Incentives Matter for Oil Production

You might want to take a look at oil economist James Hamilton’s exposition on why “peak oil” predictions have proven too pessimistic. Here’s his conclusion:

We like to think that the reason we enjoy our high standards of living is because we have been so clever at figuring out how to use the world’s available resources. But we should not dismiss the possibility that there may also have been a nontrivial contribution of simply having been quite lucky to have found an incredibly valuable raw material that for a century and a half or so was relatively easy to obtain. Optimists may expect the next century and a half to look like the last. Benes and coauthors are suggesting that instead we should perhaps expect the next decade to look like the last.

Or, alternatively, it might be the fact that it was cheap and so easy to obtain that resulted in its being so highly used.

9 comments… add one
  • steve Link

    I think the sort of concerning part is that production has not been, recently, as responsive to price increases.

    Query- If there is as much natural gas available as most claim, why isnt there more of a movement to using it as an alternative to oil? I assume it is infrastructure issues, especially for transportation. Why hasnt some entrepreneur jumped in?


  • I brought this point up years ago. Hubbert curves ignore prices and as a result are not good predictive tools. Yet many people run around as if they are based on a single accurate forecast. Never mind all the other forecasts that turned out to be wrong.

    Most people, when it comes to understanding statistics and probability, are ignoramai. They bare understand rudimentary probability and things like conditional probabilities are like rocket science. Look at people still being confused decades on about the Monty Hall Problem. Look at that link, there are numerous proofs, from doing a table, to decision trees, to Bayes theorem, to computer simulations. Yet there are a significant number of people who just don’t get it and refuse to accept the logic that you always switch doors in the second stage.

    So things like the Hubbert curve live on and many charlatans and con-men use it to secure a living. Take Collin Campbell as an example. From the link,

    Colin J. Campbell, PhD Oxford, (born in Berlin, Germany in 1931) is a retired British petroleum geologist who predicted that oil production would peak by 2007.


    In 1989 Campbell claimed that there would be a shortage towards the late 1990s. In 1990 he claimed that 1998 would represent a “depletion midpoint.”


    Query- If there is as much natural gas available as most claim, why isnt there more of a movement to using it as an alternative to oil?

    Rent seeking.

    Why hasnt some entrepreneur jumped in?

    Rent seeking.

    Let have three cheers for big(ger) government!!!

  • More here on Peak Oil and the Hubbert Curve, note the opening sentence basically points out that the initial prediction was wrong. It was wrong because it did not include any supply/demand responses to changes in relative prices.

    From a predictive stand point a model about as useful as the Laffer Curve.

  • steve,

    I briefly looked into converting our main commuting vehicle to CNG a few years ago. There are infrastructure issues ( But if your house has natural gas you can refuel from home overnight, though that’s an additional expense for the equipment), and CNG isn’t as convenient as gasoline, but the biggest hurdle is expense – converting a vehicle to CNG costs $15-20k dollars. So, the payback could be longer than the life of the vehicle.

    The process is expensive for technical reasons (you have to replace a lot of stuff) as well as significant regulatory hurdles. Any conversion must be certified by the EPA for each “engine family” to be compliant with emissions standards and that certification only lasts limited amount of time (it used to be year, I’m not sure what it is now). For all these reasons conversions make the most economic sense for fleet vehicles with common engines.

  • PD Shaw Link

    Andy, that doesn’t sound like something that would go over to well in a city; was/is this a rural option only?

    I’m not familiar with this particular EPA program, but based upon their treatment of similar issues, like requiring annual inspection of lawn sprinkler systems, I would imagine it would be very difficult to move them off a one year certification procedure.

  • Drew Link

    I want to thank Steve V for saving me many key strokes. Read what he wrote. Read it again. Read it and look at any references. Then read it again.

    Can we please dispose with moronic peak oil?

  • PD Shaw,

    Individual vehicles don’t have to be inspected annually – or they have, AFAIK – the same inspection requirements as regular cars – it’s the manufacturers of the conversion equipment that have to do the testing before they are allowed to sell the conversions. They must run a series of expensive tests on each type of engine and put in the results along with the EPA application. They have to retest on a schedule that I’m honestly not familiar with – last I checked it was a year but they were considering changing the rule. Again, it’s been a couple of years. Given that not many of these conversions get sold, the expense of the testing requirement and the equipment itself, it really bumps the price up.

  • Drew Link


    I should acknowledge that Andy is correct. Infrastructure issues are crucial. Have you noticed that some car manufacturers are going diesel? But diesel, which is relatively easy for a gas station to implement, can have lines.

    Imagin CNG. Imagine hydrogen.

    We are in a gasoline world for quite some time.

  • It would be easier to add more diesel to existing stations than CNG. There are cars like this in Europe that get 70MPG but can’t be sold here supposedly because of emission standards.

Leave a Comment