How limited global oil supply may affect climate change policies
Posted by Gail the Actuary on August 28, 2010 - 10:45am
Topic: Policy/Politics
Tags: climate change, oil prices, oil supply, peak oil [list all tags]
Topic: Policy/Politics
Tags: climate change, oil prices, oil supply, peak oil [list all tags]
On Wednesday, August 25, I gave a presentation called How limited global oil supply may affect climate change policies at the MIT-NESCAUM Endicott House Symposium on climate change.
The audience included leaders from governmental, industrial, academic, and non-governmental (NGO) sectors. They were very concerned about climate change, but not very aware of, or concerned about, the issue of resource limits.
In my talk, I pointed out where the "standard" view of the economic response to peak oil goes wrong. People expect that if there is an oil shortage, prices will rise and then substitutes, or additional supply, or technological solutions will be found. But what if these solutions take decades or even generations to implement? Oil from new fields is not instantly available; new biofuels do not scale up quickly; and technological innovations take decades to make a meaningful difference in the overall picture.
In the absence of a quick response of substitute supply or technical innovation, it seems to me that other responses come into play--ones that explain the recent financial distress we have been seeing. When oil prices rise but are not met with immediate solutions leading back to lower prices, consumers respond by reducing discretionary spending, or by defaulting on debt. Either of these responses tends to lead to recession, reduced oil demand, and a reduction in oil price. Eventually growth in demand (perhaps from China and India) can be expected to raise prices again, but again, new oil supply /new technology /new substitutes are likely to be delayed, so that higher prices are likely to give rise to reduced discretionary spending and debt defaults, and more recession.
Because of these impacts, the expectation for the future should be for oscillating prices, but not necessarily very oil high prices. Recession can be expected to improve, and then get worse again. If the expectation for the future is this type of economic situation, perhaps views regarding needed climate change policy should be revised to match the new economic reality.
Furthermore, because the world is a closed system, with limits, there is the possibility that world oil supplies will actually decline in not too many years. The likelihood of this decline gives rise to a greater sense of urgency of the need to reduce oil use--one cannot just wait and hope that future technological innovation will fix the situation. It may be that lifestyle changes will also be needed, reflecting a lower standard of living. Climate policies may need to be rethought to match the way a world with limits can really be expected to act.
The audience included leaders from governmental, industrial, academic, and non-governmental (NGO) sectors. They were very concerned about climate change, but not very aware of, or concerned about, the issue of resource limits.
In my talk, I pointed out where the "standard" view of the economic response to peak oil goes wrong. People expect that if there is an oil shortage, prices will rise and then substitutes, or additional supply, or technological solutions will be found. But what if these solutions take decades or even generations to implement? Oil from new fields is not instantly available; new biofuels do not scale up quickly; and technological innovations take decades to make a meaningful difference in the overall picture.
In the absence of a quick response of substitute supply or technical innovation, it seems to me that other responses come into play--ones that explain the recent financial distress we have been seeing. When oil prices rise but are not met with immediate solutions leading back to lower prices, consumers respond by reducing discretionary spending, or by defaulting on debt. Either of these responses tends to lead to recession, reduced oil demand, and a reduction in oil price. Eventually growth in demand (perhaps from China and India) can be expected to raise prices again, but again, new oil supply /new technology /new substitutes are likely to be delayed, so that higher prices are likely to give rise to reduced discretionary spending and debt defaults, and more recession.
Because of these impacts, the expectation for the future should be for oscillating prices, but not necessarily very oil high prices. Recession can be expected to improve, and then get worse again. If the expectation for the future is this type of economic situation, perhaps views regarding needed climate change policy should be revised to match the new economic reality.
Furthermore, because the world is a closed system, with limits, there is the possibility that world oil supplies will actually decline in not too many years. The likelihood of this decline gives rise to a greater sense of urgency of the need to reduce oil use--one cannot just wait and hope that future technological innovation will fix the situation. It may be that lifestyle changes will also be needed, reflecting a lower standard of living. Climate policies may need to be rethought to match the way a world with limits can really be expected to act.
Dr. Richard Gibbs, one of the symposium co-chairs, kicked off the symposium by talking about the fact that the world is a closed system, and we are now dealing with pollution and excess greenhouse gases as symptoms of the limits inherent in a closed system. My job was to try to extend this idea--to explain that oil is subject to limits as well, and to point out that, in fact, we seem to be reaching some of these limits.
READ FULL POST and PRESENTATION HERE
READ FULL POST and PRESENTATION HERE
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