Peak Oil and financial contraction: whose worried and basic concept

Following up on my last post, I attempted to help untangle the credible warnings such as climate change from the timeless rapture-esque predictions such as 2012 and y2k. Though I don’t think anybody taking the time to read this really needed the clarification, I was hoping to use the idea of limits to growth to bring the topic at issue in this post. Like I mentioned, these kinds of warnings are the hardest to focus on since they span over years and cannot be simply explained; so I’ll try and keep this post the exact opposite.

So what could be as dangerous as climate change and all the more immediate? The problem can be best understood as a crossroads: Peak oil and financial contraction in a debt based monetary system. A prediction long forecasted, casually wavered, and baring at our heels; over the next ten years, it’s going to be harder to deny the claims that we’ve hit a key limit to infinite growth. If we take a close look, like Chief Economist of CIBC bank Jeff Rubin did, we’ll see 2008 should’ve been a clear enough warning. Before going into an explanation of the problem, I’d like to quickly detour into who else is already worried, as I’d like to assert the credibility for your healthy scepticism.

So CIBC aside, who else believes we’re past or nearing peak oil?

International Energy Agency
Chevron
Shell
Total Oil
stat Oil
Hess Oil
Toyota
Volvo
Lloyds of London: insurance market / assessing risk
U.S. corps of engineers
U.S. department of defence
Energy watch group: German energy analysts
U.K. Industry Oil task force: sponsored by Virgin, foster +partners, ARUP, solar century, Scottish and southern energy
U.K. energy research centre
Association for the study of peak oil/ A.S.P.O: worldwide collective of active or retired petroleum geologists.

Both the U.S. military and the German military have published reports on peak oil: its urgency and immediacy – if you think there’s an obvious solution to peak oil, your making the implicit assumption you’ve thought of something they haven’t. (1)

And of course, no credible warning would be complete without a denial from those with the most to lose; you may recognize some of them from the climate change denial camp.

Energy information administration: U.S. stats agency
O.P.E.C. – organization of petroleum exporting countries
C.E.R.A. – chartered enterprise risk analyst
Exxon mobile

The first person to bring the concept of Peak Oil to the forefront was petroleum geologist M. King Hubbert. Finding a way to predict how much oil could be produced from wells through equations, his model became the simple chart seen below.


As you can probably speculate from the chart above, oil is first pumped easily and at an increasing production rate, that is, until you’ve extracted about half of the oil. The rest of the oil, being a viscous substance, and trapped under porous rock, is much harder to extract; both physically and financially. It’s worth noting all oil wells are not open pockets of pure oil, they’re porous rock with oil trapped in between.

Hubbert went on to refine his equation throughout the 50’s and by 1956, calculated America’s total peak in oil production by totalling all of its oil wells and applying the same idea, this formed the same curve shape as all oil wells are fundamentally the same. His prediction concluded that the national peak would be around the 1970’s, followed by an inevitable decline. Just like today, faith in the free markets and human innovation played a large part in the decision making back then, and Hubbert’s claim was refuted in the belief that better technology and increased investment could keep American energy independent.

The free market optimists did get better technology, especially in the area of finding new fields; there was also heavy investment from government and public alike. Despite getting what they wanted in support, despite uncovering Alaskan oil fields and eventually off shore drilling, domestic production never got any higher than when it did back in the 1970’s – as Hubbert predicted.

Hubbert took his calculations one step further, he began to total up all the world’s oil fields into one global oil production curve. He found his global curve peaking somewhere around the year 2000, and to date, global oil production has been at plateau since 2005. Back in the 80’s a lot was invested in finding all the world’s major oil fields too, it’s hard to imagine something was missed along the way, especially with oil companies using more off shore drilling, setting up around tar sands, and toying with the idea of drilling in the arctic. All of which make an obvious case for desperation, considering how much extra cost each one entails in comparison to your average middle east oil field.



So, why are people worried about oil production? Because peak oil is first and foremost not a physical problem, but a financial one; those who understand the concept clearly aren’t worried about the world running out of oil, there’s still tons of it in the ground – the problem lies in how much it costs to extract the rest, and what high oil prices can do to an economy.

Jeff Rubin of CIBC co- published a report that found four out of five recessions in the U.S. since the 1970’s were preceded by oil price spikes (2). James D. Hamilton published a report for the National Bureau of Economic research that eleven out twelve recessions since world war two were preceded by oil price spikes(3). This correlation is no coincidence, if you can accept that oil is in everything that’s plastic, in paint, in the lubricants of industrial machinery that is powered often by oil; it powers construction equipment from trucks to cranes, and powers transportation from cars to planes. Oil is by all means the life blood of industrial society and is to this day. The 2008 recession was preceded by 147$ oil price spike, despite crashing back down to 30$ after grinding growth to a near halt, it went back into higher prices, historically speaking. The ladder half of 2011 and 2012 has seen oil flirt around the 100$ mark, a price that would’ve seemed impossible only 10 years ago.

One can think of high oil prices as a universal energy tax for consumers and business’. For an average family it means...
- higher cost of commutes to work (as most average families don’t bike to work)
- higher cost of food at the supermarket (modern agriculture is very energy intensive)
- higher utility bills for heating and often electricity from a local oil powered power plant
- the price of healthcare (namely pharmaceuticals, which are oil derivatives )

For business’ the cost of oil effects them in a similar way, and what they may not feel in higher costs of food and healthcare benefits, they will certainly feel in areas like transportation where designs can come from America, parts from Brazil, and manufacturing in China. The goods most business’ produce will likely involve a mixture of plastic products and or plastic wrapping, oil lubricated conveyer belts, and energy intensive machinery. The chart below can give one a pretty clear example of just how dependent business’ are for cheap oil. Gross domestic product or GDP is a measure of market value for all goods and services, as we can see, the correlation is striking.


The theme to all of it is an often unnoticed energy tax. And as more money is taxed through the higher cost of energy, less money goes towards buying products, which in turn slows economic growth. The last five years serve as a good example. Without focusing on the peak of “peak oil”, we can already see the dramatic effects of hitting a plateau in oil production since 2005. Countries that are oil importers have seen shaky economic growth where as oil exporting countries seem to be at the mercy of volatile prices. When the total production of oil globally begins it's inevitable decline, then economies the world over will follow the same trend: contraction. And this time, any "recovery" will bring oil prices to newer highs that will just as quickly hurt economic growth.

So far, western countries are showing a clear ignorance to the problem of peak oil by addressing what is fundamentally an energy issue by manipulating financial levers such as lowering interest rates, printing money, and imposing austerity. Canada for instance, refuses to admit the empirical evidence altogether (4). These actions only exacerbate the problem were about to face because whether or not peak oil has happened already, or will soon, or later – a financial collapse forty years in the making has been building up alongside the peak oil narrative. In my next post I hope to elaborate on where we are in the narrative of financial history, and why peak oil is going to be the pin to the greatest of all financial bubbles. Hopefully in a later post, I’ll explore the notion of switching to alternative sources of energy and why it won’t bring us back to business and lifestyle as usual.

(1)U.S. dept. of defence Hirsch report http://www.netl.doe.gov/publications/others/pdf/Oil_Peaking_NETL.pdf
Bundeswehr report
http://www.energybulletin.net/stories/2011-06-13/review-bundeswehr-report-peak-oil-section-22-tipping-point-nov-2010 (link to original German transcript at the bottom of the page)

(2)http://research.cibcwm.com/economic_public/download/soct08.pdf
(3) http://dss.ucsd.edu/~jhamilto/handbook_climate.pdf the NEBD paper needs payment but this free pdf explores the issue as well.
(4) http://www.energybulletin.net/node/40663

I'm interested in hearing what you think a solution might me, not to negate the problem of peak oil as it's obviously an in depth issue, but on an individual scale in terms of lifestyle. After learning what you've learned, where does this leave you? What do you plan to do?

Good question Alyssa! there is quite a lot of angles to this like you mentioned. For the most part, the more you learn the angles the bleaker the picture gets unfortunately. The best we can do to cope with what's about to happen is to start gearing lives in a more sustainable way. Sustainable, in the grand sense, like indigenous populations that lived off the land for centuries - and that's not to say I think we should abandon life as we know it for some arrows, tee pees and pelts - I just want to clarify what sustainability ought to mean rather than the commercialized hybrid car meaning of "sustainable". After my next post regarding why alternative energies and other fossil won't be able to keep up first world lifestyles, I'll have one final peak oil post about what to do to prepare. Also, any books about peak oil usually have good pointers about what to do, I really encourage anyone to pick one up, perhaps from the library, as my posts are just condensed chapters meant to get people concerned.