issues
support pci
Eco Amazons
Blog post
The Peak Oil Crisis: The Next Price Spike
Posted Sep 21, 2009 by Tom Whipple
The peak oil thesis holds that the cessation of further growth in world oil production will be accompanied by wild price swings as the world attempts to adjust to the new state of affairs.
Now that mankind's oil supply has not grown significantly in the last four years despite some very high prices in the interim, many people believe that the peak has arrived in the form of a bumpy plateau and will soon begin the inevitable fall that must come with the depletion of a finite commodity. To be fair, some optimists don't see a significant decline coming for another 10, 20, 30 or more years, but few, including perennially optimistic government forecasters, predict significant further growth - at least not for conventional oil.
We already know something about the damage a contemporary oil price spike can do. In 2002, oil was selling for as little as $20 a barrel. In the next five years it rose steadily to reach $100 a barrel just as 2008 was beginning. The speculators jumped on board, the Chinese began stocking up for the Olympics and before you knew it, oil was over $140. As the US consumes roughly 20 million barrels of the stuff daily, our collective oil bill at the 2002 low was $400 million each day. By July 2008 the bill was up to $2.8 billion each day or a $2.4 billion daily increase. If you multiply this by seven, it means that collectively we had $16.8 billion less to spend on other things each week, or $72 billion less each month. Remember, two thirds of this money was being shipped out of the country to foreign oil producers. If that did not hurt our economy, at least a little bit, I don't know what will.
Some revisionist writers are beginning to question the conventional wisdom that the current recession was caused only by a combination of excessive lending to unqualified borrowers and poor regulation of Wall Street's leveraging practices. These writers are asking whether the cessation, or if you don't want to believe it has peaked, at least the pause in the growth of world oil production might have had something to do with the rapid spread of a U.S. housing bubble to a world wide recession. Needless to say, the $4-5 gasoline prices of last summer brought some reduction in demand for oil when prices were high, and dampened sales of SUV's and pickups. Nine months later, the bailout of Detroit was to cost the taxpayers $10's of billions more - and the story isn't over yet.
The high gasoline prices of July 2008 did not last long for the day the Olympics started the Chinese cut their oil imports by 2 million barrels a day (b/d) and this, coupled with the spreading recession and then some more help from friendly speculators, sent oil back down to $30 a barrel by the end of the year. The good news was that we Americans then had $2.2 billion more to spend on stuff other than oil and gas each day. We didn't even have to borrow it from the Chinese - it just appeared in our pockets.
Good things can't last forever, however, and before you knew it OPEC and the oil companies were screaming that $30 oil was preposterous. There simply was not enough money being made to find and develop more oil supplies and support the oil exporting countries in the styles to which they had become accustomed. So, OPEC cut the supply, some oil companies reduced exploring for and developing new oil fields and prices began climbing again.
Despite the global recession, oil climbed back into the $70's leaving some OPEC producers happy enough to start cheating on their production quotas to take advantage of the better prices. So there the matter rests - at least for awhile.
Recently, however, there have been reports that the demand for oil may be on the rise again, at least in the U.S., China, and India. The International Energy Agency is now forecasting that consumption in 2009 and 2010 will be 500,000 b/d more than they were predicting a few months ago. As the various stimulus packages take hold in the U.S., Europe and China some economic activity is starting to revive even as foreclosures and unemployment increases and house prices continue to fall. The Department of Energy is reporting that the demand for oil in the U.S. is starting to pick up.
If there is going to be another oil price spike in the next year or so, its origins are more likely to come from continued increases in Chinese and Indian oil consumption than from the U.S. and other OECD countries that still have a ways, perhaps a long ways, to go in working through a backlog of economic problems. A rough rule of thumb says that if a country is going to increase its GDP by a certain percentage, then its oil consumption will need to increase by half the percentage the GDP grows to support the growth. A couple of years back, China's GDP was increasing by 11 percent a year. With the global recession and drop in exports, Beijing is aiming for only an eight percent annual increase in GDP implying that, if the effort is successful, China will be increasing its oil consumption by some four percent each year.
While much higher oil prices three or four years from now, coming from new production failing to keep up with depletion of existing fields seem highly likely, the current issue is whether prices will climb into economy-damaging territory in 2009, 2010, or 2011. This is now an issue of how successful the U.S. and China are in stimulating their economies. If the GDP in the U.S. resumes falling steadily, and the recent spurt in China's growth turns out to be a government sponsored bubble, then it is unlikely we will see increased demand for oil next year. There are so many variations on this scenario -- such as the U.S. going down and the Chinese doing well with an outcome in the middle -- that it all becomes too difficult to see the immediate future clearly. The prudent among us will lean towards the side of pessimism.
Originally published in Falls Church News-Press, September 17, 2009
Get The End of Growth http://www.postcarbon.org/eog | Watch the animation Who Killed Economic Growth? http://bit.ly/whokilledgrowth
Like this post?
Keep the information flowing: Donate to Post Carbon Institute
Stay connected: Receive our monthly e-newsletter
Reposting: See our reposting policy
meet our fellows
what is pci?
Reader Comments
3 comments
Show Me The Money!
From: Stimulus Bill, Sep 29, 2009 12:56 AM
Introduction
Allow me to say at the outset that I am 56 years old. The sky has been falling for most of my life, and it has never once hit the ground that I know of. My childhood home had a fallout shelter because the Soviets were going to bomb us back to the stone age. Jesus was going to rapture the church and the Tribulation would follow. Global cooling was bringing another Ice Age. After a while, you simply stop listening.
Now, even I think I'm beginning to sound like Chicken Little. I find myself repeatedly saying, "It's NOT the Banks and Stock Markets that are failing, Stupid!" Money and other financial instruments are only abstract representations of value. The real value is in the underlying products and services they buy. And EVERYTHING they buy today is created using vast quantities of cheap energy. Stay with me a minute...
Regardles of what you've heard, THE WORLD IS NOT RUNNING OUT OF OIL AND OTHER FOSSIL FUELS. Peak Oil simply means that we can no longer increase production arbitrarily to meet demand. U.S. demand continues to rise, and demand from developing nations like China and India is rising exponentially. If supply stays flat or begins to decline while demand increases exponentially, what happens to the price of energy? It rises exponentially.
The cost of products manufactured and transported with that energy will rise accordingly, causing the value of money to plummet. Meanwhile, your paycheck only reflects your human labor, and will not rise unless you contribute more. You do the math. [ Or, change the channel and go bury your head in your silicon toys, if you prefer. ]
Defining The Challenge
Human society as we know it in the Western World, is about to change forever in ways we can't fully imagine. Several interrelated crises are converging to assure this fact, some of which are already clearly evident. And there are probably others that are still somewhat obscured.
The decline of the consumer economy is the most visible and relentless crisis at the moment, despite being propped up with unprecedented amounts of borrowed money that we haven't begun to figure out how we'll pay back. That this economy has been created and driven by a no-longer-never-ending supply of cheap, dense energy (oil, coal, natural gas and nuclear) is becoming increasingly apparent to the minority of people who are actually paying attention. This is crisis #2 on my list.
Topping many people's lists of other converging crises are Climate Change and Governmental/Political agendas that we no longer understand or approve of. Underlying these is my #3 pick -- the "dumbing down" of the citizenry that comes from our ever-increasing addiction to Consumerism. For those of you who do not understand this concept, I refer to the endless cycle of working hard to pay for leisure products like big screen TV's that we need for relaxation after working so hard, while being fed messages that spur us to buy more items that we will have to mortgage our future to pay for. It's no surprise then, that we find ourselves too exhausted to expend much effort understanding what drives the world around us. I often refer to this as "Idiocracy", in deference to one of my favorite movies by the same name.
Crisis #4: Whether by deep conspiracy or the irony of limitations borne of past good intentions, Idiocracy has utterly defeated Democracy in our time. Those who cast their votes solely on heavily marketed sound bytes so vastly outnumber those who painstakingly educate themselves about the issues and candidates that they render the latter votes irrelevant. It should be no surprise then, to discover that our government represents the moneyed interests of those who paid for those marketed sound bytes, and not the voters who believed them.
Consumerism will fail in this generation because the resources that have sustained it thus far are failing. Those who profit from consumerism (and their representatives in government) have no motive to rally humanity to a post-carbon future, and nobody wants to hear it anyway. "We The People" have become addicted to the standard of living their carbon-leveraged economy provides us, and they have become "The Pusher Man" that Jimi Hendrix sang about. Some of "them" will never admit to themselves that there even is a problem, and others will seek to maintain the illusion as long as possible, determined to finish their lives in the positions of power and privilege they have earned. And in pursuing those ends, they will no doubt be as truthful with the rest of us as they have always been.
[ Prediction: Expect to hear stories of vast new oil reserves that will last for decades in some remote part of the world where it is virtually impossible to verify or refute the "discovery". According to this future story, it will no doubt take 2 or 3 decades for this new oil source to get into the consumption pipeline, so the rumor won't suffer from premature expectations. This is not clairvoyance at work. It simply stands to reason that the only way to dispute Peak Oil data is to provide new, contradictory data - even if it doesn't happen to be true. ]
No, the post-carbon future will be built by a grass-roots movement, or it will not be built at all. And unless we act now, and succeed at diverting a significant portion of the world's existing carbon-leveraged industry to our cause while it still functions, our children's future will be bleak indeed.
Assessing the Impact
I saw a bumper sticker on a semi-tractor that read, "If you bought it, a truck brought it." Setting aside increased costs in manufacturing, how will projected fuel prices of $20 per gallon affect your access to even basic commodities?
To say that preparing a smooth transition to our post-carbon future is a matter of life and death is not an exaggeration. Semi-rural communities may be able to create self-contained communities and economies, but these will inevitably need to trade with other communities.
This point is perhaps best illustrated by considering the plight of huge cities. Large urban areas cannot possibly produce enough food to feed their populations. Highrise apartment dwellers are particularly vulnerable to the failure of existing energy infrastructures. Woodstoves, windmills and solar panels are simply not an option for them. And let us not forget about their daily need for drinking water.
Even non-city-dwellers should be concerned about this. If cities become untenable, the rats (armed gangs) will be among the first to leave these sinking ships.
The carbon economy is not inherently bad. It has, in fact, brought us many good and necessary things, which must somehow be preserved. But the carbon economy itself is nearly at an end, and curing our addiction to its excesses can no longer prevent that. We must therefore envision a carbon-free infrastructure to replace that which humanity truly needs, and fully resource the required transitions. Failure is simply not an option -- but it is a very real possibility.
My Own Awakening
Having been out of work for more of the past year than not, I became a news junkie, reading every scrap of CNN's website (and occasionally others) every day, and then drilling down on items of interest with Google searches. The high gas prices in the summer of 2008 and the subsequent financial meltdown in the fall spurred me to answer the question, "What is really going on out there?"
For more than a year, I failed to discover any of the sites which are dedicated to discussing the effects of dwindling cheap energy supplies (of which there are several). But the facts I did uncover led me to the same conclusions in the spring of 2009. I posted my hypothesis to a blog/discussion site in July for comments, and was puzzled at getting virtually no intelligent reaction to the topic. [ "The Economy - What's Next?" stalled 3 times on the way to 38 total replies, half of which were superfluous. By comparison, "What's for Dinner Tonight?" is still going strong with 409 replies. But I digress. ]
By the time I ran across a 2006 documentary entitled "A Crude Awakening" on Netflix in August, I felt I could have written it. Subsequent net searches revealed several sites dedicated to the same conclusions I had come to on my own, complete with preparation plans for a post-carbon future that echoed my own thoughts. I must admit that I am somewhat abashed that I had missed these before. I am also alarmed that these sites can seemingly only be found if one already knows what he is looking for.
My First Reaction
I am a former Navy "Nuke", a former nuclear power safety whistleblower, and am retired from a 25 year career in Information Technology that included founding two entrepreneurial companies. For more than a decade I've dabbled in energy related inventions on the side, collaborating with another noteworthy engineer and inventor. One of the patents currently in our queue is for a transducer that brings unique efficiencies to the capture of energy from wind and flowing water sources.
I am also out of work and broke right now, so I decided it was time to pursue capital for an R&D facility to produce energy patents and products from a variety of inventors. I found no support for this idea in my first attempt, which was targeted to a specific venture capital firm that I thought would surely snap it up.
At this point, I began scouring all of the sites dedicated to discussing Peak Oil, like "The Pickins Plan" and "Post Carbon Institute" for links to development capital and resources. I have found none to date.
Muster the Troops
Unlike most impending disaster films I've seen, I cannot predict how long we have before a total economic collapse could occur. My guess is 3 to 30 years. Why such a wide range? There are vested interests that will prolong Consumerism as long as possible, and there is a very real possiblity that a panicked population could crash it prematurely. Like those disaster films however, we are facing circumstances so dire that nothing less than an "all hands, all resources" effort is warranted. And there is no question that the pool of resources available for this effort will shrink exponentially when the carbon economy ceases to function.
Public awareness in the absence of a clear (and fully resourced) plan is a prescription for panic, which will inevitably result in a worst-case scenario. [ Fortunately, most of the potential readers of this piece moved on to something more entertaining several paragraphs ago. ] The best-case scenario we can hope for is a vastly reduced (but functional) trade, commerce and security infrastructure that strengthens local communities of people leading vastly different lives.
I am aware of many ideas and technologies (both large and small) that could be tapped for this effort. I am also aware of several self-funded think tanks and public awareness/education campaigns that are doing the best they can with what they've got. I applaud all of these efforts and would love to contribute anything I can to them. But in my view, a Critical Success Factor for all of these efforts is noticably absent: Money.
With sufficient capital and/or industrial backing, many products and solutions that will be needed in the post-carbon world can be built before they are needed. Personal energy generation products come quickly to mind, along with water purifiers, medical supplies and manual tooling for local industry. My father's generation outfitted fallout shelters. We need to outfit local communities.
On a much larger scale, we need to rebuild shared infrastructures. For example, a very low carbon freight transportation system should be built to keep groceries and other critical supplies flowing. Without the necessary backing to build that infrastructure, we could very well find ourselves limited to the capabilities of horses pulling wagons. An example of an ultra-efficient transportation technology can be found at http://www.et3.com. The inventor of the Evacuated Tube Transport system claims (with some justification) that such a system would use less than 3% of the energy currently used for the same purpose -- and is powered by electricity. I have no affiliation with this fellow whatsoever, btw. I just find it curious that no one is throwing money at him. I know of other struggling entrepreneurial inventors who envision technologies that, when combined with ETT could create a complete low-carbon freight infrastructure. These too, are currently dying on the vine.
Perhaps it is already too late to put projects of this magnitude (potentially many billions of $$$) in place. But perhaps not. To my way of thinking however, there is no harm in trying, as without these solutions, the money we might spend on them will become worthless anyway. Not to mention the jobs (and hope!) such projects would create.
The resilience and resolve of the American People and American Industry is legendary. The challenge currently before us is no less daunting than what we faced in World War II. What is missing is a Federal Government which will spur us to action. What is needed are individuals with credibility who are willing to galvanize our resolve, and convince those with financial and industrial resources to partner with think tanks of scientists and engineers to fund every viable research project, and build the solutions they develop.
Some of those efforts will fail. But some of them will succeed. The only difference between this model and conventional venture capital, is that this effort is for a cause greater than money. What do we have to lose by trying? And what do we have to lose if we do not try? Everything.
Is this the legacy we want to leave to our children?
If you have time, influence, financial or industrial resources that you can contribute to the quality of life for future generations, you have a moral and civic duty to ACT. You and you alone are the steward over the assets in your possession, and future history books will hold you accountable for what you do with them. I'm not asking for your resources. I'm asking you take responsibility - and invest your strengths whereever you determine that they will do the most good.
But DO contact me, or others like me who are trying to organize a coordinated effort. If we all work together, our kids will be better off than if we don't.
Bill Kuykendall
(AKA "Stimulus Bill")
Email: wek@ppci.com (Use "Peak Oil Discussion" in the subject line to avoid spam filtering.)
End of party? Or is it?
From: Anonymous, Sep 23, 2009 01:10 PM
Hi,
Please read the conclusions of the U.S. Department of Energy’s Aquatic Species
Program:
The authors say: "These analyses indicate that significant potential land, water and CO2
resources exist to support this technology. Algal biodiesel could easily supply several “quads” of
biodiesel—substantially more than existing oilseed crops could provide. Microalgae systems use far less
water than traditional oilseed crops. Land is hardly a limitation. Two hundred thousand hectares (less than
0.1% of climatically suitable land areas in the U.S.) could produce one quad of fuel."
The dollar could create upward pressure on oil prices
From: Randy, Sep 22, 2009 11:47 AM
One thing I have noticed on the market, is that when the dollar goes down against the euro, oil does tend to move up. This is the case most of the time. Since we are very overextended financially in this country, and inflation is bound to occur (it is occurring now, but downward wage pressures and other factors are working in the other direction), there is a high probability that oil will continue to increase on this merit alone. I remain skeptical that any major decrease is in the works.