Bitcoin As a Metaphor for Fossil Fuel (Repost)

I posted this in April 2013. With the recent bitcoin price increase, it’s worth republishing:

Bitcoin has been getting some initial attention lately. Much of that comes from the fact that someone buying bitcoins at $2 only about two years ago would have made a profit of 10,000% if they had sold at the latest record high of over $200. That’s not bad for two years. It’s a way to get rich, and some people sure have.

When I wrote my second global warming science fiction novel “Tasneem” last month, I had one of my characters become rich by selling bitcoins at “$50” in 2013. I may want to go back and change that number. I also may want to buy some bitcoins myself. Maybe I should have done that instead of writing that stupid novel.

Anyway, a look at the Wikipedia page for Bitcoin shows that there are and will be, by design, only 21 million bitcoins ever.

To be more precise, in November 2012 about half of the supply was generated, and by the end of 2016, three quarters will be generated. From 2017 on, the speed of generation will go down until the hard limit is reached in 2140.

Now, to simplify things, forget about coal and gas for a moment, and just compare oil to bitcoins. The situation for the other fossil fuels would seem to be basically the same.

Assume that World oil reserves currently are 1.3 trillion barrels. Wikipedia shows slightly more than that for the top 17 countries, so let’s just go with that.

Just like bitcoins, that is a hard limit. Once you burn oil, it takes millions of years for new one to form.

For that reason, just as it did not make much sense to sell bitcoins at $2 in 2011, it doesn’t make much sense for the owners of oil to sell it now. It will always be more valuable a couple of decades or centuries later (short term fluctuations disregarded).

In other words, bitcoins are an excellent example to point to when explaining the concept of “scarcity rent”. As I noted before, that concept means for oil that owners of reserves may want to refrain from selling any oil now because they quite reasonably expect oil to become much more valuable a decade or two from now. Actually much of the volatility in the bitcoin market right now comes from the fact that a large part of those 11 million bitcoins in circulation now is held by people who are in it for the long run.

As anyone paying attention knows, 80 percent of known fossil fuel reserves need to stay in the ground. Do the math, courtesy of Bill McKibben.

So, to use the example of bitcoins again as a metaphor, what might happen to bitcoin prices if some hacker succeeded in obliterating 4 out of every 5 bitcoins? I mean, the system is new and experimental, so this might happen? It probably can’t, but let’s just assume for a minute it does.

What would that mean for the price of the remaining bitcoins? Might that price possibly go up?

Of course it would. And it would, all things equal, go up by exactly a factor of five.

In contrast, if you put a big “off limits” sign on 80 percent of oil reserves, I would expect prices to go up much more than by a factor of five. That’s because the demand for oil is not very elastic.

Now, the difference to my bitcoins example is that the 80 percent of oil off limits for burning would still exist right in the ground and would still be available for selling as raw material for the petrochemical industry. It doesn’t just disappear.

So even if prices of oil go up only by a factor of five when actually putting 80 percent off limits, the owners of the reserves come up ahead on the deal. They can sell the oil as raw material at the same much higher prices.

Just to be sure, oil is at around $100 a barrel right now. Have that price go up to $500, and you are looking at an extra profit of $520 trillion from higher evaluation of those 1.3 trillion barrels.

Might an extra $520 trillion of profit be an attractive idea for the oil industry? Just asking.

One Comment

  1. […] And regulation that would take a large percentage of all known reserves permanently off the fuel market (leaving the owners free to sell it as raw material for the chemical industry, or even sell it as fuel if for every kg of CO2 emissions one kg of CO2 is removed from the atmosphere) would lead to a windfall profit for the oil industry that might be around $500 trillion worth. […]

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