies were going through the roof. Many people continued to work hard and continued to purchase luxuries just the same as before, and instead assumed that their increasing internet stock investments would mean that they could retire sooner than expected.
On the other hand, between 2003 and 2007, people on average did increase their consumption of luxuries, such as houses larger than what they could afford. We collectively forgot that a house is not an asset. (For example, the price of a car depreciates with price...why did we all think that the price of a house should increase in time?)

Tuesday, November 8, 2011

Links to Articles on Shale Gas Production

I wanted to collect together a series of articles on the development of shale gas and shale liquids in Texas, and its expansion from Texas to Arkansas, Pennsylvania, North Dakota, British Columbia, and overseas. The expansion of tight gas production in the US is having a profound effect in regional economies, as well as providing natural gas at a price that is allowing businesses to remain open that otherwise would have shut down when gasoline prices were increasing between 2009 and early 2011.

It's important to study shale gas development in detail, so that we can discern for ourselves what impact shale gas will have on the future of the US economy, as well as the global economy. It's important to get this right so that we don't over or under hype this potential resource.

On that note, here's links to some good articles as well as a quick description of each article:

Shale-Gas Reserves Have Potential to Reignite U.S. Economy

This very recent article from Bloomberg Energy does a good job of giving the history of horizontal drill and fracturing, especially the role of George P. Mitchell in developing these techniques for economically getting natural gas out of tight shale formations

An Information Video on Horizontal Drilling and Fracturing

This is a video overview of the technologies used to produce natural gas from tight shale formations. A must-see for anybody that's not already an expert.

Stepping on the Gas

This article and video interview by Daniel Yergen is an intro to shale gas development by this Pulitzer Prize winning author.

Sunday, November 6, 2011

Significantly cutting wasteful government spending will not cause a recession

I'm tired of the same old BS from political pundits that cutting the federal budget will cause a recession. This kind of thinking stems from faulty logic that suggests (incorrectly) that there is a positive multiplier effect of government spending. Once you realize that money is the capability to do mechanical or electrical work, then you'll realize that, on the average, US government spending has a negative rate of return on work invested because a lot of the US government's spending goes into projects with no return on work invested, including but not limited to: paying people to not work, paying people to do the equivalent of digging and filling holes, paying people to build bridges to nowhere, paying people to enforce drug laws, paying people to collect other people's taxes, subsidizing the consumption of prescription drugs, paying people to estimate the future of the economy (which they can't do at all), subsidizing solar energy projects that consume more work building and installing the panels than they generate in electrical work throughout the lifetime of the power plant, subsidizing ethanol blending in our gasoline, and finally, but not the most or least wasteful, paying people to count the amount of gold in Fort Knox.

Let me demonstrate the fact that most things we do will have a negative rate of return on work invested (and especially most of the things that the US or other governments spend money/work on.) I'll demonstrate this with a thought experiment that you can actually go out and do yourself.

Let's say that you are given 1 MegaWatt-hour (MWh) of electricity.  (You could try yourself by buying ~$100's worth of electricity, and then "investing it" in one of the following options.)

You can a) store the electricity in some batteries you own, b) use the electricity to purchase gifts for your family and friends,  c) give the electricity to the government to spend, or d) invest it in a private electricity generating company (for example, NRG Energy.)

What happens in each case after 1 year?
a) After one year, the amount of electricity in your batteries will probably have drained out and you will be left with no electricity. (Though, if you had used your money to purchase ~$100's worth of gasoline, you'd have roughly the same amount of capability to do work as at the beginning of the year.)  Option A (i.e. sitting on electricity or fuel) leads to a negative or zero rate of return on investment.

Saturday, November 5, 2011

"Anonymous" the movie & Paranoia all around us (9/11, Peak Oil, Birth Certificates, The Fed, Climate Alarmism, etc...)

I recently saw the movie "Anonymous" because I think that I'm distantly related to the de Vere family. I'm Not Sure about this, though, because my family genealogy only goes back about a hundred years or so.
In case you haven't seen it yet, the movie suggests that William Shakespeare was not the author of plays, such as Hamlet. This is not a new accusation, but it may be the first movie regarding this topic. Here's the trailer (with Everything in its Right Place playing in the background.)




I am not an English major so I have no clue about the truth of the accusation, but since watching the movie, I found a lot of biographical details suggesting that Edward de Vere was the author of Hamlet. I have no real interest in whether this accusation against William Shakespeare is right or wrong, but I certainly like the possibility that a possible relative of mine is the author of Hamlet rather than somebody to whom I'm in no way related.

Does believing that William Shakespeare is the not the author of Hamlet make you a conspiracy nut? I don't think so, and the goal of the rest of this post is for me to explain what I think are good forms of paranoia and bad forms of paranoia.

Here are some characteristics of possibly healthy paranoia:  (1) willingness to hear both sides of the debate,  (2)  general skepticism of authority and so-called authorities, and (3)  acknowledgment that we all lie

Here are some characteristics of unhealthy paranoia:  (1) telling yourself that you have no control,  (2)  believing that there is a massive conspiracy that would require the involvement of hundreds of people lying and/or keeping silent on the lie, and,  (3)  disobeying Occam's Razor.