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It’s going to get all balled up. We can expect politics and economics of the petroleum depletion to become completely rolled up together in the very near future. It is already happening and a current example is the use of the word ‘shortage’. Shortage is a politically charged word meaning what I want costs more than what I am willing to pay. In economics, shortage does not exist. The big reason is that economics defines demand as want plus the ability to pay. The three variables: price, supply and demand; must always be in balance. If the price of petroleum goes to $200 per barrel, price, supply, and demand will be in balance. Where is the shortage when supply, price, and demand are in balance? Continuously, the free-enterprise system optimizes the balance among supply, demand and price. To be sure other economic rules apply. Probably the most germane rule for the new era of petroleum scarcity will be that outrageous profits produces equally outrageous competition. This is a rule that causes high technology businesses to vie so strongly to be first to market with a new product. Technologies to accommodate petroleum depletion are already on the world stage. They are: gas to liquids, solids to liquids and upgrading heavy petroleum. Focus on the problem Let’s keep our respective eyes on the ball. We need energy to do work. Ideally we would not bother with fuels, just move energy around like we do with electricity. But we are far from being able to move raw energy effectively. So, instead of weightless energy, we are stuck with moving fuels (gas, liquid and solid) with the enormous weight and volume that entails. The amount of energy contained in fuels is the key to competition among fuels. To replace high-energy fuel, low energy fuel is needed in greater amount. The extra bulk/volume adds additional cost. Two technological challenges must be overcome to graduate from a fuel-based to an energy-based civilization. First will be the means capture the energy, then the means to move energy to where it is needed, and third will be the means to store energy. In all respects we are in the equivalent of the Stone Age. I mention this only because breakthroughs can never be anticipated and any such a breakthrough would make petroleum, coal and nuclear power obsolete. As petroleum gets more and more scarce what will we see? To state the obvious, we will have to adjust and adapt our machines for other fuels or adapt the fuels to our machines. The economic opportunities will be found in bottlenecks within the adjustment process and relief of those bottlenecks. The adjustment process will involve creative destruction, as the old is made obsolete by the new. Politics will address this adaptation as gouging, shortages, and all other imaginable emotion-driven words. The world will have to go through ‘creative destruction.” As this happens, we will have to remember that free enterprise means freedom to adapt. Politics will do everything possible to maintain the status quo. Political and economic interests will conspire to thwart the transition. Why? Because people dislike change, change makes some rich and some poor, it rearranges power, it simply changes everything and people do not like change. So, free enterprise will be the whipping boy for all manner of social ills coming from the adaptation process. OPEC will whipsaw the price of petroleum to destroy nascent competition from non-petroleum energy sources. To be sure, countries with government-controlled economies (especially those with government controlled energy distribution) will stumble badly as politics and economics get all balled together. For the United States, the Federal Reserve Bank is our potential stick in the spokes. If the Federal Reserve Board facilitates the free enterprise adaptation process then America will do very, very well compared to others. If, the Federal Reserve Board instead orients on the politics of employment, we will join the other government manipulated economies in prolonged misery. Fixes are here, but… Amenable to technology are the capture and use of energy derived from fuels other than light sweet petroleum. Some are in pilot projects. But, one must appreciate the length of time it takes to go from discovery to application of technology. If we assume technology will unlock the energy from heavy liquids and solids, some opportunities will present themselves. Other opportunities will come from identifying sources of scarce materials necessary for the transmission and use of electricity (until something emerges to replace electricity.) Finally, one must consider the intellectual properties that will eliminate the current impasses to effective adaptation. Nothing is going to happen over night no matter how we would wish it. Perspective of the timeline may be gained by looking at just a few of the necessary steps:
Of course, combining steps and speeding up process can help. But, each step is necessary to make sure what is being developed will not only work in conjunction with other elements being developed, but that it will be competitive with whatever else is coming available. Finally, it must be what people want. The development of drugs gives some idea of the time lines for truly crucial products. However, and this is important, the entire drug industry is in full bloom, our transition has hardly started. The cost will be incredible. See my previous editorial Cost Per Capita for Liquid Fuels Deficit. This cost will have to be added to the debt and unfunded liabilities of the United States. Where the financial resources will come from is another issue entirely. Have some fun, ask your legislator!! But more seriously, doing just that may be a way to research where we stand in the mix of politics, economics and time.
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