The Story of Peak Whiskey

The comment I got on yesterday's post about the 150th birthday of oil makes me think I have to talk about it one more time. The comment says the idea that the Earth will stop producing oil is nonsense. And the comment is right. The Earth will not stop producing oil. Except that is not the problem either.

Let me tell the story of peak whiskey. A hundred or so million years ago some guys set up a still that can make 1 barrel of whiskey per day. Then they build a giant glass to hold all this whiskey with a spigot down on the side to get it out. But something happens and it never gets used. Just stays locked up somewhere with the still on. Each day for a hundred million years that still pumps another barrel into the glass.

Until now. Now is when a down on his luck barkeep finds that giant glass of whiskey, holding billions of barrels of whiskey and that old still churning out another barrel every day. So he sets it up in the attic of his bar. When he opens the spigot just a little bit, a geyser of whiskey comes shooting out. Remember that the fuller a tank, the higher the pressure at the bottom and the more liquid will come out per second from a spigot.

So that old barkeep starts selling whiskey on the cheap. It is good whiskey but he has more supply than he can sell, so he sets the price low. People come and buy that whiskey up. Every year there are more and more people wanting that cheap whiskey. Now two things happen. As the demand goes up, the amount coming out the spigot per day is not enough. So the barkeep just cracks the spigot a bit wider and he meets the demand again. But over the decades as the whiskey glass starts to drain, the pressure at the bottom drops and the rate out the spigot drops too. But again the barkeep just cracks it a bit wider to compensate.

Decades go by. The pressure slowly drops more and more as the level in the glass goes down. The demand keeps going up and up. The spigot opens wider and wider. Until one day, the old barkeep goes to open it up a little more, and he can't. The spigot is already open all the way, far as it can go. The still up top is still pumping in a barrel a day. But the demand is now 80 million barrels a day, so the production rate is just too small to even notice. There is still lots of whiskey in the glass. It is about half full, so there are still billions of barrels of whiskey in there. It is just that he can't get it out faster than 85 million barrels a day.

His customers start wanting 90 million barrels a day. And every day the pressure is slowly going down. He has a bigger and bigger demand, and his supply per day is dropping. So what does he do? You got it. He raises the price. Because now he is not in a market where the supply is way more than the demand. Now there is more demand in the market than supply. Over the next decades, there is still whiskey to be had, millions and millions of barrels a year, but not enough to satisfy everybody. So the price just goes up and up and up.

Now the situation with oil is about the same. The Earth is still making oil as fast as ever, but that is only barrels a day. May as well be zero. We have billions and billions of barrels of oil still in the ground. But the rate we can get it out is flattening and will probably begin going slowly down. We will extract 80 million barrels a day for a good while still.

Now the idea is this: beginning about now, the supply of barrels per day is not going up any more. It will probably start going down. At the same time, China, India, Brazil and the rest of the world want to use more of it. A lot more. The result is going to be like with the whiskey: higher prices for oil and therefore gas. Even though the Earth will not stop making it and we still have billions of barrels of it. The shortage we are going to have is extraction rate.

These phases are common. Once you get a little older, you see that things come and go. A good example is with computer speed. Fifty years ago there were no computers. Then they invent them, and for about 30 years they got faster and faster. Remember in the 80's fast machines were a couple of Megahertz? That constant increase lasted a long time, but now it has stopped. Have you noticed how for about the last 5 years the speed hasn't gone much above 3 GigaHertz? That's because the engineers hit a wall ... making chips much faster than 3 GHz is not technically feasible right now.

But notice what happened. The computer industry changed course. When they couldn't make their chips faster, they made them smaller and put more than one together. Now you can buy quad core chips. Four chips, all at the same 3 GHz speed of five or six years ago. The lesson here for the auto industry is that times can change and they do change. The times of cheap oil and gas are on their way out. But that doesn't have to mean the end of the auto industry.

They have to adapt to the new course, like the computer industry did when chip speed stopped increasing. Any software company in the year 2000 that was developing a program that would only run on a 10 GHz single core chip would be out of business, because they were wedded to a course that stopped running. I think that is what is happening to Detroit. Detroit has always played by the rules that oil is cheap, and those rules are changing. If Detroit can't adapt to the new rules, they will vanish like the software company that needed 10 GHz single cores.

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