Welcome to the age of diminishing returns

Friday, December 27, 2013

Peak demand: the sound of a single hand clapping


Speaking of "peak demand" about the present stasis in the world oil production is a little like the concept of "the sound of a single hand clapping" is an old Zen "koan." This riddle has been solved by Bart Simpson in recent times.


The concept of "peak demand" is gaining popularity in the discussion about peak oil. It is a good example of how a discussion can get lost in a no-man's land of unsupported ideas and concepts. Peak demand, in a certain way, is a rebuttal of the idea that we have limits to what we can do on this limited planet. So, the implication  is that the present lack of growth in world oil production (which is a prelude to the peak) and the reduction of consumption in OECD countries has nothing to do with physical limits: it is a choice we made. We decided to consume less oil because we are smart enough to have found ways to use less of it. So, you see? We are still in charge; we are still the masters of the planet.

It is a concept that, unfortunately, flies in the face of everything that's happening around us. Maybe people have been buying more efficient cars, but it also true that they are driving less miles per year.  Simply, they can't afford to drive as much as they used to and that hardly looks like a choice.

But, then, what is exactly meant as "peak demand"? Economists talk about demand and supply, and then state that demand must always be equal to supply. Which is fine as long as you see supply and demand as qualitative terms that help you conceptualize a market situation. You could say, "if coffee were to cost 20 dollars per cup, I would drink much less of it". Obvious.


But the curious thing is that neither supply nor demand are measurable alone except in some rather special cases. They are two faces of the same coin: speaking of "peak demand" is a little like asking what's the sound of a single hand (OK; I know that Bart Simpson has solved that one, but let's not go into that....).


It is the same with "peak supply" that is a typical straw man for cornucopians who still tend to accuse peakers of saying that we will be soon "running out of oil". We will not. Supply is determined by several factors: demand (what people are willing to spend for oil) combines with supply (how much money companies are willing to invest in extracting oil) to generate one measurable parameter, which is production. We can equate production with demand, and that's fine. But peak oil is neither peak demand nor peak supply. It is peak production.

So, the concept of "peak oil" is the result of a dynamic evolution of production and consumption which is determined mainly by how EROEI goes down with time as extraction proceeds. It can be modeled and it leads, indeed, to a bell shaped curve. See here: www.mdpi.com/1996-1073/2/3/646

In the end, it is fine to argue about peak demand. But at some point we'll have to stop arguing and think solutions.


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(BTW: there are cases in which you COULD reasonably speak of demand being affected by factors other than prices. Think of silver: the technology of digital photography destroyed the demand for silver for photographic film. Fine, but two things: one is that there has not been any comparable technological discontinuity for fossil fuels. The other is that digital photography didn't reduce the silver demand. You don't see any reduction in the silver production during the past decades. Good ol' Jevons still rules. )


9 comments:

  1. Would you please give a reference for "present lack of growth in world oil production." World oil production has increased from about 76 mb/day in 2002 to slightly 90 mb/day in 2013. Most of the increase has been from biofuels and liquid natural gas, but crude and condensate has increased from about 67 mb/day to about 74 in late 2013. http://earlywarn.blogspot.com/2013/12/oil-supply-update.html#more

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    1. I could have said "very slow growth, if any". Everything is relative; in the heydays of the industry, production was growing at 7% yearly. Today such rates would be unthinkable. And, indeed, there is a reason why people speak of "peak demand"!

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  2. As you wrote, there is nothing like a level of demand beeing bigger or lower than a level of supply. This is a naive concept and a blatant oversimplification. There is a potential-consumption(price) - and a potential-production(price) - function which meet, where production(price)=consumption(price).
    So when "demand" decreases, it might be because production(price) went down or consumption(price) or both.

    Many thanks for the US miles driven link. Are there similar informations for the whole world? I could imagine, the picture looks very different.

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    1. I don't think there are worldwide statistics for miles driven. What I know is that in Italy the consumption of vehicle fuels is going down, so I suppose that means people are driving less. At least, I don't see a boom in the number of Priuses around (a few, yes, including mine)

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  3. Hi Ugo. No economist will ever tell you that demand must meet supply, you can easily conceive a market where both curves do not overlap in the positive Q / positive P quadrant. But in essence, "peak demand" and "peak supply" are nothing but nonsense, words spelled either by ignorants or deceivers.

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    1. Yep, it is more complex than that. But that demand always equals supply is what they tell you in economics 101. And much of the public debate is still based on that

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    2. There IS a difference between supply and demand. In general it is called "inventory". For something as ubiquitous as oil, inventory is a tiny percentage of production. Trends in inventory, however, are very useful in predicting near term moves in price and/or production.

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  4. Peak demand could be the polite version of "demand destruction in progress". Simply put, the desired flux of net energy isn't there, and demand is curbing.

    Its effects can be seen as "recessive growth" (as economist like to state for insufficient growth) , or stagnation, or recession.

    But when it comes to a concept like "peak demand" (wathever meaning you intend) you are implicitly assuming that demand will never come back from a peak value, and that is interesting enough in itself.

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  5. google data explorer is instructive:

    https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&ctype=l&met_y=is_rod_engy_pc&hl=en_US&dl=en_US#!ctype=l&strail=false&bcs=d&nselm=h&met_y=is_rod_engy_pc&scale_y=lin&ind_y=false&rdim=region&idim=region:NAC&idim=country:DEU:ITA:GBR:IND:CHN:RUS&ifdim=region&tdim=true&hl=en_US&dl=en_US&ind=false

    The west uses less power on the road since about 2000 - 20005, North America using as expected more then 2.5 times than Europe.

    The world as a whole keeps on using more, with China trying hard to reach western levels, but still neglegible on a per capita basis.

    Dominik

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Who

Ugo Bardi is a member of the Club of Rome and the author of "Extracted: how the quest for mineral resources is plundering the Planet" (Chelsea Green 2014)