Atrios on Peak Oil and Supply disruption

Atrios on Peak Oil and Disruption: "I think some people assume that an inevitable result of lower oil supply/rising oil demand is disruptive supply shortages. Widespread persistent supply disruptions would indeed be a big deal, but they just aren't an inevitable result of peak oil concerns. Arguably political instability caused by the economic pain of higher oil prices could lead to such disruptions, but there's no simple cause and effect there."

Atrios, aka Duncan Black, recovering economist, isn't often wrong on economics issues, but this comment was not particularly enlightening.

Here's the thing about the oil economy: for a fairly simple commodity, it is a long supply-and-value chain.

At one end of the chain, are the people, who are extracting petroleum as mineral wealth from the ground, and at the other end, are people, who invest in transportation and industrial infrastructure, which consume petroleum energy -- the people in James Kuntsler's suburbs and SUV's -- and, in between, a large infrastructure for processing (refining) and distribution.

Here's the thing about the refiners and distributors in between: If the world is at a Peak, that means that the world will never again be producing/consuming more oil than right now. So, there will never be more oil products to process or distribute, than right now. So, if you are a distributor, you have no incentive to add to your capacity, because the one thing you know abut the future is that your future capacity utilization will be lower than it is now.

So, yes, Atrios, supply disruption is built into the situation, at least right now, in the short run, because distribution and refining capacity is so highly utilized and so little investment is being made in expansion or, even, in the repair of marginal capacity, which might be near obsolescence and retirement.

The great danger of supply disruption is in that part of the supply chain. A hurricane in the Gulf of Mexico is a bigger deal, consequently, than war in the Persian Gulf. But, this is a temporary circumstance, which will change radically, as oil production declines quantitatively, and the refining and distribution infrastructure develops huge redundancies.

As production sags in the years ahead, the profit will go out of distribution. Declining quality of oil will push up the costs of refining, particularly the energy costs of refining. Refining oil products will become a much less profitable business as well, at least in consuming nations. The economics of refining will drive oil refining to the countries producing an exportable oil surplus, and the exporters will export product rather than crude.

The declining profitability of refining and distribution is not something I have seen discussed much, although I am sure people in the industry anticipate it in detail. The U.S. oil giants will probably migrate abroad, as Halliburton has already done. Those, which remain will decline precipitously as an industry. The Energy industry will be very powerful, as always, but the oil industry will be a sad, fading memory.

And, big surplus or high-idle capacity in distribution and refining will tend to dampen the effects of disruption. While inventory is inadequate, now, to buffer disruption, in the future, a distribution net with a high-degree of idleness will be able to cheaply hold and manage larger (relative to rates of consumption) inventories of crude and product. So, the threat of disruption will fade away.

The scenario favored by James Howard Kunstler and fans, of a huge escalation in oil price to an astronomical price, leading to total economic meltdown is just not a realistic prospect.

The global warming problem, however, may be exacerbated. Like a cigarette producer going down-market in search of addicts, oil producers will go to the relatively un-developed world with refined oil product, at an assured price, which does not require large investments. Oil will be the energy source of choice for the under-developed world -- which is most of the world, after all -- for the same reason that they favor cell-phones: if your society cannot afford or maintain a complicated infrastructure, the technology with the simplest infrastructure wins out.