Wednesday, January 30, 2019

Why we will never run out of oil.

We will never run out of oil. Or coal. Or natural gas. Or any other critical natural resource, and no amount of shouting by Al Gore will change this.

Flashback to 2010.

I posted the essay below as a result of a spirited discussion with a colleague who at the time was convinced that “peak oil” has already been reached and that energy prices were poised to skyrocket until the end of civilization. Nine years ago, and we’re still waiting for the wars, strife and otherwise miserable existence we were told was certain to occur.

As dispositive evidence that there is no such animal as a “peak oil,” the essay is reposted, unedited.


A lot of ink has been spilled (and bandwidth eaten) over a looming prospect that neither we nor generations of our descendants will ever witness--the day we run out of oil.  Yes, petroleum is a fossil fuel and exists in a finite quantity.  But, doing simple math of estimating reserves, estimating consumption over time and coming up with some ominous date in the future does no one any good at all. Either the oil doom-and-gloom crowd don't understand basic economic principles, or they understand them quite well and they don't think a peasant like you is nuanced enough to understand.

This blog post is going to help one side or the other, and I have a lot more faith in you than I do  them.

The Bama Oil & Exploration Company, Inc.

Let's say I'm digging a well in my backyard because I'm tired of paying the water company all that extra dough to fill my pool, water my garden, wash my cars and spray the kids down.  About 150 feet down, the drilling rig breaks through a layer of rock and finds something.  But it's not an aquifer--it's a reservoir of light, sweet Alabama crude.

I am now an Oil Man.

Big Oil sends a team of geologists and oil production experts out, and they estimate that my field has about 13 million barrels of reserves, and that given today's production technology, about 10 million barrels can be brought to the surface at a rate of about 1 million barrels each year.  At today's spot price of about $70 a barrel, Bama Oil & Exploration is worth about $700 million.  I won't have to worry about the extra dough for pool filling and kid spraying, after all.

After about five years of production, geological and other estimating technologies have improved, and it turns out that there were really about 17 million barrels down there, and there are 12 million left.   And, technology has improved a great deal in just the last five years.  Instead of achieving 77% production rates, rates are now around 88%, meaning I have about 10-1/2 million barrels left.

We've been producing in the same field for five years, and we still have the same amount of oil down there than we thought we'd started with!

What the doom-and-gloom crowd either don’t understand or don't tell you about is the economic concept of production possibilities, time and the effect technological change has on production.  This is not an oil-only concept.  It applies in every market.

I'm an economist, so I can't have a discussion on economics without a chart.  To the right is what's called the Production Possibilities Curve.  The vertical axis, C, represents capital (plant, equipment, etc).  The horizontal axis, L, represents labor. Any point on the one of the curved lines represents a mix of capital and labor that produces the same quantity of a good or service.  It doesn't matter if the good or service is oil, gas, coal, legal services, cars, buildings, widgets, software or blog posts--substituting more labor for capital will not increase production any more than substituting more capital for labor.  Certain industries, like oil production, are very capital intensive.  Oil producers spend hundreds of billions of dollars on capital but don't spend as much on labor.  Conversely, legal services are labor intensive.  What this means is that most industries have mixes of capital and labor that are defined by the nature of the industry itself, rather than the decisions of the producer.  The producer may fiddle a little here and there with the mix, but his or her industry most likely determines the general neighborhood of the mix.

What the producer will not do is produce an amount that falls to the left or below the curve.  The profit motive causes the producer to add more capital and labor until the curve is reached.

What the producer cannot do is produce an amount that falls to the right or above the curve, and the limit is imposed by the state of technology at the time the production commences.  This is important to understand.  The production possibilities chart I have presented here shows two curves--one for period t and one for period t+1.  As a result of the growth of technology between the two time periods, the same mix of capital and labor is capable of producing a greater quantity. Only a change in technology can cause the entire curve to shift out and up (conversely, only external intervention in the market can cause the entire curve to shift in and down, but that's a blog post for another day).  And, technology tends to have a larger impact on capital-intensive industries than labor-intensive industries, because technology tends to affect the productivity of capital more than it does the productivity of labor.  That is, more efficient capital tends to make labor more efficient, but more efficient labor has a much more limited effect on the productivity of capital.

I will assume you agree that if the price of something increases, producers are willing to produce more of it.  And, that if the price of something increases enough, producers are willing to develop new technologies to produce more quantities more efficiently.

Going back to Bama Oil & Exploration Company's field: given the relationship between the reserves we have in the ground and the rate of production at which we can operate, we can generate another chart--depicting a production decline curve.  On the vertical axis, Q, we show the quantity of oil in the ground.  On the horizontal axis, T, we show time.  Again there are two curves shown in the chart, one for each time period in which the estimate is made.  Over the life of the well (or the field), we estimate the amount of product remaining given an average production rate.  But notice that the curves are concave, meaning that the production rate is horizontally asymptotic.  As time increases, the rate of production slows at a decreasing rate. That represents the fact that extraction and production technology increase over time, such that a fixed relationship between reserves in the ground and current production rates does not exist.  This is one of the things that the doom-and-gloom crowd don't tell you:

As the price of oil increases over time, extraction technology improves, such that our ability to produce oil from a known reserve increases vis-a-vis production estimates made during previous time periods.

There is another factor at play here as well.  Increases in technology also have the effect of improving our ability to find, analyze and estimate the amount of oil in the ground.  This is the second thing that the doom-and-gloom crowd don't tell you:

As the price of oil increases over time, the technology for exploration, analysis and estimation for reserves improves, such that our ability to identify economically productive reserves increases vis-a-vis estimates made during previous time periods.

These are two demonstrable facts associated with petroleum production.  While oil is a finite resource, the truth is we really don't know how much we have left.  We have estimates, but those estimates are made using a set of technologies and assumptions that will not be in place tomorrow.  And, while production rates today are greater than they were just a few years ago, the estimated rate of production is again based on a set of technologies and assumptions that won't apply a few years hence.

There is a third factor involved which needs no chart at all.  As oil prices increase, alternative energy technologies that are not cost effective today will become more cost effective tomorrow, especially as (you guessed it) the technology to develop and deploy them improve.  And this brings us to the third thing that the doom-and-gloom crowd don't tell you:

As the price of oil increases over time, alternative energy sources become more feasible economically, such that the demand for oil increases at a decreasing rate, causing further revisions of estimates regarding demand, production and available reserves.

If you ever find yourself in a debate regarding the future of fossil fuels, I hope you'll use these three points.  Tell your friends or opponents that technology improves our ability to find new sources of oil; that technology improves our ability to squeeze every last drop out of the reserves; that rising prices make other energy technologies more feasible and that because of all this, we will probably never run out of oil.

Or coal.

Or natural gas.


Wednesday, January 9, 2019

President Trump addresses the nation

In case you missed it, here is President Donald Trump addressing the nation on the need to address illegal immigration and his plan to increase physical and technological security on our southern border with Mexico.

"How much more blood needs to be shed before Congress does its job?"

May God Bless you, and may God Bless these United States.

Tuesday, January 8, 2019

Bama’s great year ends on a sour note


What the hell just happened? How is this even possible? What unworldly spirit has possessed Justyn Ross? Is this even real?

There is an awful lot to unpack in the worst beating of an Alabama team coached by Nick Saban. But there are only four keys to what happened in Santa Clara.

  1. Clemson used QB Tua Tagavailoa’s greatest strength against him. Tua’s ability to read defenses pre-snap is uncanny. He made history and headlines in 2018 by deciphering coverage and pressure schemes and putting the ball exactly where the defense was at its weakest. Clemson’s defensive braintrust addressed this by showing Tua one thing, and quickly doing something else, making a weakness a strength and vice versa.  This shook the youngster’s confidence and produced two critical turnovers.
  2. Clemson’s front seven played over their heads. Once Tua’s first options were taken away, even a four man rush got him out of the pocket and forced him to throw before he was ready. That is the holy grail of pass defense. A hurried throw is rarely a good one but Tua made several amazing throws under pressure anyway. He’s going to learn from this.
  3. It was Alabama’s defensive backfield, not Clemson’s, that played poorly. Clemson receivers were open all night, and it was Alabama’s front seven that could not get Trevor Lawrence to panic. He could have pitched a tent and lit a campfire in the pocket. When a QB that good has receivers that good running that wide open, bad things happen to you.
  4. Dabo Swinney &Associates outcoached Nick Saban & Co. Swinney, The Pelham, Alabama native and Alabama alumnus had the advantage of a pushover first round opponent in Notre Dame. Clemson prepared scarcely two days for that cakewalk and spent the rest of the time between the ACC Championship Game thinking up new and interesting ways to torment the Tide.

Those four little things added up to the 44-16 shellacking we saw last night. And it could have been worse—Clemson opted to eat clock deep in Alabama territory as the game expired. Please resist any urge to blame officiating (it was awful, but awful both ways), blame Tua, blame the receivers, etc. Alabama was just beaten by a better team that had a better plan. It happens. Thankfully, it happens only about once a year but it’s as inevitable as tomorrow.

Alabama will regroup after this. This machine Saban has built is not just going to go away. Much to the dismay of its future opponents, the 2019 National Championship loss is not the beginning of the end of anything. It is simply another chapter in another volume of Alabama football lore.

Watching social media out of the corner of my eye during the game last night, I was struck curious by the volume of other teams’ fans who deliriously celebrated Alabama’s defeat. Then it occurred to me that Bama may be one of the most hated programs in the modern college football era. And then it occurred to me that it was better to be the hated rather than the hater, because that usually means the former has whipped the latter so often that the hater legitimately fears the hated. And as we all know, the only righteous fear is the fear one has of something capable of your destruction.

It’s just a game, folks. And we’re just fans.

And it’s just a scant 235 days until kickoff.

Saturday, January 5, 2019

Last Call: Alabama vs Clemson, Part IV – Who wins and why


Here we go again. It’s Alabama and Clemson for the fourth time overall and the third time for the National Championship. Alabama has a 2-1 lead in the College Football Playoff series, winning it in the title game after the 2015 season, losing in the title game after 2016 and winning again in the first round last year. This is the matchup everyone has expected since opening day last September. Though it’s probably not the matchup everyone wanted.

Both teams have had close calls on the way to Santa Clara. Clemson scraped by Syracuse at home and struggled against Texas A&M on the road (Bama easily beat A&M in Tuscaloosa. Alabama trailed Georgia until late in the 4th in the SEC Championship game. But both teams have blown out most mere mortals.

Alabama has the best QB tandem in the country. Either current starter Tua Tagovailoa or 2017 starter Jalen Hurts can absolutely ruin Clemson’s day. Clemson’s Trevor Lawrence is a talent upgrade from 2017’s Kelly Bryant (who quit the team after being benched; go figure). But he is an experience and athleticism downgrade and wash, respectively. Lawrence has never seen a defense like Alabama’s and this is his first year as a starter. Lawrence is not the running threat that Bryant or his predecessor Deshaun Watson was. Both Tagovailoa and Hurts are. The game of college football can sometimes turn based on the play at the QB position and remember that Alabama doesn’t always use Tagavailoa OR Hurts.

Alabama’s offensive line has been stellar all season and they are the major reason why the QB and running corps have been so successful. Clemson has great athleticism on the defensive front, but the Tiger secondary comes up wanting. Syracuse and South Carolina had passing clinics against Clemson but neither team had defenses quite up to the task of stopping Lawrence & Co. Bama does.

Alabama’s defense has somehow consistently gotten better as the season has gone along. Early in the season, the baby-fresh secondary had receivers running open almost every play. Guys were often out of position or bit on head fakes. By the time Oklahoma’s Kyler Murray faced the Tide, guys were better at strategy, technique and physicality. True, Patrick Surtain was targeted successfully on one drive by Oklahoma.

Clemson’s experienced offensive line will face the meanest, most athletic and deepest defensive front it has seen all year. They haven’t seen anything like it since last year’s strangulation by Bama. Alabama’s offensive front will see a bunch that looks a lot like LSU’s. And Mississippi State’s. And Auburn’s. And Georgia’s.

While college football often turns on QB play, the outcome is usually determined by which team has big uglies that are better than the other guy’s big uglies. Alabama has a slight edge in the DL-OL match, and by far the better QB team.

Alabama 38, Clemson 28

Addendum: The fourth Alabama – Clemson matchup in four years is being used by ESPN’s selected mouthpieces as another reason why we need an expanded playoff field. They used the snub of Georgia and Ohio State in the same fashion.

More football games in the postseason is not good for college football. It lessens the importance of the regular season and it is that which sets football apart from every other collegiate sport. The tradition, pageantry and rivalries that make the regular season so important to so many fans and alumni must always be a primary consideration. A completely secondary consideration is more money for conferences, conference executives and ESPN.

As for the fans, we are good with four and no more.