Peak Oil Overview - July 2009

Most people who have read a little about peak oil have heard that US oil production peaked in 1970. This happened, even though oil companies have been working as hard as they can to keep production up. Oil companies have even applied enhanced oil recovery techniques to wells where it looked like doing so would be profitable. After the US mainland (48 states) peaked in 1970, extra effort was expended to ramp up Alaskan production. It soon peaked as well, in 1988.

Figure 1 - US Oil Production, based on data of the US Energy Information Administration.

The question now is with respect to world production. The price of oil isn't very high--is there any possibility of a near-term peak in world oil production? Lower prices would seem to suggest there is no problem.

It seems to me that if we look closely at the situation, world oil production has likely peaked, even though prices are not behaving as most had expected. Furthermore, the peaking of world oil production seems to be a major cause of the current financial crisis. The tie of peak oil to recent demand destruction points to a possible continuing destruction in demand in the years ahead, with oil prices fluctuating, but not necessarily rising to great heights.

1. Where are we now with respect to world peak oil?

There is considerable evidence that we may already be somewhat past the peak in world oil production.

Figure 2 - World Oil Production, separated between Organization of Oil Producing Countries (OPEC), Former Soviet Union (FSU), and others based British Petroleum Statistical Data (BP)

Figure 2 indicates that world oil production was rising up until 2005, but then leveled out in the 2005 to 2008 period, at a little over 80 million barrels a day of oil production. If we divide up world production into three components--Organization of Petroleum Exporting Countires (OPEC), Former Soviet Union (FSU) and All Other, the three groups act quite differently.

OPEC production bounces around, as production is raised and lowered because of planned production changes, wars, over-production and need to rest fields, depletion, and response to market conditions.

FSU production reached a peak prior to the breakup of the Soviet Union in 1990. It is currently at a new lower maximum (still rising, but not quickly), with the application of new technology and additional investment.

Oil production for the big group of All Other countries (shown in blue on Figure 2) is characterized by more steady investment. When one considers the steady investment, production for this group has almost certainly peaked. This group would include US, Canada, the North Sea, Mexico, China, and many smaller oil producers not in OPEC or the FSU.

The peak for this group occurred in 2002, with a plateau occurring more or less in the 2000 to 2004 period. Once this group started declining, there wasn't enough of a production increase elsewhere (FSU and OPEC) to bring total production up. One could argue that this was just because FSU and OPEC chose not to increase production more, but there seems to be more to the situation than this.

2. What makes you think that world oil production has peaked? Figure 2 just shows that it has been flat recently.

There are several things:

a. Recent drop in world oil production. In 2009, there has been a drop in oil production, that doesn't show up in the annual data in Figure 2.

Figure 3 - World Oil Production, based on data of the US Energy Information Administration and British Petroleum (BP). *2009 is January - April

There are a number of sources of oil production data. Figure 3 compares three measures of oil production, two of them from the US Energy Information Administration (EIA), the official US source of data.

The EIA now reports a broad measure of oil production called "all liquids". It includes everything from crude oil, to natural gas liquids, to refinery gain, to ethanol. The problem with this measure is most of the "other liquids" are lower in energy content than crude oil. They have been growing by volume in recent years. I have attempted to correct for the lower energy content by showing a line called crude + 65% x "other liquids".

One can see that with each of these measures, oil production is clearly down in 2009. In fact, since oil production was close to flat between 2005 and 2008, with the drop, production for 2009 year-to-date is at or below the level of 2004 production. Since population is rising, and the number of vehicles in use is rising, this is truly alarming.

b. Strange behavior in oil prices in the 2003 to 2009 period. One would expect oil prices to rise with the general inflation rate, but instead prices rose much faster than inflation in the 2003 to 2008 period. Then, a sudden break came, and oil prices dropped from $147 barrel to $30 barrel in the second half of 2008. Oil prices have since risen to above $60 barrel. (The graph shows only annual data, so you cannot see this detail.)

Figure 4 - World crude and condensate oil production, based on **EIA crude and condensate oil production data and ***EIA West Texas Intermediate spot prices. *2009 oil production is average January - April; prices are average January - June

The long rise in the price of oil between 2003 and 2008 seems to indicate production of oil was not rising as much as was needed by the economy and the growing number of vehicles. Oil prices were rising to encourage increased production.

According to economic theory, higher oil prices should have lead to higher oil production (or substitutes-but the impact of biofuels is small, and included in "All liquids" in Figure 3), but this did not happen, suggesting that it really was not possible to ramp up production as much as the economy needed. Even if some of the price rise at the end may have been speculation, the price rise still did not result in much of an increase in production.

It should be noted that the rise in energy prices started right after the production of the "All Other" group in Figure 2 began to decline. It was at this point that a real increase in production was needed from OPEC or FSU to offset the drop in oil production from Mexico and the North Sea. While there was some increase in production, it was not enough of an increase to keep oil prices steady. Instead oil prices keep rising. In response, per capita vehicle miles traveled declined starting in 2005, according to a study by the Brookings Institution.

Figure 5 - Brookings Institution comparison of Gasoline Prices and US Per Capita Vehicle Miles Traveled from this study.

In the 2004 to 2006 period, the Fed, it its minutes, expressed concern about rising oil prices, and raised interest rates because it felt the economy must be overheating, if such inflationary effects were occurring. The combination of higher oil prices, higher food prices (caused by higher oil prices) and the higher interest rates set by the Fed in response to higher oil prices had a braking effect on the economy. People's discretionary income dropped. Housing prices began to drop, especially in the more distant suburbs, as people could afford less. People began defaulting on loans, and the financial condition of banks became worse and worse. Still, through all of this, oil prices continued to rise.

Finally, in July 2008, a break came. The economy could no longer tolerate the high oil price. Instead of rising higher, other changes started occurring, affecting the economy as a whole. Banks began cutting back on lending. This cut-back in lending, as much as anything else, caused demand for all kinds of products to drop, since without more loans, people couldn't buy automobiles and all of the other things they wanted, and without loans, businesses couldn't fund new investments.

Once the break in oil prices occurred, oil companies began delaying their plans for increased production, especially in high cost places like the Oil Sands in Canada, where it would not be possible to produce oil and make a profit at the new lower prices. The cutback in lending also affected some of the oil companies, forcing them to limit investments to what could be financed through cash flow from current production. Since prices were low, cash flow was low, further reducing investible funds. Production from existing wells continues to decline, and new investment is needed to offset this decline. With the current lower investment, though, the amount of new investment is almost certainly inadequate, so future oil production is very likely to drop.

Spikes in oil prices have in the past have been associated with recessions, according to Jeff Rubin. In addition, an econometric study by James Hamilton of the University of California at San Diego shows a link between oil prices and the current recession:

Whereas historical oil price shocks were primarily caused by physical disruptions of supply, the price run-up of 2007-08 was caused by strong demand confronting stagnating world production. Although the causes were different, the consequences for the economy appear to have been very similar to those observed in earlier episodes, with significant effects on overall consumption spending and purchases of domestic automobiles in particular. In the absence of those declines, it is unlikely that we would have characterized the period 2007:Q4 to 2008:Q3 as one of economic recession for the U.S.

If there is a single day for peak oil, it would be the day the price break took place. This was July 11, 2008.

c. Forecasts by Tony Eriksen ("ace") based on megaprojects data show declining future oil production.

Figure 5 -World Oil Production to 2012 as forecast by Tony Eriksen ("ace") in May 2009. Oil includes crude oil, lease condensate and oil sands.

Tony and others have put together a database of planned investments in oil fields called the megaprojects database on Wikipedia. This database includes all known capacity additions of 100,000 barrels a day or more, and is constantly updated. With the drop in oil prices, more and more projects have been pushed off to future dates. At the same time, existing fields continue to deplete.

Prior to the recent drop in prices, it seemed likely that production could continue to rise, at least for a few more years. Now with lower prices, enough projects have been delayed that based on Tony's analysis, oil decline can be expected for the next several years.

d. OPEC wells are for the most part very old. Decline can be expected in the not-too-distant future.

We really have very poor information about OPEC's true oil production capability. Several of the OPEC countries have published very high reserve estimates, but these amounts are not audited, and there is serious doubt that the actual amounts are as high as they claim. Also, we don't know how fast the oil can be extracted. We don't know if these high reserves mean they actually have enough to maintain, or increase, their current production levels. The reserves could also be consistent with a near-term drop in production, and a continuing dribble for hundreds of years.

Figure 6 - OPEC oil reserves, by backdated to year. Summarized by author, using 2005 ASPO database and current list of OPEC members.

Figure 6 shows that most of OPEC oil reserves relate to fields that were discovered more than 40 year ago. In fact, some were discovered more than 60 years ago.

The problem is that at some point, oil fields become depleted. Instead of being able to pump a constant or rising amount of oil out, production begins to drop rapidly, even with rising investment. In the United States, that drop in production occurred in 1970 (see Figure 1), about 40 years after production from its major oil fields began. In the North Sea, the time frame was shorter--about 28 years between initial production and the time when it became virtually impossible to maintain the prior level of production.

Several of the OPEC countries have not been pumping at maximum capacity for the full time and initial reserves seem to be quite large, so the time until terminal decline starts playing a major role is likely longer--but could be very soon.

We know that Saudi Arabia is using aggressive techniques to maintain it production. But at some point, these techniques are likely to stop working, and production may drop by as much as 3 million barrels a day quite quickly. We have heard reports that Saudi Arabia is "resting" 1.5 million barrels a day of production from its largest field, Ghawar. This may--or may not--indicate a problem in maintaining production in the field. If Ghawar (with at one point, 5 million barrels a day of production) should start declining rapidly, this would be a problem.

e. The FSU does not look like it can play a major role in offsetting declines elsewhere.

Russia represents the largest part of the FSU. Its production seems to have recently started declining. Investment available for further development is limited by the lower oil prices, so Russia's production is likely to continue to decline. The production of the other countries in the FSU are relatively small. Their production may be able to offset Russia's decline for a few years, but are unlikely to add enough to offset much of the "All Other" decline in Figure 2. As a result, the vast majority of the decline in the "All Other" category will need to be made up by OPEC.

3. Can't OPEC adjust prices so that they are just right--high enough to keep production rising, and low enough so the world economy will not go into shock?

There are a couple of problems with adjusting prices. The first is that it is not all that clear that OPEC has that much control over price. Most members would prefer to produce "flat out", so it is difficult for OPEC to reduce production by very much, from their maximum available production. While we are often told that there is "x million barrels a day" in spare capacity, we have no way of verifying that that is in fact the case. So if production is down, we don't know if that is because of an intended cutback, or if it is because there are other issues (for Venezuela, inability to pay creditors; for Saudi Arabia, need to rest wells).

Apart from the difficulty in controlling the price, the real problem is that there really is no "sweet spot" where oil prices are high enough to encourage adequate production, but low enough to keep the world economy running. The US Fed found that even when oil prices increased from $30 barrel to $40 barrel back in 2004, this had inflationary effects on the economy, which they felt were necessary to control.

Clearly a much higher price than $40 barrel is needed to encourage production. We don't know exactly what that price is, but this graph gives an indication of the range in production costs:

Figure 7 - CERA estimates of full costs of oil production, from a Horizon oil presentation. The CERA graph was put together when oil was about $90 barrel. The dotted line seems to indicate the highest cost types of production that would be profitable at the $90 barrel price.

In order to get oil production to rise, we need new oil production from even the most expensive sources, including new deep water production and oil sands production. This means we likely need oil prices of something like $100 barrel. The world economy cannot support such high oil prices, without people defaulting on their loans, banks getting into serious financial difficulty, and the whole financial system crashing.

4. Where can oil prices and production be expected to go from here?

Opinions differ on this, but my view is that I don't expect oil prices to go radically higher. Instead, I expect that oil prices will continue to fluctuate, and the economy to continue to collapse. Thus, what we will see will look more like collapsing demand than collapsing supply.

In my view, the underlying problem is the fact that the current level of debt (by individuals, businesses, and governments) cannot be maintained, unless we have a growing economy. The reason we need a growing economy for the debt system to work is the fact that a person can borrow from tomorrow, only if tomorrow is better than today. (This is especially the case if loans require the payment of interest.) But if tomorrow is worse than today, borrowing from the future doesn't work. Even if tomorrow is the same as today, the system doesn't work, if loans need to be paid back with interest.

The problem is that the economy cannot grow unless oil production is truly rising. This lack of growth in world oil production since 2005 is what is causing the debt collapse we are now seeing. This debt collapse is in turn giving rise to the demand destruction we are seeing currently. Since oil production cannot rise in the future, it seems to me that we are going to see a continuing unwind of the credit bubble that was made possible by rising oil production. Without credit, people will be unable to buy cars and houses. Businesses will be unable to finance new investment, and we will see greater and greater demand destruction.

The result will be oil prices dropping, more and more people unemployed, and fewer goods and services purchased. In short, the whole system will unwind from the demand side. At some point, there may be a major break, if the international financial system cannot stand the strain. There may also be political upheaval, both in oil producing countries (because the price is too low) and in oil consuming nations (because more and more people are out of work). The results are likely not to be very nice.

Gail, Great post and summary. Thanks for all you and the other contributors do. I have a sense that there are still a couple of pieces missing which I struggle to articulate.

As Sam and WT point out with the export land model, many exporters past peak will soon go to zero exports. While that is important, it doesn't seem to me to go far enough. As every former exporter moves from the export camp into the import camp, every subsequent depleted barrel they lose in production equals 2 barrels needed on the global export side to remain the same. In other word, there is now a barrel that was their previous contribution to available export which is not there, plus a second barrel which is now needed for them to import.

In a recent post there was also a chart showing the impact of decreasing EROEI. Although we may go into a slow global descent in production, a larger percentage of that production will be funneled back into future production leading to a reduced net availability for end user consumption.

With the havoc of the current economic situations, and increased cost of exotic explorations, risks factors may reach a point where future exploration is greatly curtailed. A single multi-billion dollar dry hole will greatly reduce investments, and money will tend toward the sure thing which means major players will buy proven fields from independents, and the independent wildcatters be fewer and far between.

I also sense that the majority of technological solutions (Horizontal/multilateral wells, fracturing, acidizing) in the oilfield work toward increasing the flow rates, and increasing cash flows rather than significantly increasing the ultimate recovery. We can suck the well dry faster, but don't get that much more out of it in the end.

Again, I have trouble grappling with these concepts, but to me at least, it seems we have reached peak and the impact of the decline may be more harsh and more rapid than many realize. Of course time will tell.


Some variations on the ELM

I assumed that we had an exporting country that hit peak production and then saw a production decline rate of -5%/year, comparable to Norway, Indonesia, Mexico, etc. The three variables that control the net export decline rate are consumption as percentage of production at final peak, the rate of change in production and the rate of change in consumption. If the rate of increase in consumption is fast enough, net oil exporters can slip into net importer status even as their domestic production increases, e.g., the US & China.

In any case, let's look at four variations of the ELM, using a constant production decline rate of -5%/year, and varying the rate of change in consumption (RCC) and varying consumption as a percentage of production at final peak (C/P)

(1) C/P = 50%, RCC = +2.5%/year; Net Exports go to zero in 9 years, with an 8 year decline rate of -28%/year

(2) C/P = 50%, RCC = 0%/year; Net Exports go to zero in 14 years, with a 13 year decline rate of -24%/year

(3) C/P = 25%, RCC = +2.5%/year; Net Exports go to zero in 19 years, with an 18 year decline rate of -22%/year

(4) C/P = 25%, RCC = 0%/year; Net Exports go to zero in 28 years, with a 27 year decline rate of -16%/year

All four of these models show that the net export decline rate exceeds the production decline rate of -5%/year and that the net export decline rate accelerates with time. An obvious implication of this is that net export declines tend to be front end loaded, with the bulk of post-peak cumulative net oil exports being shipped early the decline phase, e.g., Indonesia shipped 44% of their post-1996 cumulative net oil exports in only two years (1997 & 1998), as they went from final production peak in 1996 to net oil importer status in 2004.

I have recently reviewed 15 net oil exporters that have slipped into net importer status, or that have recently shown net export declines. All 15 have shown net export declines that are in excess of their production decline rates (or rate of increase in production in the case of China) and despite occasional year over year increases in net exports, the overall trend was predominantly for an accelerating rate of decline in net oil exports--especially for countries have slipped into net importer status.

Egyptian Net Oil Exports/Imports (EIA), result of declining production & increasing consumption:
(Egypt, 1996-2006: Production, -3.3%/year & Net Oil Exports, -29.3%/year)

Chinese Net Oil Exports/Imports (EIA), result of increasing production & fast increase in consumption (note difference in vertical scale):
(China 1985-1992: Production, +1.8%/year & Net Oil Exports, -16.9%/year)

I have heard you review some of this info before, and I confess I still don't understand the implications.
Basically we have 30 odd countries who are exporters today
Each one of these falls into one of you four cases you outline here
So what you are suggesting (if i understand it)is that the decline in exports will be much, much faster than the overall global decline (lets say 5%), or the global decline as applied to available exports (lets say 8% or 9%)

what you seem to be suggesting is that the decline rate in available export crude will be 15% or 20% or more, once it kicks in, when you aggregate all countries

... but we have not seen this yet in the aggregate... is that becuase as Indonesia or Egypt crashes, we have a Nigeria or other to take its place
but soon there will be no new exporters. and so we will be hit with the full impact of the exporters...

could you explore the global implications of your hypothesis, and suggest where you think we are today on a global basis, and what we could expect in the next few years?

First, high flow rates can be quite misleading. As I have frequently pointed out, Indonesia's final production peak was 1996, and their net exports fell in 1997, before rebounding in 1998, so that their 1998 net export rate was only 9% below their 1996 rate--this doesn't sound so bad, except that by the end of 1998, they had shipped 44% of their post-1996 cumulative net oil exports, with the remaining 56% being shipped from 1999-2003. In 1997 and 1998, Indonesia was shipping one percent of their post-1996 cumulative net oil exports about every 17 days.

As you know, Sam has done quite a bit of modeling of the top five net oil exporters--Saudi Arabia; Russia; Norway; Iran and the UAE--accounting for about half of world net oil exports. The 2006-2008 data points are falling between his middle case and high case, which suggests that they will collectively approach zero net oil exports around the 2033 time frame. However, as noted above, net export declines are front end loaded. A ballpark estimate is that the top five will have shipped about one-third of their post-2005 cumulative net oil exports by the end of next year (one third gone in five years), with about 60% having ben shipped by the end of 2015. Currently, Sam's estimate is that the top five are shipping one percent of their post-2005 cumulative net oil exports about every 50 days or so.

We are focused on the top five because they are easier to model and they are the key contributors to the total volume of net oil exports, but consider three smaller, but still major, net oil exporters--Canada, Mexico & Venezuela (CMV), which represent three of the top four sources of imported oil for the US. From 2004 to 2008, their combined net oil exports fell from 5. 0 mbpd to 4.0 mbpd.

The point of my comment about the 15 case histories is that I have not yet found an example of a net exporter of any size, say a few hundred thousand barrels per day or so, which is showing or has shown lower production, and that is not showing an overall net export decline rate that is faster than the production decline rate. So, the expectation is that as more exporters peak and start declining, the aggregate net export decline rate will exceed the exporters' production decline rate and that the net export decline rate will tend to accelerate with time. And again, net export declines are front-end loaded, with the bulk of net exports being shipped early in the decline phase.

The disconnect between "Net Export Math" and the conventional wisdom of near infinite fossil fuel supplies is breathtaking.

Another way to look at it is to consider Nigeria with a population of 140 million heading fairly rapidly to 300 million.

If Nigerians lived the non-negotiable American way of life the intrinsic right of a person living in a free democracy they would be a huge oil importer around 8mpd.

With very few exceptions most oil exporting nations would be major importers if the lifestyle of the population was even close to that of the US.

In general the oil age was only possible because the populations of oil rich countries in general live in abject poverty makes you wonder and hopefully it makes net export math more sensible. Basically any change in the living standard upwards rapidly drops net exports to zero in most oil producing countries.

If the populations in exporting countries are rising, just maintaining the standard of living [same per capita use] the internal use of the country will rise. Will exporters sacrifice their populations for the sake of continuing to have positive trade balances?


A copy of a post I made on the DB thread:

Let's assume that you are sitting in a commercial airliner, about to take off on a New York to London flight, and you get three different evaluations of fuel on board, from the pilot, co-pilot and from a relief pilot.

The pilot says that he calculates that we have plenty of fuel for not only London, but a grand tour flying over European capitals, returning to London at our leisure--with plenty of fuel on board for a non-stop round the world trip if we wanted to try it. The co-pilot says that he estimates that we have enough fuel to get to London and for a controlled descent for landing. The relief pilot says that he calculates that the plane will run out of fuel about half way across the Atlantic, and he wants off the airplane.

The three pilots respectively represent the conventional wisdom view of virtually infinite fossil fuel resources, the Peak Oil view and the Export Land Model.

:) now we are getting somewhere. Memmel, bring over that kettle of hot water ! Last tea anyone ?

Very good metaphor.

The Peak Oil pilot might be a bit optimistic, though ;-)

ERORI can be tricky. Much of the energy invested is electricity and natural gas, at least in refinery operations. Does declining EROEI result in relatively higher exploration and production costs, and is E&P more oil-intensive than refining?

From the data I have seen the largest energy expense is the steel casing pipe. So I would say E&P is more coal and NG intensive than oil intensive. I don't know how the energy balance works out with deep water, hydro frac or heavy oil. Heavy oil is likely to be strongly NG biased.

Other questions:

If we effectively abandon some of our existing coal infrastructure, what does this do for EROI calculations? How many years can we expect new infrastructure to last (and therefore expect amortization over), in a world with less oil resources? Does Liebig's Law of the Minimum become effective early on?

You have made a key point that I don't think has been discussed on TOD:

"While that is important, it doesn't seem to me to go far enough. As every former exporter moves from the export camp into the import camp, every subsequent depleted barrel they lose in production equals 2 barrels needed on the global export side to remain the same. In other word, there is now a barrel that was their previous contribution to available export which is not there, plus a second barrel which is now needed for them to import"

thus if the decline rate of the world is 5%
5% of 74MBD = 3.7MBD
but its not 74 we should be looking at, its 44MBD which is the total world exports
this is the only number that counts
3.7 / 44 = 8.4%


Thanks, yes that is what I have been struggling with. The impact is that net exports are falling faster than the production drop, because exporter internal consumption is increasing. Also former exporters are becoming importers, vying for a share of the available net export. Metaphorically our export pie is getting smaller, but now we need to divvy it up into more slices. The size of each respective sliver will be reducing at a rate faster than the overall pie.


Again, there are three key variables: consumption as a percentage of production, rate of change in production and rate of change in consumption that determine the "glideslope" of a net export decline.

Two examples: (1) China went from (net) exporting about 600,000 bpd to net importer status in eight years because of rising consumption, even as their production increased, while (2) the UK went from (net) exporting over one mbpd to net importer status in seven years because of falling production; they had almost no increase in consumption.

One more compliation: I wonder whether Exporter consumption will continue to rise in a post-Crash world. Are their economies really that insulated? I can imagine destructive feedback loops.

I think it would be hard to constrain exporter consumption, because people in exporter countries live near the vulnerable oil infrastructure. Make them too unhappy, and they will start blowing it up, as we've seen in Nigeria and Iraq.

I agree that Nigeria is a prime example of what happens if a country tries to minimize domestic consumption. In any case, so far I haven't found a single example of an exporting country with declining production where the net export decline rate did not exceed the production decline rate.

I didn't mean to "try" to minimize local consumption. I meant, maybe their economies will tank too, lowering consumption. The premise of this article is that economic destruction willdrive oil prices lower at the same time. Won't that affect exporters economies and, thus, consumption? An unemployed Iraqi drives less just like an unemployed American.

Just an idea.

Your comments are what I would call exponential growth, in reverse, with a double whammy!

Regrettably, your thoughts that the decline may be harsher than first thought, may prove correct?

A really nice summery Gail.

Opinions differ on this, but my view is that I don't expect oil prices to go radically higher. Instead, I expect that oil prices will continue to fluctuate, and the economy to continue to collapse. Thus, what we will see will look more like collapsing demand than collapsing supply.

I agree with your basic position. I think we will see a pattern of price spikes and dips. But we won't see extremely high prices until the least efficient parts of the economy have been "demand destroyed". And who knows, that could be 30% of the economy destroyed before what is left will support a $200 per barrel oil price.

I think Jeff Vail had a nice graphic in his Oil Demand Destruction article. Different pieces of the economy are more or less efficient at turning energy into useful products. Those that are more efficient can support higher prices. The range of pieces causes a different kind of price behavior that if demand were uniform.

The financial sector is extremely efficient at turning oil products into GDP, but I see its place in the next few years as falling apart rapidly. It seems like other service sectors will collapse as well--how often does one need one's hair cut, or toenails painted. In fact, how much of the population do we really need to send to college or graduate school?

At the same time, we see a call to make huge changes to our infrastructure--like more transmission lines, more railroad capacity, more wind turbines and more electric cars. Building all of these things will take a huge amount of oil, with a payback over many future years (we hope).

So it is not obvious to me that we will see a big improvement in "efficiency" going forward, even though we may think we are working in that direction. We may spend more of our oil resources on things that don't bear results quickly.

If we look at the third world or any traditional culture, personal grooming services are are the very core of the service sector. They require almost no physical resources and they meet a basic human need - to look and feel good.

We may lose the boutiques but the hairdresser has a job for life.

Education and infrastructure don't stand a chance...

and don't forget dendistry , one's teeth are essential
look at the old civilizations - dentistry was a binding concern!


Yes, the "barber" was an important figure a few centuries ago, cutting off unwanted growths, pulling teeth, and so on. Let's hope somebody somewhere is stockpiling topical Lidocaine, or at least clove oil.

But I think it's a fool's game to bet on future COMEX oil prices, which are not predictable and may not even be meaningful in a time of shortages.

The rubber band stretched tight last Summer, the economy snapped down in response to high oil prices (IMO), and the overshoot then pulled down the oil price. It's rebounding now, but how far depends on too many variables in both the supply and the demand sides of the equation. It's easy enough to predict volatility, but about what mean?

Unless we'd care to venture a guess about the political scene, we can't say whether in the short term the oil price will drive the economy or vice-versa. Yes, in the future oil must become less affordable, but no, that does not imply a higher price.

Personally, I'm ready to go short again in most of the indexes, but I'm steering clear of oil altogether.

Of course it will be rocky early but we are part of nature and thermodynamics will prevail.
We always take the path of least resistance when it presents itself.
Live and learn I guess.

t the same time, we see a call to make huge changes to our infrastructure--like more transmission lines, more railroad capacity, more wind turbines and more electric cars. Building all of these things will take a huge amount of oil, with a payback over many future years (we hope).

All of these things can be built without huge amounts of oil. In fact, most of the country's railroad lines were built without huge amounts of oil, back in the 19th century. They were built in most cases with what amounted to slave labor.

"At the same time, we see a call to make huge changes to our infrastructure--like more transmission lines, more railroad capacity, more wind turbines and more electric cars. Building all of these things will take a huge amount of oil, with a payback over many future years (we hope)."

You regularly make these claims, I think they are all wrong. In the case of wind turbines oil accounts for less than 5% of energy used( mainly transport to sites) and the total energy is returned within 6 months. For transmission lines, electric cars ( mainly steel and aluminium) the only oil is used for mining ores and transport of components.
Most oil in US is used for truck and light vehicle passenger transport, heating oil and jet fuel. Very little is used for farming(2%), rail or ship transport(5%), mining or manufacturing(?). With the exception of jet fuel most uses can be replaced by NG or electricity ,generated by NG, coal or renewable and nuclear.
Most of the oil used for manufacturing and construction is used by the employees in their ICE vehicles averaging 25mpg. The room for improved efficiency in private transport is "huge" and the payback very rapid if oil prices continue to increase.

I'm on the fence between your and Gail's analyses..

I do think there are ways to build what we need, particularly by reallocating MFG assets that have been making fripperies and widgets, say.. but aside from the sheer volume of Oil required to make Electric Cars, Grid Lines or Wind Turbines, say, is the bottleneck effect in the overall transportation sector.

EVERYTHING we make, buy and sell is affected by the tagline..

"If you bought it, a truck brought it." (While there are surely particular exceptions, a vast majority of shipped components within our trade goods are only one hand-shake *{degree of separation} from a vital Truckload.)

I would agree that almost everything we use and make involves oil, that's only an issue IF suddenly there is NO oil or IF we use a very large amount of oil for most of these processes.
Clearly we use a lot of oil for transport, but a lot of that is single passenger commuting and light commercial vehicles. The really essential transport miles( rail and ship) don't use very much and rail in time can be converted to electric.

"but aside from the sheer volume of Oil required to make Electric Cars, Grid Lines or Wind Turbines,"
That's what I am challenging, is it really a high volume of oil for these activities?

." the bottleneck effect in the overall transportation sector."
Agreed transport is absolutely essential and oil is essential for transport, but that doesn't mean a high proportion of the oil presently used for transport cannot be replaced by electricity and higher fuel efficiency. We don't have to replace all oil tomorrow we have to replace the DECLINE in oil availability by efficiency and a much smaller ( in BTU terms) amount of electricity AS OIL DECLINE OCCURS.
The big exception is air transportation, this will have to contract.


I don't say that Gail is "wrong" per se, because I do not know what scale of re-engineering and restructuring she is using as a model, but I do think that the consumption of oil in restructuring the economy is sometimes greatly overstated.

According to graphs that Gail herself has linked us to almost all the oil we use is burned, i.e, it goes to Diesel fuel, gasoline or heating oil, up the smokestack or out the tailpipe. Very little is used for "other" such as industrial applications, chemical applications, etc. This is mostly provided by natural gas. Thus the changeover to a more efficient energy system could raise crude oil consumption some but is more likely to have an effect on natural gas consumption.

The most promising return is of course the plug hybrid car. Almost all of our oil is consumed in transportation, and this sector promises the most improvement fast. As regular sized vehicles are shifted more and more to plug hybrid, crude oil consumption per mile is reduced and crude oil consumption flattens and then begins to drop. The plug hybrid is the most acceptable technology to the public that can radically reduce crude oil consumption.

We are in an interesting period: Oil producers are much more frightened of demand destruction than lack of supply. This means they are not willing to make the long term investments needed for oil production. We must recall that the investment in oil production cannot be expected to pay off in less than 10 years or so, and the producers simply cannot be assured of demand levels they need to pay for the investment as fast as the alternative technologies are now moving. Carbon release issues will only accelerate incentivization of the plug hybrid vehicle. Friends, we are seeing a pivotal shift away from crude oil as the driver of growth in the world. The race is now fully ON. The nations that adapt fastest will be the power players in the world for the next century. Those who do not will abide by their will.


The calculations for restructuring the economy are fairly easy; there won't be enough in the diminished future because there isn't enough in the less- diminished now.

@ 80 million barrels a day, there is almost no restructuring taking place. Without anyone paying attention, the world shifted from a 'total growth regime' to an allocation regime.

An allocation regime requires choosing between commercial investment or energy use. In a total growth regime it would be possible to order- up both at the same time.

The allocation model has been gaining force for at least ten years. Actual hard- cash plus massively leveraged investments have taken place in demand- only areas such as housing, commercial real estate and in conventional auto- building capacity. All of this so- called 'investment' has amplified consumption. Investment directed toward energy production has been inadequate and grudging (Simmons). During the same period actual, net energy consumption itself increased. This is before the total of just- built demand has arrived in the market! The support of simultaneous commercial investment (on energy use) and energy demand required a dangerous increase in credit and risk. Every marginal increase in credit reduced the ability to allocate effectively by stacking risk and redirecting allocations away from energy production toward supporting financial institutions.

Energy- centric allocation was not and is still not considered necessary by the economic/political establishment. This form of blindness is likely to prove fatal to economic development as once reserves are directed into the credit 'black hole' there is less available for 'brick and mortar' investments in energy production or consumption efficiency. This is the main point Gail is making.

The US not only borrowed cash money from the future, but also borrowed a great deal of energy, as well. In demonstrating how to do this 'paying foward', Americans have stimulated excess demand for energy worldwide, particularly among countries who can leverage lending against their energy- derived cash flows.

See any of weatexas's posts here @ TOD. By means of US- derived finance credit, oil producers quickly became large consumers, building thousands of miles of highways and filling them with tens of millions of cars.

In order to have the kind of commercial growth that you suggest, it would be necessary to not purchase oil at all and direct spending toward energy investments. If there was no oil consumption, there would not be enough economic horsepower to effect the desired restructuring. If one chose to purchase oil, one would be restricted to both the legacy fleet of oil- consuming equipment AND legacy oil producing infrastructure. Both sets of which are deteriorating rapidly.

To produce new energy sources and still maintain consumption against current demand would require supply in excess of that demand to price crude @ a very low level: Think $30 oil. I don't know what that supply/demand ratio would be but last years' low would suggest an available supply over a considerable time of 88- 90 million barrels per day over 2008 consumption. Any increase in demand would need additional supply + 4 or 5 mbpd.

It's the money directed toward supporting consumption that is pulling the world away from alternatives. This leaves inadequate funding available to support restructuring; building a to- scale increase in the hybrid vehicle fleet for example. The costs of the fleet 're-engineering' that has taken place so far has been internally subsidized by manufacturers by the sale of large, gas- guzzling vehicles like SUV's and giant pick-up trucks. These vehicles were sufficiently profitable to allow makers to charge less for gas- efficient vehicles.

You might check Money and Markets. Martin Weiss PhD. has made a brief examination of the last Federal Reserve Quarterly Flow of Funds report.

It is hard to read - no, not the eyeball- numbing charts - its its sober and ominous content. There is simply not enough cash in the till to make grand restructurings.

We are broke!

You are right about not having enough energy/money to do everything simultaneously. It is hard for me to get numbers to put around what the problem is--partly because I am not sure the right numbers are published, and partly because I am not as familiar with data sources.

According to one report, the IEA estimated that global upstream oil and gas budgets were being cut by $100 billion, or 21% from 2008 levels. This would seem to suggest that in 2008, global upstream investment budgets amounted to $100 billion / 21%, or $476 billion.

As the "easy-oil" gets extracted, the cost of per barrel of extracting the remaining barrels goes up. So this hundreds of billion dollar amount goes up. Financing this becomes more and more difficult, especially for countries like Venezuela, with financial difficulties, and Mexico. As those who cannot get financing drop back, production is likely to drop faster than our models would predict.

The price barrier is unknown. There was no increase in output @ $100 per barrel prior to 2008. Would $200 generate more production?

No and that means that $200 ie simply a tariff. At that point the economic system is completely broken - what does $147 suggest?

That we are so ... so ... so very close to the edge.

I can understand people paying 'Large Dollars' for oil if it is used as an energy multiplier like Indium or Tellurium. Those elements leverage energy production and neither are directly consumable.

According to one report, the IEA estimated that global upstream oil and gas budgets were being cut by $100 billion, or 21% from 2008 levels. This would seem to suggest that in 2008, global upstream investment budgets amounted to $100 billion / 21%, or $476 billion.

I presume your figures are all non- OPEC; let's use their figures and give them a trillion per year for capacity costs and compare this to the $20- plus trillion committed since 2007 toward consumption.

"Bbbut ... those moneys are investments ...!"

Yes, investments in autos, consumer and mortgage finance, commercial real estate, road building, communications (read 'advertising') and simply rolling over past loans for past consumption. Our goods wind up in the landfill inevitably. Our debt lives forever.

The produce- to- consume model is never scrutinized or put under administrative assault. It erodes from within as its capital base disintegrates, but you wouldn't know it by looking at the onslaught of consumption strategies. Our stance is (fatally) compromised by our viewpoint; we are so immersed in consumption that anything else fails to register.

$200 is too valuable to burn or the money paying for it is only good for burning. An honest $200 barrel cannot be leveraged into consumption. Consumption itself has too 'cheap' a return on energy invested. What is the borrowed energy worth? Since its product/proxies all wind up the the trash or in the atmosphere, the 'book' value of the energy that enables this is simple ~0 or less than worthless since atmospheric remediation has costs, too ...

That's the conceptual problem with EROEI; no liabilities to balance the assets. EROEI is about production, the greater balance sheet (game) is really consumption.

How does anyone balance EROEI against less than zero- worthlessness? How can anyone justify trillions in investment on some good that is simply wasted? What is the real value of the investment and how does one value alternative TYPES of investments? What do we do with all those energy 'slaves'? What are they worth? Nothing, obviously since we pay so little for them.

Can EROEI withstand any conceptual competitor that returns anything greater than -1 or -n or any positive number. We were gifted 100:1 EROEI and what did we do with it? Travel the solar system? Leverage more 100:1 energy systems with that original 100:1?

We humans 'had' WWII and we invented suburbia and SUV's. (Am beating head on wall ...)

$200 oil does not by itself bankrupt economies, it means economies are already bankrupted by $100 oil or $60 oil. This is done by default/repudiation or runs against currencies. $200 oil does not generate financial returns or increase energy returns. At this point there is no oil price funding level for alternative because there is no real economic activity. @ a consistent $200 price level there is much less oil sold. Increasing the price further reduces demand, diminishing the utility of the money spent even more. $200 oil is a collecter's item.

You are right, Gail; Post- peak feedback loops are hard to figure out. I suspect + $45 oil starts bleeding economies; that is what we are currently living.

I would agree w/ James Hamilton in that $147 oil did so much damage the outcome was reflected in the $34 oil ...

Those are parameters. I would say ~ $150 is the bomb. The next 'trend' low would be $40. Over resistance @ $78 and a retest of the 2008 high is next. That would wring more $trillions out of the nation's bank accounts; more deleveraging and another panic.

$40 ot $150 is a good swing. That by itself is damaging.

Great job, as usual Gail.

I think we will see a pattern of price spikes and dips


I think we're still in for some interesting price spikes still in our future so that our decline looks like this:
Staircase Model 2009

And Hirsch used this graph from Deutche Bank to show how completely dependent on oil we still are:
Oil and the World Economy

For a full estimate of our economic decline as oil declines, Hirsch's paper is an excellent starting point:
Mitigation of Maximum World Oil Production:Shortage Scenarios, Hirsch, 2008

It's behind a paywall so I've got a short writeup here that includes his paper and three others:



On Hirsch's graph from Deutch bank, I wonder what World GDP growth would look like, if we looked at growth in World GDP less the financial services industry. I bet the two lines would be quite a bit closer together.

I think your graphs are correct however I'd suggest that we simply don't know the prices as we take the second step. Related to my other posts in this thread peak oil is a rear view mirror type event. Only after peak is well in the past is peak oil important. We probably have made the first step down but its hidden if you will in many other factors. Esp as Gail point out in here reply in our economic system and financial system. Its when we make that second step that peak oil begins to become a clear economic factor.

We simply have not quite yet made the transition into the post peak oil economy and I don't think it makes sense to try and carry forward whats happened to date and assume it applies to what will happen as we make the second step. However its probably a safe bet that as we do make it the economy will recognize its in a post peak world.

Now I think your 100% right about where we are i.e just starting on the second step but its wrong to take the events of the first step and apply them to the second. We are hitting one of the biggest transitions in the last 100 years this year. From a cheap oil fiat currency/debt driven economy to a resource constrained ?????

I think you are correct that we are still operating in the "there will be a recovery" context and that is primarily determining investment decisions. It will take some time before there is a tipping point and enough people take their marbles and go home instead of risk them inside the current system. (I had a conversation on Saturday with a friend who is an investment advisor who is still advocating dollar-cost averaging. I bit my lip because I just wasn't up to the conversation after two beers in the rare warm sun shining down on San Francisco in the summer.)

I think the staircase graph shows the general outlines well enough though and I put question marks beside the prices for subsequent spikes because between deflation/hyperinflation/economic contraction/etc. it's impossible to tell what price will "damage" the economy further. I am certain, though, that there will be price spikes that — at whatever level they arrive — will cause the current participants in the economy some grief.

When enough people understand the concept of receding horizons, all it will take is one event to spook the market and everyone who was hoping to "make just a little bit more money before getting out" will run for the doors.

At that point the green line above goes virtually straight down. There are many other scenarios that can produce that result sooner but that one is building in the background, I think.

According to Chris Nelder's latest piece, "the smart money" is already leaving the system. He reports: "In their judgment [his associates who are managing large amounts of money], the markets are simply too corrupt to play anymore, and Goldman Sachs is Public Enemy #1 with alumni now staffing all the key posts at the Fed, Treasury, SEC, and on down the line."

I would want more data to say that what he reports is a trend but it is at least one data point.

For those interested in the idea of the receding horizon, please see:
You've Bought Your Last Car


P.S. for those interested, tonight I'm hosting an evening with Matt Stein, author of "When Technology Fails"'s going to be an open question evening so bring your questions for Matt...for when our systems begin functioning intermittently or stop altogether....

I agree 100% with: "We simply have not quite yet made the transition into the post peak oil economy and I don't think it makes sense to try and carry forward whats happened to date "

Please read the piece from Stoneleigh:

Eventually the dollar will collapse, but that time is not now (and a falling dollar does not mean an expanding money supply, ie inflation)

Energy prices are first affected by demand collapse, then supply collapse, so that prices first fall and then rise enormously

Ordinary people are unlikely to be able to afford oil products AT ALL within 5 years

(The graph shows only annual data, so you cannot see this detail.)

Monthly/quarterly world production data can be obtained from the EIA's International Energy Statistics Portal.

No problem in finding the data. I was just trying to simplify.

A lot of people have trouble reading graphs. The more complex I make things, the worse it gets.

gail, do you have monthly data going back long enough to notice if the first quater of a year has higher or lower production than average? or is the monthly jitter just too random? if there is a lot of jitter, do you think the error bars on that the last point would be, if there isn't could you comment on the production difference of the first quarter of a year vs the year average?

(i tried to do a plot of the monthly data from the IEA website, but cyclones have skewed the means with 1 month big drops, as the series only goes back 4.5 years... )

In this particular post, I was just trying to pull together things from a variety of other posts, in as simple a format as possible, so that much of the story as possible could be told in one place, without getting into all kinds of details. The story is still pretty difficult to follow for a new reader, unless he/she is very persistent.

EIA data is generally a whole lot easier to use than IEA data. This source is monthly, and goes back to 1994.

In general, oil demand is highest going into winter, because so many use oil for heating. I haven't really researched how Jan - April compares to the year as a whole. Back in the "good old days", oil production was generally rising, so the second half of the year tended to have higher production than the first half of the year, just because of the general upward trend.

Forecast demand numbers by various agencies also give some idea as to seasonality.

Gail, Thanks for the pointer to that data.

RE: seasonal trends:

The above image is the mean difference between a 12 month average (centered on that month) and each months production.
The second series does not count any month which was more than 1MB/d lower than the previous month (9 months out of the series, which goes back to 1994), to ignore the effect of cyclones on seasonal trends.

On average the year to date production for jan-apr will be 194k above the year average (178k if you ignore cyclone effects), suggesting that any estimate of the mean production for 2009 is currently .2Mbpd too high (assuming a constant production, which seems to be optimistic).

In the whole scheme of things, 200,000 bpd isn't all that much.

Disruption by hurricanes is to some extent to be expected in the July - September period. June must be the month that a disproportionate amount of maintenance work is done.

I expect that that is at least part of the reason for higher production during October to March is the outages in the summer. Of course, the use of oil for heating during winter is the other reason.

Fundamental supply does control the price of oil !

Thats right the price of oil is not tied to fundamental supply levels. Consider the case of a fairly enlightened society like the EU that heavily taxes most oil products forcing demand lower than what it would other be because of simple price arguments. And consider the heavily subsidized situation in many oil producing nations leading to higher oil consumption than is "normal".

This demand side is thus heavily influenced by economic policy and this demand interacts with supply to result in a price. And last but not least the price of oil is controlled by a futures market. If the futures market does not expect a strong increase in prices for what ever reason then you won't see super steep contango and rising prices.

Now whats important and its something I've realized from following the futures market for oil over the last several days is to recognize that this market has yet to "price in" peak oil.

In short the recent price swings are not driven by a market recognition of peak oil. This should be fairly obvious if you follow the mainstream media where peak oil is still considered a fringe subject. I think all of us me included have read to much into the price movements of the last two years. Thats not to say that peak oil is not and underlying factor in the price movements but for financial markets its critical to differentiate between what I call key market drivers and underlying forces. Traditional market bubbles make it clear that fundamentals can be ignored for a surprisingly long time.

So I'd suggest that this key post is simply to early for the market peak oil has yet to arrive and only when its clear that the market is actually directly pricing in peak oil does it make sense to look at fundamental supply and the market.

This means of course that you have to dismiss the rise in prices in 2008 as a signal of peak oil from the market perspective despite the fact that fundamentals played a role in the rise.

I think if you really look at whats happened you will come to a similar conclusion that peak oil is not yet a important factor in the worlds oil markets. We are blinded by our own insight.

Why is this important ?

Well 150 a barrel is probably not even close to the price of oil once the markets start pricing in peak oil.
Who knows what the price will be but I'm now convinced we have not even come close to seeing it.

I suspect many people will be shocked at the market decision when it does wake up to peak oil.

:) thx memmel, you have a lovely way to give people the creeps! Adapting theses pesky trading algorithms to peak oil might take some time too...

I tried to find a children's story without success. It goes like this Momma was going to make her homemade soup and each child asked here to leave out a ingredient that they did not like. In the end the soup was only hot water.

Now we can look back at the past 18 months and realize that peak oil is just that hot water as far as the market is concerned if you treat cheap oil as cold water using the soup story analogy.

Once you subtract all the economic factors and assume that the economy simply grew to fast and resulted in temporary supply and demand imbalances the peak oil signal is so weak its hard to justify.

Instead if you look you will see the combination of rapid growth in China and India and flattening of growth in the oil supply played the biggest role in recent price history.

I'd argue that anyone who is willing to take a unjaundiced view of the market and its difficult to do if your peak oil aware will realize quickly that peak oil is simply not part of our current oil price.

This does not mean we are incorrect in recognizing that its probably the underlying driver for the current price situation but to put it in perspective peak oil is driving oil prices without market recognition and these rising prices have themselves had a secondary impact on popping the recent credit bubble. I argue that to date peak oil itself has been such a small factor it can readily be discounted.

To a large extent this makes a lot of sense if you really think about it because peak oil really just sets a floor on prices until its fully recognized and "priced in" other factors have had a far greater influence on both the highs and the lows in recent oil prices most from the demand side of the equation.
Thus so far there seems be no clear peak oil signal in prices its simply not there. So far only hot water.


I think you are looking for to closely for a cause and effect relationship, Possibly peak oil is a factor in the last few bubbles as the "conventional" economy over compensated for falling net energy by allowing over zealous growth in other areas, i.e. It masked the effect simply because it could. Conventionally the "automatic stabilizers" would kick in if such a pivotal commodity such as oil was in short supply, but in oils case its own short supply (which should strangle the economy) generates growth (in attempting to extract more/economise more/substitute).

This is where conventional economics fails, it treats oil as just another product, not the crucial major contributor to all productivity.


I don't disagree what I'm trying to say is that for the most part despite the wild swing in oil prices its been BAU. I expect that as oil depletion/export land advances that we will see a strong and direct signal from peak oil. I'm asserting we have yet to see it. Put it this way the ability of expanding debt to work as faux economic growth despite tepid growth in oil supplies and changing import patters is business as usual at least since the 1970's for most of the OECD nations excluding Britain/Canada for a few decades.

I'd argue the price spike in 2008 had a lot more to do with a bit of final bubble economy blow off than with basic lack of oil. It was peak BAU. So far given the size of the bubble we have also had a fairly standard recession. Thus although this last party and resulting hangover where super sized they where not fundamentally different outside of stagnant oil production despite rising prices.

But the game is now changing. Now we are I believe starting to begin a new phase where the critical nature of oil becomes important in its own right. But to repeat myself one more time whats most important for everyone to understand is that we are almost certainly in a once in a lifetime transition period. Or probably more correct once in a civilization.

Whats happening right now is so huge it splits the next few years off as being completely different from every year thats gone before.

It could well be that what we see is just a repeat of 2008 for decades I doubt it but it still marks the end.
The next important thing to understand is that given I'm saying we are undergoing a gut wrenching economic transition where fiat money effectively no longer works we simply can't project the past into the future. New and powerful trends are developing that will swamp out the old BAU relationships. Again it could just mean we have a sort of cycle of price spikes and collapses and the economy contracts however I simply don't see that as the most likely scenario. And I just don't feel that recent price history will be a good guide to future oil pricing. I just can't see this 200 year disaster ending with a whimper.

I hadn't thought about 2008 being peak BAU, but I guess that is a reasonable description of where we are been.

This downward trend is really uncharted. In some ways, I guess what I am saying is "Don't expect that there has to be a huge price spike for oil availability to be going down. That is a simple explanation of how things may work, but we are in uncharted territory now."


I think both you and Gail have done a fine job of presenting your arguments.Obviously there are so many variables involved no one can say for sure what will happen in the short term,but the long term is, paraxodically, easier.

My guess is that Gail is more nearly on the money for the next year or two ,or maybe even five years or so.

But if the depletion numbers we see here on the Oil Drum are correct,(and I suppose they are as good as any and better than most)then unless the world economy continues to contract and contract fast,the depletion problem will soon out wiegh the contraction problem ,and then I'm with you.

Once the market really recognizes peak oil,the sky is the limit imo.

What's to stop a long term Warren Buffet type investor from simply tying up a good field and waiting for his windfall?

Or a megabank from moving from tank farms and parked and loaded supertankers to under ground storage of crude similar to the fed's storage of the strategic reserve?

Or the Saudi royal family deciding that crude undisturbed under the sand is a better investment than bonds and stocks?

Of course WWIII will rearrange the ownership of the world considerably,and like the big one in California, it's coming-someday.

As an amatuer student of history,my opinion is that the only thing that is stopping it is in fact fear of nuclear Armageddon.

Whats vital about my argument is to understand you simply can't take whats happened to date and speculate into even the near term future. I'd argue that the price now will have zero bearing on the price even six months from now. At best you can look into the future about three months. If you will we are right now at a sort of Black Swan moment. Now six to eight months from now I'd argue that we can begin to look farther out into the future but for now at least we can only take what happens as it comes.

I've written a few times that I think we are right in the middle of a critical transition from pre to a post peak world. But for the moment at least this completely obscures any attempt to even guess the future.

I think there is a real possibility that there will be a major break, and things will be very different going forward.

This would likely come in the form of a breakdown in international trading, many political changes, and possibly even war. My expectation that something of this form would result in a much bigger drop in oil production. I am not certain we can even talk about what it would do with prices. There may be a new price system all together.

There are all these rumors about the US sending huge amounts of $ to its embassies and consulates and telling them to change it to the local currency---they will need about a years` worth of cash apparently and they should be done with the changing within 120-150 days.

Also I read that Panasonic asked all its employees in the US to leave by September 9. Is this true or just a grim I-net rumor?

I wonder if the US govt IS planning some sort of major US$ devaluation or bank holiday in order to get out ahead of this mess and take control of the situation before it loses any possibility of doing so in the future?

Stoneleigh predicted currency controls I remember.......

Some are saying there will be a new curency, one based on something with value.

We shall see.

I don't agree with the internet rumor of either a 'de jure' devaluation or of a bank holiday.

There is another 'Internet Rumor' that has the US declaring a bank holiday - perhaps in September - accompanied with a devaluation of the dollar.

A top investment advisor, Harry Schultz - who was MarketWatch's Peter Brimelow pick for financial newsletter of the Year in 2008 - is now claiming:

Some U.S. embassies worldwide are being advised to purchase massive amounts of local currencies; enough to last them a year. Some embassies are being sent enormous amounts of U.S. cash to purchase currencies from those governments, quietly. But not pound sterling. Inside the State Dept., there is a sense of sadness and foreboding that 'something' is about to happen ... within 180 days, but could be 120-150 days.

Investment advisor and former Army Counterintelligence officer Bob Chapman is saying the same thing, reporting on the possibility of a so-called “bank holiday” planned for late August or early September. According to Chapman’s sources, U.S. embassies around the world are selling dollars and stockpiling money from respective countries where they operate.

These kinds of rumors are quite similar to rumors that have Barack Obama as not being the President because he was born in Nairobi, Kenya. Or Jakarta. Or Monrovia. There doesn't appear to be any rationale behind this bank holiday rumor.

First of all, the bank holiday would accomplish exactly what? Friday, Saturday and Sunday are more than enough time to roll over failed banks and - as during the crisis period of last year - bail out important friends of the Treasury Secretary.

And crush the competition of Goldman- Sachs and JP Morgan- Chase. Ol' JP would be proud!

When FDR declared his famous bank holiday in 1934, there was no deposit insurance; depositors were yanking funds from accounts and causing solvent banks to fail. Banks had been failing for years and the stream of failures fed on itself, becoming a river of palpable fear. The bank holiday stemmed the panic and gave Roosevelt the opportunity to ship stacks of liquid cash - by airplane - to banks all over the country.

See, "The Glory and the Dream" by William Manchester.

Today, there is the FDIC. Deposits are insured to the amount of $250k. There is no need for a holiday.

As for a devaluation; compared to what? The world's other currencies are as sorry as the dollar. Even the once- mighty Swiss franc is on the ropes as Switzerland teeters at the edge of an Eastern European credit meltdown, funded in francs. Devaluation of the dollar would simply make petroleum that much more expensive. The current slide in the dollar is already contributing to an almost 100% price rise since the beginning of the year. If the economy is staggering around now like a drunken sailor as a consequence of $60 oil, imagine what it will do with a cheaper dollar and oil prices twice as high.

Most likely are credit problems expanding from eastern Europe. In today's whacky markets this would probably mean a sharply higher Euro ... for awhile. As European bank failures multiply, the outcome as usual would be a flight to safety into the dollar and Treasuries.

I'm more cynical that the usual pundit. The Treasury simply has to push one of its zombies off the cliff and the resulting panic would punch up the dollar. Morgan- Stanley, anyone?

From reading Matthew Simmons, it didn't sound like Saudi Arabia has the luxury of sitting on their oil. They need the cash flow for infrastructure investment, debt payments, and to subsidize their rapidly growing population. How do they get from here to there (deciding to sit on their oil)?

They don't have to sit on all of it.And the way bookkeepers and accountants work sometimes seems to me to be straight out of an acid trip-although I do more or less understand why things are done the way they are done.

They sit on billions in investmenst while they borrow billions more for infrastructure or social needs.Why? Because they think the investments will repay the debt plus the interest plus leave something over,so they hang onto the investments.

In an area of rising prices they can make more on the oil in the ground than they can make in bonds or stocks-or they may think they can at least.

Oil left in the ground when it was twenty a barrel a few yars back that could be sold today or this year for anywhere from forty to eighty,or last year for a hundred plus,could easily beat most portfolios over the same period.

They can sit on some oil until they have no cash reserves or other investments left if they choose to do so.As far as I know they have plenty of both in Saudia Arabia and most of the middle east but of course the situation in Venezula and Mexico is different.

If depletion numbers are correct here on TOD...
Here on TOD they are talking about 2% to 3% depletion.
But the IEA in its latest report from November 2008 talks about 8% depletion without new discoveries and about 6.3% with new discoveries included. Thats the IEA! Did you forgot this report?

I think you are talking about decline rates, and you are right there are all kinds of numbers around, in different reports, depending on what is referred to. The IEA has post peak decline rates, and post plateau decline rates. Overall decline rates, which include increasing as well as decreasing fields, but not new production, are often quoted at about 4.5%.

I don't know what you are referring to by "Here on TOD they are talking about 2% to 3% depletion?" Are you talking about Ace's graph? On it, he is adding new production. In addition to that, Ace's number include both fields where production was recently started, which are increasing, and fields where production is now decreasing. It is not surprising to me that this number (including new fields, fields with increasing production, and fields with decreasing production) would show a much smaller decline rate than the 8% IEA was talking about, based on only fields in decline. I am also not surprised that it is lower than an overall decline rate of 4.5%, not including new production.

It is sort of apples, oranges, and pears.

Yes, you need a discovery model plus a reserve growth model to compensate for depletion. This allows you to arrive at an aggregate.

It may be apples ad oranges to a certain extent yet these growth and depletion terms can be easily mixed using the shock model. Nothing I have seen suggests that there is any fundamental problem in the understanding. Depletion, decline, growth all have the same dimensional units if treated correctly.

There has been research on what percentage oil costs can be, relative to GDP, before there start to be recessionary impacts. I was hoping that one of these posts would be up before this post, but I don't remember one. We will likely have one shortly. The maximum oil price before there are recessionary impacts seems to be in the 4% to 8% range, and this has a limiting impact on oil prices. (It is different for US and world, and imports affect this result.)

The problem is that as oil prices rise, so do substitutes, and so do food prices. The prices of use goods that are shipped by oil rises. Demand for all of these things is relatively inelastic, so it is demand for the elastic goods that is cut back (new houses, new cars, trips to restaurants). All of this puts a brake on the economy, and tends to hold prices down.

Surely Euan's post on the financial return on energy invested suggested <14% of GDP for energy was a critical value.

It's important not to forget that these numbers are not set in concrete, as the economy changes a very different number could be sustainable.
Long term declines in electricity and NG will provide more room for oil to take up a larger portion of total energy.

This says nothing about oil price long term, for example a 100% increase in efficiency of oil used could allow a 100% rise in price with no change in % of economy. Or for example if 50% of vehicles moved to EV, and the other 50% ICE vehicles had twice the fuel economy(HEV), gasoline use could be only 25% of today's figure and the price 400% higher. Other sectors such as heating oil and jet fuel may be forced out and completely replaced.

Thanks for reminding me of that link. Euan's analysis is of total energy, rather than oil, which would be lower, and would to some extent depend on other energy availability / cost.

There have been other posts as well. This is one by Dave Murphy, specifically looking at oil. His cut-off for recession is about 5.5% for oil.


When do you expect the market to "price in" Peak Oil?
The thing that has begun to strike me is the extent to which the "market", by that I mean, the "traders" understand the nature of the Peak Oil problem. In today's "Energy Bulletin" there was an interview with Marshall Adkins of Raymond James Assoc. in which he very succinctly discusses Peak Oil and most interestingly, the lack of counter-argument he has been getting from the investment community. We also have the likes of Matt Simmons, long term member of the oil patch's investment banking community as well as people like Morgan Downey who wrote "Oil 101" and a trader in oil commodities for fifteen years. None of these people are "fringe elements". It seems to me that at this point, a sizable segment of the oil business/trading community is pretty well up to speed on the Peak Oil problem. It seems to me that it's now more the mainstream media and politicians who still don't "get it".

I am watching market sentiment very closely at the Energy Futures Databrowser.

Here is the crude oil futures chain from yesterday (which basically means from Friday's close):

The black dots are yesterday's futures chain. The red dots are futures chains from each day of the last week. Blue is from the last month and gray is from the most recent quarter.

If you aren't used to looking at this data, the first and most astonishing thing is that traders are willing to place bets on the dollar price of oil all the way out to December of 2017!!!

More to the point of Jabberwock's comment, in the last month we can see a range of prices and, more importantly, a steepening contango. ( This means that contracts for delivery out in the distant future are more expensive than contracts for delivery in the near future.) I take this to mean that traders are betting either on inflation or on oil scarcity or both.

(Personally, I believe they are vastly underestimating the potential for both in the 10-year time frame.)

It will be interesting to see what will happen to the shape of the curve if there is another big leg down in the stock market.

Happy Exploring!

-- Jon

This is also for Jabberwock.

However I think right now the bulk of the contango is inflation fears and I agree even these are probably understated if commodities are simply constrained.

I also look at this sort of signature on a daily basis. Its the futures chain that matters in my opinion for peak oil.

I think once it really hits we will see one of two types of events occur. Either the front month will go into steep backwardation literally snapping the futures chain towards some new ridiculous number say 500 a barrel.
This would happen fast i.e the front month would go in a sort of tight spiral with the futures rising then forcing up the futures.

Or we will see a camel hump develop in the further out futures starting 3-6 months out this will then lift both the front and future contracts. you would have contango before the camels up and backwardation afterwards.

The 3-6 month area is about as far out as real oil users use the futures market to any large degree past that its generally pure speculation. Thats not to say its not commercial player even further out but they are also speculating much past six months.

My bet is on a camels hump.

How high can it go ? Well it will go until supply and demand are in balance. Initially I'd guess anywhere from say 120-400. I know thats a huge range but its really unknown. If things are close to BAU and people are right about demand falling quickly at prices much higher than now then it will be tough for oil to go over 120 for long if even reach it. I don't agree with this position but its within the valid range. Put it this way I think 400 has a much much higher probability than 120. I'd say 20 times more likely.

This is because whats really happening is the critical strategic importance of oil will become clear and no one is going to give up easily even if it becomes a sort of destroy the village in order to save it situation.
We will fight for oil first primarily with printing fiat currencies then with bullets.

For the US for example I'd not be surprised to see large subsidies granted to the poor as the price of oil increases and large stimulus checks sent to everyone with a good precentage of the money going to buy gas.
Etc etc etc...
What we probably won't do is see the economy collapse resulting in low oil prices.
But I don't want to argue this I'm just tired of the repeated believe that 100+ is a high price for oil.

It easily could be seen as dirt cheap.

I think you are right about oil price going way above $100/barrel( in real terms). I think the subsidies will be for PHEV and EV vehicles. We can see this beginning now with $7,000-$10,000 per vehicle. This is a lot more efficient that subsidizing oil consumption.
What can save the economic damage from oil becoming >10% of GDP is gasoline rationing, not necessarily price rationing but volume rationing as the price increases, so at prices of $200/barrel rationing to reduce oil consumption by 30-40% would keep oil below about 8% of GDP. At $3/gallon most people don't think about conservation; car pooling, combining trips, shopping once a week instead of daily. Any form of volume rationing(even a token amount) will drive demand for fuel efficient vehicles especially EV's and force old gas guzzlers off the roads much faster than price rationing.

I honestly don't know.

However I don't think high oil prices are that big of a issue directly. I.e even gasoline at ten bucks a gallon is not a big deal it can readily be dealt with. Maybe as your describing or maybe differently. Note Europe maintains consistently high oil prices but you don't see EV's. And no the argument that its taxes does not really count. If EU prices where high enough to encourage a move to EV's then it would have happened. And EU gasoline diesel prices are actually in range of what some people consider high prices i.e 6-10 dollars a gallon.

They do drive much more efficient cars but this suggest the EV price point is higher. Maybe in the US which lacks public transport we might see EV's at 10 dollars a gallon. I tend to suspect that instead we will see more efficient cars maybe plugin hybrids which make more sense as a transition car.

However like I said I really think this is a side show the real problem is higher oil prices will make daily living more expensive and it will remove money for servicing debt. The mortgage you can afford is less and all other credit is also substantially reduced. But the monster elephant in the room is the continued collapse of the housing market. Losses here and in commercial real estate will financially dwarf the underlying driver which is high oil prices resulting and ever less money to spend on homes. And of course in many cases this will destroy peoples credit ratings as they get foreclosed preventing them from even being able to buy a EV regardless of subsidies. The government would have to basically offer a debt jubilee and I don't think the US creditors will allow it.

Its the collapse of suburban house prices thats the big problem oil acts as only as a driving force.
Underneath the collapse of suburban house prices is of course the collapse of the debt based fiat currencies.
Thats whats really going on. Our economy is grow or die. Without cheap oil it dies.

However like I said I really think this is a side show the real problem is higher oil prices will make daily living more expensive and it will remove money for servicing debt.

Exactly....forget the EVs, the larger point is how do we service the debt with higher oil prices that cause continued economic contraction? When each $10 increase in a barrel of oil removes $67 billion dollars from the U.S. economy we have very simple math facing us. (Approx. 6.7 billion barrels used in one year by the U.S.)

Let's take the situation of moving from $60/barrel to $100/barrel.

That's a $40 difference, or a giant sucking sound of 6.7 billion barrels * $40 = $268 billion additional dollars towards just oil. Over a two year period that half a trillion $'s, or more than half the last stimulus package. That's is a lot of money to take out of the economy that buys us no more than what we had before. It's not just the direct money: it's also the psychological shift that takes place when business people curtail investment and risk because they "just aren't sure what the future will bring." Thus the $268 billion is amplified many times in its impact.

One might argue that Europe pays this amount but I would in return point out that their economy has grown and adjusted to the high price. We instead have a transition period to go through and it really doesn't matter that Europe pays more for gasoline to the millions of people who are losing their job because of the transition.

Your calculation for the US is good.

Regarding Europe, you need to realize that taxes on gasoline and diesel are simply taxes on that base, rather than on another base. The total amount a consumer spends because of a rise oil prices is calculated the same was as in the US. The result of the higher taxes on petroleum products is that less petroleum products are imported, so the cost per person, in terms of increased petroleum imports, is lower for a given $10 increment in oil price. Thus a rise in the price of oil has less effect on European economies, because they use less per person.


Generally I won't quibble with anything you have to say.

I agree with you that oil can and probably will go MUCH higher than most other posters think.

And given lots of time,ten dollar gasoline can as you say"be dealt with" but I must totally disagree with the "readily " part of that statement.Of course I realize you are painting on a larger canvas with a bigger brush,but short term..........

Apparently I am one of only a very few posters here who lives in close contact with the lower end of the working class part of our society.

It changes your perspective considerably.

There are many millions of people in this country who even a couple of years ago were just squeaking by on a week to week basis who must commute,and very few of them are in a position to trade vehicles.Probably half owe on thier present commuter car,which is likely to have a near zero trade in value even at five dollars per gallon.

And when I think about all the folks who will lose thier jobs as a direct result of people driving less-fast food employees,housekeeopers at resorts,etc,it scares the living hell out of me given the viscious feed back that will destroy even more jobs.

I have never believed in the "power down" or Olduvia type scenarios,but I have always recognized that they are real possibilities-just not very likely to actually come to pass.

I'm beginning to lose a little sleep thinking about these things.

Up until recently,getting ready has been a sort of intellectual exercise in prudence,similar o paying for health insurance.I've done a lot to get ready,just in case tshtf.

Now it looks more and more likely from one month to the next that we may be in for it for real,with no bottom in sight.

For me that feeling is like being sick and not knowing if you will get well again.Worrying about actually dying is a lot worse than worrying about how you will pay a hospital bill.

I still believe we will pull thru in the US and most of the developed world more or less whole but chastened.

It's beginning to look as if there is very little hope for the grossly overpopulated parts of the third world.

I just can't see the aid arriving that will keep them alive,given the situation in the developed countries.

Thanks for that explanation, memmel. It makes sense that we should see a convulsive/panic reaction from either the spot or near term futures market at some point.

Overall, my own view is consistent with yours. I respect Gail's analysis and am sure that it contains much truth, but the idea that industrial man will timidly slide quietly into the muck of a new economic Dark Ages (a gradual "oil demand destructed" economic collapse) just isn't the way we humans do things. Our way is through short-sightedness, complacency and denial suddenly being replaced by panicked reaction and conflict; that's just human nature. We will get into some sort of bidding war with other nations over this. As you point out, the strategic importance of oil will not get overlooked. This is an existential threat to our way of life; our very existence. Major convulsions in the market place will happen, followed most likely by armed conflict. That's the Human Way.


I don't know much about the oil market,other than what I 've learned here at the Oil Drum.

But i have watched some other markets closely over the years and even when the players have clear indications that all is not well,they still continue to "go with the flow".

Huose prices were clearly unsustainable in many areas for quite a while before the real estate market crashed,based on two simple rules of thumb used by friends of mine who were remodeling older houses and renting them out.Every once in a while they would sell one,when they got a better one to keep as an investment.

The first rule they used was simple as falling off a log-when prices are high enough that the typical person living in the area has a hard time making his payment,prices are unsustainably high.

The second one was that interest rates always go up ,given time.See number one,and if rates are down,and payments are still tough to make,then when rates are up again,payments are impossible to make.

Simple enough,right?

So they quit buying and sold everything not considered a great keeper for the long haul.

They are sitting pretty.

The pros with thier mba's are broke,the sales agents are broke,the banks are broke,the buyers are broke-and yet the fundamental facts were in plain view and did not require more than every day common sense to be appreciated.

I beliebve X or some other person who studies ag commodity futures has commented on simliar seemingly irrational behavior by traders in commodities.

Thank you Gail.

Furthermore, the peaking of world oil production seems to be a major cause of the current financial crisis.

As you know, I disagree with that statement. The cause of the financial crisis was too much credit/debt/leverage/easy money, not oils impact on economy, which pales in comparison to the ongoing credit overhang. This started in 1970s and snowballed in late 1990s early 2000s - well before global oil peaked or even hit plateau. High oil prices might have pricked the bubble but they couldn't have been the cause because that began decades ago. (and even high oil prices were primarily a global liquidity response, rather than peak oil related - the NEXT oil price rally will be global peak oil related...;-)

Oil and financial system are definitely related, and I think US peak oil did set in motion a sociopolitical response that led to an eventual credit crisis, but I think it is more correct to say that financial crisis caused peak oil than vice versa.

Peak Oils role in our financial situation is that it limits our options (severely) going forward, not that it caused the crisis. But that is water under bridge. We are in complete agreement that the energy/economics situation is a disaster. What is important is looking forward at what can be done. In my opinion less consumption is only answer - but how to marry less consumption with an economic 'growth is good' cultural mantra will be a neat trick.

I would argue that the growth in debt could never have happened, long term, without the growth in oil production. The recent growth in debt was encouraged by the Fed, Congress, and everyone else, to cover up the lack in "real" growth in the underlying economy. So it was an easy bubble to prick. But one can argue that it was the bubble itself that was the problem.

I agree. One can learn a lot from history. Modern day fractional reserve banking and its cousin, the bond market, originated (in the most part) in 15th century Florence. The Medici family took in deposits of gold and leant them out many times over to merchants in order to finance their trade. The merchants were literally trading - being the delivery of goods to far away people in return for other goods and/or gold. The merchants biggest cost was not the purchase of the outward-bound goods, but rather in the hiring of human labour and animal feedstock in order to form a caravan or flotilla. Thus the need of the merchant to secure finance was primarily to fund his energy requirements. I would submit that nothing has changed. Our economy is still 100% dependent on energy to grow. Even wehn we work from home via the internet (as I do). To keep the structure of the internet (servers, routers, cooling, but not the home PCs) in the USA consumes 10% of all electrical output of the country. Information needs energy to exist!

So back to the point. The progression goes like this: we wish to grow our economy. That is to provide more products and services tomorrow as we do today. This requires an increase in our available capital in order to purchase the energy to create the growth. We do not have that available capital so we turn to the money lenders who lend it to us at interest. This is the modern economy.

Compare the modern economy to a more traditional, 'agricultural economy' such as the Amish of PA. They (and i don't intend this to be a sermon!) adhere to strictly biblical interpretations of work, savings and consumption. And, by-the-by, abhor the very principle of usury. In fact up until the time of the Medici usury was outlawed by the Church in Europe as its destructive powers were well documented. The European Christians however were just as greedy as the next faith and realised that they could still finance their consumption by neatly side-stepping the Papal edict - which only banned Christians from lending at interest - by turning to the Jews, who were not so contrained. (Mr Shakespeare had a decent stab at dramatising this in the Merchant of Venice)

Yes, indeed. The modern fiat-based, fractional-reserve usury-driven monetary system we have been living in since WW2 (and before) is just the other side of the energy coin. When either one fails, it brings down the other.

I think more likely the availability of money to borrow was a result of the concentration of wealth in countries like China that took over the bulk of US manufacturing industries. I'm inclined to think that a result of environmental laws, labor laws and the success of union wage bargaining. Industries simply decided to walk away from those problems and overseas countries without democratic foundations were able to mobilize their impoverished citizens into uncontrolled factories. The immense profits in dollars came back to the US and were made available to anyone who could make minimal payments. That availability of credit masked for many years the actual loss of earning power in the country. I suspect that the run up in oil prices acted as a the tiny blow needed to knock down the financial house of cards.

Gail Nate I think the real situation is not unlike quantum mechanics where the uncertainty principle prevents you from exactly defining both the position and momentum of a particle at the same time.

Our energy systems and financial systems are so intertwined its impossible to treat them as different entities.
Its not a either or situation but a sort of synthesis and mix. And obviously the fact that the physical location of the source of oil and the physical location of the sources of money are different plays a HUGE role in our intrinsic economic model. When the US was both a oil and financial powerhouse we had a dramatically different economic model it was as the sources of oil become increasingly split from the sources of money that we developed this wacky economic system. And of course the location of manufacturing wages etc play a important role.

But I'd say this political divergence between the who controls the oil and who controls the money is the heart of the convoluted mess we see today. To try and disentangle it is probably not possible.

I am afraid the convoluted mess will disentangle itself. That is the problem we face.

In spades like gangbusters how ever you want to put it. However I think its simply not correct to try and use the entanglement period to predict whats going to happen during disentanglement if you will. Just because the first step towards a post peak world still has most of the entanglement if you will from the entanglement periods says nothing about whats next. The crystal ball is broken in my opinion for the next six months. Regardless of what happens within six months we will be out of a traditional post WWII recession just based on time arguments alone.

Only then can we really even begin to understand how things will unfold. Again that not to say that your post is not correct i.e. we are at the beginning of something new a post peak world but it is new. I think that it will rapidly become clear whats going to happen however even this is unknown.

Since the first big price run up, short-selling and now other "speculation" is being regulated/banned. How long until the information that this trading is based on comes to be seen as too sensitive to be released to any but a select few?

I believe we are near or perhaps past peak accurate information. It will become harder and harder to really know what is going on in any detail even while the grim realities we have been predicting become ever more apparent.

The 2002-2007 housing bubble was a straight out fraud, with financial valuations far in excess of future revenue streams that oil-based growth could deliver, assuming oil production could have kept growing. The longer term bubble you describe since the 1970s would have hit Peak Oil or other resource limits of the planet sooner or later, but as another TODer said, we didn't count on derivatives launching a preemptive strike on Peak Oil.

But what else happened in the early 1970's?

It's at the top of Gail's post.

So Nate's decline happened to neatly coincide within this time frame.

It's all subjective though since no controlled study exists.

Excellent post as usual. The Oil Drum is the leading forum about liquid fuels, but at some point we start debating how many angels can dance on the head of a pin. It would be refreshing to look forward, not just over the edge of the economic cliff, but at paths to the future. Toward that end I offer this topic for debate:

DESERTEC is a consortium of substantial European companies formed to promote and capitalize the massive integration of North African CSP plants into the EU energy supply system. Costs are not trivial, but pale in comparison to the way capital has been expended on non-productive enterprises--- the oil wars initiated by the USA for example. What do the Oil Drummers think about its technical viability? Here is a link to their proposal.

I'll look at what whether we can get someone to do a post on North African CSP plants.

This is clearly an electricity proposal, so doesn't address the need for liquid fuel substitutes. It may help other problems though (decline in European gas situation and desire to limit coal because of global warming, particularly).

There is also a 2007 post that talks about North African CSP plants. It is probably a little out of date now.

"This is clearly an electricity proposal, so doesn't address the need for liquid fuel substitutes." Did you really mean to say that? Don't you think it possible that you are developing a bit of tunnel vision?

This April a small Canadian company (Future Vehicle Technologies) had their personal transportation vehicle tested by an independent organization. The result: 165 mpg at freeway speeds and 275mpg equivalent at city speeds, with the acceleration and cornering of an exotic sports car. This is no SUV, but with a bit of refinement vehicles of this type could be the perfect commuter and grocery hauler while being as sexy as a BMW.

The FVT eVario burns a cupful of gasoline once in awhile when its owner forgets to charge it, but the rest of the time it achieves its performance by substituting electrons for liquid fuel. Believing that liquid fuels provide the only basis for personal transportation is simply hiding one's head in the (tar) sand.

The problem is a lack of minerals to build these vehicles in quantity. It doesn't matter how good they look on paper.

One reference is here.

I was wondering what you were going to link for evidence that we cannot build a few billion EV's.
It seems that only Lithium, Neodymium and Copper could be in short supply. The US recycles 98% of automobile steel.
Only copper is essential for electric vehicles, world production is 15Million tonnes/year, producing 50million EV vehicles per year would require 15-30% of copper consumption. Higher demand for lithium and neodymium would enable lower ores to be refined, but neither are essential for EV's. One claim is that present Li reserves could provide 600Million EV vehicles. All of these metals would be recycled at a high rate of recovery.

The tar sand story makes quite a bit of difference in the timing of events. I tell that story

I think climate change is an issue so I hope your "optimistic case" doesn't come to pass.

Nice post and a great summary of how we have gotten here, yet I have the suspicion that you have underestimated the Saudi capacity to increase production from where they are today. It looks to me that they have cut back a lot recently, clearly in response to lower prices. You can argue that they need to "rest" some wells but if that was needed they would have it scheduled into their overall production schedules and not rest wells only when prices were low.

So my guess is that Saudi response to a price rise will be to increase production, thereby limiting the price increase. How long they can do that however we can only guess.

At this point, the many of the Middle East countries, including Saudi Arabia, have huge problems maintaining adequate electricity supply. If they were really in as great shape with oil as they say they are, it seems like this would be a trivial problem to solve, with all of their extra oil, or with natural gas associated with all of their extra oil.

Maybe this isn't their priority, but it seems strange.

Here is what we have observed so far, as of 2008, relative to 2005: A production decline rate of -1%/year, with a net export decline rate of -2.7%/year (EIA).

If Saudi Arabia had maintained their 2005 net export rate they would have shipped about 10 Gb from 2006-2008, inclusive. They actually shipped about 9.1 Gb (EIA), 900 million barrels short of what they would have shipped if they had just maintained their 2005 rate.


Excellent review and right on the money I believe with regard to the United States and oil. I also concur that we may already be past the peak in oil production. But I am still very uncertain as to exactly what that will mean.

My concern is that the correlation between GDP and oil in the US is not shared globally. The booming economies of Asia and and those of the Middle East are more dependent upon coal and natural gas than they are on oil. Even the UK, which I regard as the G7's canary in the coal mine, might suffer less than I have expected if shipments of Liquified Natural Gas arrive in sufficient quantity.

When we look at the relationship between GDP and energy use in nations like China, Indonesia, Brazil, Iran, etc. we no longer see a simple picture of oil depletion and economic collapse. I think it is entirely possible that China will continue to expand economically and bid up the price of oil even as the US economy shrinks. If that happens it is quite possible that we may experience a deflation with respect to fixed US assets like houses and stocks at the same time as we experience strong inflation with respect to globally fungible commodities like oil.

There is so much that could happen that I think the only thing we can truly bank on is volatility.

With regard to the UK, don't forget that we are largely dependent on the fortunes of the US. 2007 we exported $57 billion to the the US. If the US goes tits-up permanently then this export market will close to us, and with it our largest in flow of foreign currency. The Euro is second. This really is the nub of the problem. I blame it on globalization. We are all so interdependent now (except the Amish!) that all eyes are rightly on the US. And boy, do you guys have a problem! (but then so do we)


I agree. I think UK's dependence on the financial industry is causing part of its woes, but with globalization, it would have a problem in any even.

I think the fact that we are truly reaching limits to growth is the real issue. I some countries, oil shortages will be the major issues. In other countries, like China and India, fresh water shortages and pollution issues may be the limiting factors. There may be a difference of a few years in timing, but it seems to me that we are all headed in the same direction, on not too different a time scale.

What you're looking for is some kind of feedback system of energy prices. In control theory negative feedback is almost always good, positive frequently bad.

For example,
Oil prices rise, causing more investment leading to more oil supply leading to lower demand leading to lower oil prices.


Oil prices rise,but no increase in supply(depletion) leading to substitution leading to lower demand(overtime) leading to lower oil prices.


Oil prices rise, destroying investment, leading to lower demand, leading to lower oil prices.


Contrary to delusional libertarians, investment is usually stimulated by government policy not free markets. Very few big projects have been completed by private investors(even Donald Trump).

Markets by themselves are just roller coasters.

We have had an energy policy for the last 30 years that been all about subsidizing the private energy sector instead of actually developing alternative energy systems. We end up more dependent of foreign oil, fossil fuels, nukes than ever so we know that method has failed.

We need to stop worrying about oil prices and get down to transitioning to a low carbon society, IMO.

We certainly need to do something differently. I don't think we will all be able to agree on what it is.

Excellent points, maj.

Do you know of a study here or elsewhere that has attempted to account for the various feedback systems at work here?

From Bloomberg: U.S. Rescue May Reach $23.7 Trillion, Barofsky Says (Update2)

How can interests for this dramatic added debt value be paid without economic growth?

Can't in real terms. Maybe in notional terms (printing press) but even that is a stretch. I suspect by 2015 we have a new currency (probably a 'Global', or some IMF-backed concoction where international body has more control over policies). US will fight it, but hopefully only verbally....(and I really hope, though I won't hold my breath, that the next exchange vehicle will be unleverageable and backed by natural resources).

Ramón Tamames has registered a name for that global currency: "cosmos"

That is too funny. I just named our new (stray) kitten 'Cosmos' today...auspicious...

More than 40 yeas ago the IMF suggested the we have a combined reserve unit. They suggested the name CRU. This was during the DeGualle pro gold days. Someone responded with a poem:

Poor France, left out in the cold.
Won't have anything but worthless gold.
I'd rather have a valuable CRU
Wouldn't you!

There is an interesting piece on the msn money site today titled the us /china ponzi scheme.

Worth everybodies time imho.

Liked your post!

The Chinese government is becoming serious about allowing the yuan to trade more freely in the world. This is a mature step for that government and is the only route for that currency to gain international acceptance. . .

Another difficulty that the Chinese had to face with but seemingly don't now is the requirement for the PBOC to print vast amounts of yuan to service all the new overseas yuan customers. This was indeed a problem. Long ago (2008) yuans were once scarce on the ground being hoarded (saved) by the citizens. No longer; since the Great Unwinding the Peoples Bank has been spewing enormous quantities of yuan for domestic purposes and the flood tide is sufficient to allow some of them to float overseas.

China's strategy therefore is to ape the US's dollar strategy and leave the world awash with cheap money, cheaper money riding on the back of cheap Chinese labor and poisoned consumer products, cheapest money, the strategy being the implementation worldwide of Gresham's Law, the bad (money) drives out the good. Or rather, the worst money drives out the bad ...

Inflation is the trick. Printing notes.

Carbon capture and storage (CCS) is regarded as a good transition solution in Europe, eventually the goal must be energy generated from clean/renewable sources. There are several projects underway right now, heavily sponsored by the EU (source:
Emerging economies should take their responsability and start investing in CCS as well as renewable energy.

We have had several posts on this. So far, it doesn't look like more than a remote possibility, and the energy costs are very high. These are some posts on Carbon Capture and Storage.

I don't think you can compare world oil production to what has happened in the US. A large part of declining US production has been from the government putting potential drilling sites off limits. On the global stage, I don't think you're going to see those kinds of limitations. In that respect, I don't think oil production has peaked yet, or has even come close to peaking. China and India have dismissed any proposed reductions in CO2. Those countries and others (notably Brazil) will likely pursue offshore production on a very large scale. If we don't see US rigs offshore, we may end up seeing Chinese rigs off our shores. The same way we see Chinese products filling up our stores.

Regardless of what the press may make it sound like, what is off limits is a pretty small share of the total. This is from a presentation by Dr. Sam Shelton of Georgia Tech, showing his estimate of how much difference drilling in the Alaska National Wildlife Refuge would make. Drilling in currently forbidden offshore locations is likely to make a similarly small contribution.

I have argued that we should do whatever additional drilling we are going to do now, because the quantity of oil is so small in these additional places that we cannot maintain sufficient infrastructure (pipelines, refineries) just to service them on their own. Because of this, the idea of "leaving them for our children" won't really help our children. Of course, the climate change issue exists whenever we use them (but given the small amount, it may be immaterial).

Yes, yes, and yes! The government should compel oil companies to explore and drill everywhere, so the 'drill here, drill now, pay less' crowd will shut their pie holes for good. Uncle Sam can print some more money and subsidize off-shore (OCS) and ANWR production. Anything to remove this ridiculous red herring from the table and talk about real, useful strategies.

Peaks Happen: Two regions developed by private companies, using the best available technology, with virtually no restrictions on drilling:

Whatever amount of US production decline is due to drilling limits is not a "large part." On the global stage, on the other hand, we have seen political limitations play a "large part" in OPEC and the FSU. I think that was one of Gail's main points in the keypost, but your comments suggest an opposite reality with no supporting information. Just because China and India may want to burn more oil doesn't mean they have large offshore resources to tap. Your comments on Brazil's offshore production suggest that you haven't done much research on the amounts in play there, which are unlikely to affect the significant digits of global oil production this decade. Whether offshore rigs are made and run by one country or a different one probably won't have much to do with when we see a global peak in oil production.

"This decade" is a rather short term to be discussing peak oil production. If you don't believe there are significant offshore reserves, I suggest you study USGS estimates. The point I was trying to make is that just because the US doesn't have the political will to develop those resources, don't expect the rest of the world to follow suit. US oil demand may have peaked, but the US is a small percentage of the world's population. Increased demand from developing countries will generate increased supplies beyond current production levels, IMO this looks rather obvious.

You have two options. You can look at heuristics to try to deduce the trends from empirical data, or you can actually work out the mathematics of constrained resources. All the information is there to prove the trends in a formal manner, but unfortunately not many people are interested in such an approach. It appears your knowledge is heavily swayed by whatever cornucopians you listen to. And it just so happens that the cornucopians happen to be the worst at math of those interested in debating the topic. If you can find someone talented, alert the media.

By "this decade" I meant the next ten years. (Sorry that was imprecise.) By the time the Brazil offshore deposits are fully brought on line, other declines throughout the world will more than outweigh them.

Your reference to USGS estimates shows that you are not familiar with the copious criticism of their survey. That was so five years ago. For ill or good, you are way over your head if you think what you're saying will change anyone's mind on this website. People here are better informed than you on these subjects.

The USGS estimates aren't all that big, in comparison to the amount we have recovered in the past, and what we are using today. According to API, the amounts in question are 10.53 billion barrels of oil on the Pacific Coast, and 3.82 billion barrels on the Atlantic Coast, and 3.7 billion barrels in the Gulf of Mexico, making a total of 18,05 billion barrels for the US 48 states. This amount equates to about 2.6 years of US oil use, assuming the US uses 19 million barrels a day.

If it is really there, it is a good amount, but it is small compared to prior production.

I thought we were talking world oil production. A USGS geologist is quoted here estimating 40 to 160 billion barrels in the Arctic Ocean alone.

Russia has already announced their intention to develop those resources.

This is what the abstract says. I highlighted what I considered the salient point.

Among the greatest uncertainties in future energy supply and a subject of considerable environmental concern is the amount of oil and gas yet to be found in the Arctic. By using a probabilistic geology-based methodology, the United States Geological Survey has assessed the area north of the Arctic Circle and concluded that about 30% of the world’s undiscovered gas and 13% of the world’s undiscovered oil may be found there, mostly offshore under less than 500 meters of water. Undiscovered natural gas is three times more abundant than oil in the Arctic and is largely concentrated in Russia. Oil resources, although important to the interests of Arctic countries, are probably not sufficient to substantially shift the current geographic pattern of world oil production.

Now do a search on theoildrum for the dispersive discovery model. This is also a probability-based model that looks at the search trends for the entire world and says that it is impossible with any significance to reverse the trends of finding equivalent amounts of oil.

You basically linked to some math and I threw it back at you. Your job will be to try to refute my math. Who is better at probability: the USGS, me, or perhaps you? Give it a shot.

The only place where we have the option of drilling is (1) on land available to us because it is part of our territory, or (2) a place overseas where somehow we can talk someone into giving us a share of the oil that is recovered.

Nowadays, all other countries want do is pay an outside developer an amount per barrel ($2 per barrel in Iraq) for helping with the recovery, rather than giving a share of the oil. Most of the arctic oil is Russia's, to the extent any is there. A lot of people think that whatever hydrocarbons are there are more likely to be gas than oil. Shipping gas from a location like the arctic is likely to be a problem. So for undersea oil to make a difference to us, it needs to be near the US (unless we can just buy it from someone else, after it is extracted.)

You have described the US position very well, and that's exactly my point. However, other countries do not have that position. Russia is claiming the entire Arctic sea bed. Not just the 230 mile economic limit. And I don't think they would be building those huge rigs if there wasn't any oil there. Similarly, China and Venezuela have said they plan to produce oil in international waters. No doubt other countries will follow suit. It would be naive to think this isn't going to happen, or that there is no oil under the worlds oceans. The same process that has produced the offshore oil discovered so far has existed throughout the world's oceans.

Gail, thank you for your great work as usual.

The one point I'd like to come back to is this:

Opinions differ on this, but my view is that I don't expect oil prices to go radically higher. Instead, I expect that oil prices will continue to fluctuate, and the economy to continue to collapse. Thus, what we will see will look more like collapsing demand than collapsing supply.

This viewpoint is treating money as a static/fixed entity. But it is far from that. For the past 30 years in the US, we have benefitted from a strong dollar that was the international reserve currency. Therefore, many people have come to view the dollar as relatively fixed and static.

But the days of the Dollar as the reserve currency are numbered. Foreign creditors are getting increasingly leery about accepting dollars. The dollar has already resumed its weakening after our little bout of strengthening (which some people incorrectly labeled "deflation"). In fact, the resumed weakening of the dollar can directly account for some of the recent increases in oil prices. Oil is denominated in dollars. So if the dollar goes down, oil goes up. Both things have happened in concert, ever since the dollar bottom in about January-Feb of this year.

Dollars are moving towards becoming just another commodity. One that can be (and is) created out of thin air. There are too many dollars, not enough oil. This means a shift in the relative value of the two - from dollars (worth less) to oil (worth more).

That shift will be exacerbated as trade partners become increasingly unwilling to accept dollars in return for precious commodities like oil.

Since we import north of $500 billion dollars worth of oil per year, and send paper money not backed by anything in return... the likelihood that oil will stay at the same price is almost nil.

I don't think it would require peak oil to cause oil prices to climb in the next 5 years. Oil prices will climb anyway, as the dollar weakens until our trade balance gets fixed.

But if you add relative oil scarcity on top of it..... I wouldn't be betting against price increases over the next years.

I would agree with what you say. I guess is was thinking on some global basis, not considering the US dollar so much.

What I think will really happen is some kind of discontinuity--drop in the value of the dollar,or stoppage of international trade--that will put oil largely out of reach. If we don't have real goods to trade for oil, we can't keep up a Ponzi scheme. If other buyers are cut off as well, there could be a major world decline in oil production, and we could be worse off than otherwise.

After the fact, how this is all priced, is a good question. The economy would be much smaller.

A drop in the value of the dollar is just about the same thing as inflation insofar as it effects the working man on the street,unless he works for an exporter.And not too many of us do anymore.

Yes, you are right about the correlation between the dollar and inflation on the street.

Unfortunately, our government "cooks the books" when it comes to the CPI, so even though our purchasing power has steadily eroded, most people don't realize why they feel poorer and poorer, because "inflation is low" (according to faked numbers).

Here's a chart of the dollar index since 2001:

Note that since its peak right before the dot com bubble crashed, it has lost at least 1/3 of its value, in 9 short years!.

Also note how the oil price fluctuations have been inversely correlated with the dollar index, though amplified somewhat.

Oil won't be cheaper for us unless Greenspan rides in on a magic pony to rescue the economy from the clutches of the evil dragons to recover the dollar to its once great glory in the palace of the privileged currencies(:wink, ain't gonna happen:).

And that's without factoring in peak oil.

This is a link to The US China Ponzi Scheme on MSN Money.

By unwittingly tying together their fortunes as they pursued their own interests, the 2 nations have put themselves on an economic path of mutually assured destruction. . .

China's cache of U.S. bonds isn't worth anything unless the bonds are sold. But selling them on any kind of scale will gut their value.

"People need to realize that China doesn't actually have any real U.S. money," Das says. "Unless they can turn in their bonds and exchange them for something else, they're only paper assets. Yet if they try to exit the position, they'll destabilize the dollar, and the value of the rest of their assets will plunge. And that's not even their biggest problem. It's that they also need to keep buying Treasurys, or interest rates will go up and their capital losses will be terrible."

The debt bubble is a real problem, for China, as well as the US.

(Edit: Sorry, this is in the wrong place. I intended to respond to the earlier comment that mentioned this.)

Well, if they had actual paper bonds, I suppose that they could burn them for heat.

The dawning realization that we can't afford our current level--let alone projected levels--of government spending will spread from local government, to state governments and finally to the federal government.

Sure, but since the paper and ink were made in China, the EROEI would be negative. ^_^

The debt bubble is a real problem, for China, as well as the US.

Gail - I agree. And I think an important nuance is not to look at AVERAGE debt, whether it be by nation or by individual, but MEDIAN debt. I'm trying to acquire data on this now, but positive 'average' net worth numbers mean little in a social democracy if 50% of people are broke. I am still trying to figure out what all this means for oil/energy production. A)not the best time to be able to scale renewables and b)OECD nations are going to become MORE energy dependent, not less, (as implied by your Horizon graphic)

Yes, this is good. A site that covered this ponzi scheme well before the mainstream media caught on is It is run by Eric Jantzen, and its mission has been to warn and educate about economic bubbles in the making. They predicted the popping of the housing bubble well in advance, along with all the current fallout we're experiencing, solely from a financial and political perspective.

On that note, I would like to add another facet to our discussion. Your posts makes the direct connection of economy with oil as oil -> economy. After delving deeply into both peak oil theory and economic theory in the past few years, it has become clear to me that they are highly intertwined. It is true that the economy and energy in the broader sense are correlated, but I don't believe that correlation implies unidirectional causation from energy to economy. One reason I say that is because there have always been economic cycles like this, long before there was oil. Economies could work themselves into crazy debt and asset bubbles, crash, and economies wiped out... only to start again. This paper gives a 600 year history of economic collapses - it is quite common historically for societies and their governments to reach beyond their means and come crashing down.

I'm not downplaying the gravity of peak oil. Our bubble is much bigger than previous bubbles, because our population is larger, which is in turn because we have had access to cheap energy (cheap meaning easy to acquire). So when this bubble fully crashes, bets are off as to how we'll respond.

Anyway, I believe that the economy and oil consist of a series of feedback loops. The economy gets going, and it requires more energy. If energy is available, it makes it easier to more rapidly "build up" whatever bubble (in our case, housing was the latest), so we ramp up consumption in line with economic growth. If we hit a wall of energy limitations, then necessarily the economy can't further grow the bubble, so it may pop prematurely (but it would have popped anyway, they always do). Since we've had 70 years or so of "no limits" due to easy oil, it is unclear how we'll respond hitting the hard wall of oil limitations (unexpectedly for most people).

Interestingly, our economy has relied upon a series of bubbles to function ever since we violated Bretton Woods and abandoned the gold standard in the Nixon era. So the natural thing that will be tried is to get another bubble going, in something or the other, to restart "growth". Some think the next bubble may be in "green energy". While many smart folks here have clearly documented why green energy won't be enough to replace oil, I nonetheless can only hope that this is the outcome (as opposed to more road building, wars, or whatever). At least we'd have some renewable energy infrastructure as a result.

The thing that makes us similar to previous historical periods and that ties it all together is that we have yet had a real shortage of gunpowder.

I spotted a woman buying pistol ammo at Walmart a few days ago who regularly rants about too many guns whenever the subject comes up.I pretended not to notice.

In conventional battles,it takes thousands of rounds to kill one soldier,but in face to face robberies on the street,or home invasion type situations,I will venture a guess that every ten rounds will claim a victim.

And in the case of some farmer guarding his cows or his beans from a blind with a deer rifle,as the old hunting saying goes,one shot one deer,two shots,maybe one deer.....

If in the event of a total melt down,ifthe civil authorities lose control,which seems likely,things could get really hairy really fast.

There just aren't enough cops and troops to do anything useful in the event of a real nationwide collapse.

My daughter just finished a conceal and carry class, which was taught by a couple of local police officers. Until taking the course, she had never shot a gun in her life, and she scored 98% on the shooting test. My wife and I are probably going to take the class in a couple of weeks. BTW, even without economic factors, we would probably be headed for a higher US crime rate, because of the increasing number of young men in the population--and conceal and carry classes and shooting ranges around here are very full.

China has a huge excess of young men coming through the ranks. Many of these young men won't be able to find wives, because of the lower birth rate for women. I wonder how that will affect their stability going forward.

I've taken a private lesson and am now visiting the shooting range perhaps once per month. I had no familiarity with guns before but I reasoned that knowing a little about guns was probably a wise thing to do. Not knowing about guns struck me as a pretty big blind spot.

Everyone in my family has shot a gun before, and most own a few too; it really can save your life to practice shooting and carry some form of protection. My cousin (fem.) was attacked in her appartment by someone she knew and it was the fact that she kept a loaded .32 revolver with her at all times that shes alive today.

Anyway I like hearing from people using their 2nd ammendment rights; too often I hear people claim guns should be banned (or something of the sort) which scares me. Also I might suggest investing in a shotgun for home defense as 'in the heat of the moment' if you will, your accuracy is significantly lowered.

They also have a short barrel "Coach" shotgun:

I debated about a pistol grip pump action versus a double barrel shotgun, but I thought that the simpler the better.

Where do you live? Have you considered moving to a safer area?

i can't speak for WT but I used to live in the west end of Richmond Va with my (at the time)beautiful young wife and although Henrico countuy Va is a safe place,as urban areas go,Young women were not really safe alone at night at shopping malls with large parking lots,etc.

So I went to the mall whether I was interested or not.

When we moved down to the mountians I never worried about her riding her horse for hours along lonesome roads in the moonlight until three am sometimes,even though this was in the days before cell phones.All I asked was that she tell me where she was headed,so if the horse caused trouble I could find her.

The difference?

Down here all men are presumed to own pistols.And enough women carried at the time that nobody ever bothered a woman not already romantically involved with the trouble maker.

Makes for a polite and safe society.

I lived in New Hampshire all my life until I got a job at a campus in NY. NY is pretty uhh.. scary sometimes, but gotta be where the money is.

The "This Time It's Different" academic paper you link to above is the one that makes the offhand observation that the only economies that did not crash were rapid growth economies, like the US in recent years. The authors didn't link that observation to the need to pay back debt with interest, but I would.

Now that we are leaving a rapid growth era, there is a good chance the economy will crash, with or without peak oil, just because of our debt based system. It is the lack of growth combined with a debt based system that causes the crash, in my opinion.

Good interview by Steve Andrews with the managing director of Raymond James regarding Peak Oil:

The problem is that the economy cannot grow unless oil production is truly rising.

Strictly speaking, that should read "energy" instead of "oil." How long those two different words continue to amount to the same practical reality is the important question. Economies have grown and collapsed in the past without oil having been involved. At some point, that will be true for the United States again (although it may no longer be the United States anymore at that point). Whether that point will come within our lifetimes is not possible to know at this point. I don't trust anyone who thinks it is possible to know.

Gail, I know, thinks that renewables (wind, solar) are not going to reverse the energy production trend within our lifetimes, if ever. My belief is that the jury is still deliberating that question. (And then there are other sources of energy, such as coal, wood and muscle, which may affect economic trends.) How many of Andre's stair-steps industrial civilization will descend before finding a new way up (or not) remains to be seen. On that score, echoing memmel's comment above, I think we are still not truly in a post-peak oil economy, and we won't know how Americans will react politically until we are. Whether or not our post-peak oil experience turns out to be truly horrifying or just difficult - and how long it is before the economy stabilizes or grows again - depends a lot on how we react politically.

Strictly speaking, that should read "energy" instead of "oil."
This seems to be overlooked by many at TOD.

How long those two different words continue to amount to the same practical reality is the important question.
They have never amounted to the same reality, oil accounts for only 40% of the worlds energy use, but is used much less efficiently than NG, or electricity. We don't need to replace the 140EJ of oil energy used in land transport and heating with the same amount of electrical energy, only about 30EJ of electrical energy. Generating electricity uses very little oil.

They have never amounted to the same reality...

In the sentence I quoted above, yes they do. Look at Andre's graph above. The issue being discussed is economic growth, and (as conventionally defined), that has indeed been made possible by increased use of oil in this country in recent times. That is a reality, when you don't confuse it with something else, which is what you just did. Replacing our oil use with something else, if it's possible, will not happen overnight, and with the way the US economy is currently structured, that means we won't have sustained growth in GDP for at least a while. In this I'm more or less in complete agreement with Gail.

Oil consumption isn't the only thing that grows with economic growth, what about steel consumption, electricity consumption, cooking oil, paper.... . You are confusing cause and effect, growth causes the consumption of these commodities, not the other way around.

"that has indeed been made possible by increased use of oil in this country in recent times."
growth has been made possible by increased use of energy(along with other commodities), oil has been one of the main energy resources used in the US, in China coal has provided most of the energy.Do you think if oil prices had remained at 1980 prices, US gasoline consumption would have risen as quickly, SUV's would have been popular in the 1990's? or would US fuel economy be more similar to Europe? We would still have had growth in the internet, mobile phones, electronics, the housing bubble, just less growth in oil consumption. GM may have gone ahead with the EV-1, or developed HEV's instead of a company located in a high gasoline price country.

"Replacing our oil use with something else, if it's possible, will not happen overnight, "

Well of course it's possible to replace 25mpg vehicles with 50mpg HEV or 100-200 mpg PHEV's.We don't have to replace ALL oil just reduce consumption or use ethanol/gasoline blends.

Sure it won't happen overnight, but does it need to happen faster than the average life-time of ICE vehicles(15 years)? Half of VMT was from vehicles 0-6 years age( before this recession), so the critical time factor is how quickly ICE vehicle assembly lines can switch to HEV and PHEV's. In 1942, US car makers totally switch from passenger vehicles to military vehicles in a few months so it's possible to transition quickly if say world oil supply drops by 50% in 5 years.

Why would not having a good reason to replace all ICE vehicles in 15 years, expand wind, solar and nuclear energy instead of sending $$ overseas not lead to sustained economic growth? It would only be if the US was unable to manufacture these locally that growth would suffer.

You are confusing cause and effect, growth causes the consumption of these commodities, not the other way around.

Why are you misrepresenting what I say? I said that oil consumption "made possible" economic growth. I never implied that it was the only thing necessary for or capable of fueling economic growth, I merely observed that in recent US history it has been what we used in reality. (It's true globally, too.) Observing that our economy is not currently structured to use something else is not the same as saying it can't be restructured.

Sure it won't happen overnight, but does it need to happen faster than the average life-time of ICE vehicles(15 years)

Is it happening at all yet? I don't think so.

I don't see in your comments a serious analysis of the composition of the US vehicle fleet vis-a-vis fuel consumption vs. depletion. "Does it need to happen faster than average lifetime of ICE vehicles?" I don't know, but look at the math and make your case. I certainly don't stand in the way of electric cars as a matter of principle, but if you want to sell them as a prediction or a policy, you have to do your homework. I'm not seeing any evidence you've done it.

In 1942, US car makers totally switch from passenger vehicles to military vehicles in a few months so it's possible to transition quickly if say world oil supply drops by 50% in 5 years.

This is a woefully inadequate analogy, given that both types of vehicles ran on oil and involved proven technologies at the time. (Meanwhile, Germany threw similar resources into making synthetic oil from coal, but could not overcome the basic laws of physics and thus lost the war.)

Why would not having a good reason to replace all ICE vehicles in 15 years, expand wind, solar and nuclear energy instead of sending $$ overseas not lead to sustained economic growth?

As long as the cost of high oil prices has more impact than the profits of all those things you name, you won't have growth. I observe that in the past year we've seen economic contraction at least partly caused by high oil prices, while meanwhile electric vehicles have not yet been commercialized at prices that most Americans can afford. That leads me to believe we're most likely going to see more contraction for a while. I'd say Gail's predictions in the near term (at least 5 years?) are credible. (And I don't say this as someone who usually agrees with her or advocates the same policies she does.)

Hey Gail, another great post -- thank you. Really enjoyed the last one too.

It is amazing how clear the connection between the economic meltdown and peak oil is for those who pay attention to the peak oil discussion ... and how much it's missed by everyone else.

I'm starting to think you might be right about the near-future trend of oil prices (i.e., that they won't go crazy-high because the demand's not there). Not long ago, I was of the $200-per-barrel-soon mindset, but I'm starting to have my doubts.

One of the most difficult things about the current situation, I believe, is that we're really in the midst of -- as you say -- a great unwind rather than an immediate calamity. One or more calamities are likely to strike eventually as we continue on this path, but we're really in the waiting-for-the-shoe-to-drop phase at the moment, which is -- in its own way -- agonizing.

Thanks again for the great insights.

"Price" and oil are apples and oranges. (Don't confuse the two.)

"Price" is an artificial number that people make up.

"Oil" on the other hand, or more precisely, number of barrels per day of light sweet crude extracted globally is a physical measure.

"Price" neither proves or disproves that Peak Oil is here. That is not the definition of Peak Oil. Only the physical number counts. How many barrels per day of the substance defined as "crude oil" (plus condensates?) are we managing to extract from the Earth's crust on a daily basis and when will the Grand Inevitable Decline (the GID) begin? And when we realize the decline has started?

It's really sad that The Oil Drum, which is the focal point of rational peak oil discussion, continues to be in a rut imposed by the credit crisis and resulting crash in oil prices. It's even sadder that the comments here are 99% bobbleheading to the mantra that "peak oil caused the credit crisis". This is so counter-productive to the cause of peak oil awareness that I've wasted many hours of my life trying to beat some sense into peakers wherever I go on this issue but it's hopeless.

One more time, here we go...

To back to last year. Remove the oil price runup, but leave ALL OF THE LIAR LOAN ARMs THAT WERE GONNA RESET. Now you tell me how much longer the housing bubble would have held on before crashing and leading us smack dab where we are today?

The credit crisis was destined to happen the moment all those liar loans were signed when oil was cheaper. Likewise, with oil cheap again, the foreclosures continue apace, with option-ARM and Alt-As to follow until finally subsiding in 2012.

The authors at are suffering from chronic tunnel vision. It's the same tunnel vision that caused them to not see the housing crash and predict $200+ oil like Matt Simmons did. And it's sad that they still haven't learned to appreciate that the economy does not necessarily revolve exclusively around oil. It can collapse due to other factors such as asset bubbles.

If peakers want to talk about the economy, they should brush up on their economic theory and study the housing crisis inside and out, not just try to recast the entire affair from the vantage point of peak oil.

Let's face it. Oil is cheap again, even though it's doubled in price since the overcorrection. Production has gone down this year BECAUSE DEMAND HAS GONE DOWN! Not because we've hit global geologic peak oil. So stop obssessing on the graphs and wise up. Who gives a damn if KSA pumps less because demand is down? What we care about is oil staying expensive with the world pumping flat out with all the fat cut out of demand. Instead, oil is likely to remain cheap for the short to medium term as the economy continues to sputter. People will NOT BE RECEPTIVE to the peak oil message because of this. The way to react to this is not to fudge the facts to make it look like peak oil caused the credit crisis to keep the topic relevant. The way to react to it is to take it like a man and revise your predictions for peak oil doom further in the future tense.

Step back and realize that all you have done is show a graph and made some assertions. I would be happy to debate your premise if you would like to present some formal argument.

I find the mortgage reset graph very convincing, I guess that's why this recession will be remembered as the sub-prime financial crisis and not the peak oil crisis.
Interestingly Australia seems to have missed a recession( at least technically), could be because sub-prime mortgages were only 1% of loans. Gas prices were about $US5/gallon at the peak in July 2008.

I agree mos6507, and have tried to make a similar point on here before. However, it could also be said that oil rising to 147 a barrel couldn't last forever. The economy simply couldn't support that high a price. So at some point something was going to give, but I agree the housing/mortgage bubble burst and the rest followed.

At the same though, the estimations of how much oil can be produced and its estimated decline rate may be correct. The most recent peak of oil production will either have been the all time peak, or it could be surpassed in the future. Only time will say for sure, however I for one agree with the analysis and figure we are past peak production. Everyone has an opinion and you are certainly entitled to yours.

Which is more correct? The oil depletion analysis that constitutes a key part of, or some hare-brained analysis of the root causes of the economic crisis?

The first seems very quantitative and uses some very savvy deduction techniques. The second seems all very subjective. My point is that we should not denigrate some of the opinions here considering how much that is solid. Let the opinions flow freely and we can debate them on their merits, as long as we have something to measure and compare against.

So I suggest that Mos puts down some solid numbers that he can be held accountable to.

take it like a man and revise your predictions for peak oil doom further in the future tense


You're right and you're wrong.

You're right that Peak Oil has little to do with the current financial crisis. The current financial crisis is due to capitalism having run amok by drinking its own Koolade, i.e. believing that interest repayments (by borrowers) can keep getting larger and larger without limitation because merely "owning" a McMansion makes one "wealthy".

You're wrong to believe that global Peak Oil is far off into the future. It's here and now. There are no new Saudi Arabia's yet to be discovered. Iraq and Iran are the last safety nets left on the global scale. That's why all the world super powers are focusing their military might on those areas. It's not about "spreading democracy". It's all about securing the oil. Ditto for Vietnam. We didn't go there to secure democracy. We're not moving into North Korea to secure democracy. They have no oil. Period. So they are a don't care. Darfur matters because they might have oil. Nigeria matters because ... All these "smoldering" global crisis centers, as Matt Simmons refers to them, are proof that Peak Oil is here and now.

Credit bubbles and financial chicanery are a poor substitute for real investment and growth in productive assets. Investing in productive assets in the U.S. has been curtailed because it simply makes more sense to invest in China and ship products to the U.S. It works for a while. They lend us money, we spend it on their products and blow bubbles with it. Now our loss of jobs and incomes have been so severe that we cannot repay the debts we owe or afford the increasing price of oil. The blast-off of Chinese and Indian growth have only exacerbated the depletion of oil and increased costs.

At some point we will probably reach a transition state in which a sudden equilibrium (decade) is achieved between Chinese and U.S. labor. On a competitive basis the Chinese will outbid us for the remaining oil since their labor costs, environmental costs etc. are much lower. Eventually there will be shortages of oil in the U.S., especially as the petrodollar is deceased. We will have to trade real manufactured or grown things for oil and China will beat us on every front except perhaps food exports. We won't have enough foreign exchange, special drawing rights or whatever replaces the dollar to import enough oil to sustain our consumption or enable substantial alternative energy growth.

The U.S. has basically sold itself down the river for the benefit of corporate interests. If we want to compete head-to-head with the Chinese then we can say goodbye to our high salaries, healthcare, pensions, social safety net ...............

There is a reason we are in the Middle East and Iraq, because we can't compete for the oil any longer and they're going to stop taking our trash currency paper. We can only take the oil by force that we will be unable to buy in great enough volumes on the open market.

In the background, peak oil is the vice that will squeeze out the inefficient and wasteful. Given equal access to oil, the most efficient (China) will survive. Given unequal access to oil, even the more efficient (China) may succumb before the grossly wasteful (U.S.). Perhaps that is why the U.S. will never truly leave Iraq.

Energy will always be around, it just won't be concentrated enough to economically justify the tools needed to extract and utilize it and won't support the dinosaurian civilization that has grown up around oil. The sad thing is that depletion is happening slowly enough for adaptation and rearrangement that won't occur because the existing channels of energy utilization (vested interests) will fight any diversion of their profitable energy usage.

Hey I was not that far off.

This gives 23.7 trillion as the government exposure.

I've estimated it will take 30-60 trillion to get our economy stabilized. Looks like I'm not all that far off.

I think 23 trillion is low because its really only the minimum needed to bring us to zero or balanced I argue you need to double down i.e go to 60 trillion to actually restart growth esp if we need to transition off of oil to achieve this.

Basically the US has to default on all its outstanding debt and then borrow new about the same amount is as outstanding right now.

And then of course we would need to be able to make a reasonable effort at paying it back so the US is looking at a 100 trillion dollar problem in the sense that given 60 trillion we would need to generate at least 40 trillion of real wealth to get us finally to be financially stable.

I just don't think we will solve it.

Here is a current forecast of crude, condensate, oil sands(C+C) and natural gas liquids(NGL). It's worth noting that the increase rate in CC+NGL from Jan 2002 to Jun 2004 is greater than the forecast decline rate from Dec 2010 to Dec 2012. It's also assumed that NGL production will increase due to new OPEC NGL projects from countries including Qatar and Saudi Arabia.

Below is an updated world liquids production forecast, on an annualized basis, to 2012.

Thanks for the update. The story still seems to look like a downward trend.

the debt based financial system must be replaced with something else.

I agree.

That goal suffers from the same problem as exists for the people advocating an "environmentally sustainable economy" — no one knows how to get there from here without passing through collapse first.

There is one curve that I think drives home the concept and reality of peak oil production. Please note that this is just crude plus condensates. All data is from the EIA. Data is from 1973 to most recent month for complete data (April 2009). I've posted this before (last year).

Scatter Plot through 04-2009

ST, how is the cost per barrel determined?

Monthly average composite refiner's aquisition cost from the EIA

In my view, the underlying problem is the fact that the current level of debt (by individuals, businesses, and governments) cannot be maintained, unless we have a growing economy. The reason we need a growing economy for the debt system to work is the fact that a person can borrow from tomorrow, only if tomorrow is better than today. (This is especially the case if loans require the payment of interest.) But if tomorrow is worse than today, borrowing from the future doesn't work. Even if tomorrow is the same as today, the system doesn't work, if loans need to be paid back with interest.

Gail, we've exchanged views about this before. I agree that, in general, our society at all levels has gotten way over its head in debt, and that it is unlikely that all of this debt can ever be fully repaid. However, I remain doubtful about the claim that a growing economy is absolutely necessary for any debt to be serviced. At a small scale, it is quite feasible for individuals or small enterprises to take on debt temporarilly, even if they are operating in a stagnant, zero-growth economy.

Imagine that you have five chickens, each producing one egg per day. Your family usually eats all five eggs each day, but you could all go on a diet and get by with just four eggs per day for a while if you really had to. Say you are going to put on a banquet, and need twelve eggs to prepare the feast. You could save up the eggs in advance, but given that eggs are perishable that might be a risky plan. A better plan might be to borrow four eggs from each of three different people. Assuming that each of these three also has five chickens, they would only need to cut back their consumption by one egg for four days, which is less risky; kept reasonably cool, eggs will safely keep at least that long. After the banquet, you have to start paying them back. The deal is that you will repay each person with five eggs: an interest rate of 25%. Thus, you will owe fifteen eggs, and your family will have to do with one less egg for fifteen days. A bit of a hardship, perhaps, but you will survive.

Transactions along these lines have probably been going on for ten thousand years, and will probably continue to happen for as long as there are humans on earth. It is not that indebtedness is impossible in a no-growth economy; the issue is that it is not possible to take on and service VERY MUCH debt in a no-growth economy. If, in our example above, you were wanting to borrow hundreds or thousands of eggs instead of a basket full, then repaying that debt in a stagnant economy would indeed be a problem.

Unfortunately, in practical terms, it doesn't work well.

in this academic paper analyzing 800 years of government debt, the authors make an offhand comment about finding in their analysis that the only countries that did not suffer debt defaults had rapidly growing economies. (page 15) I think this is evidence of the phenomenon I am talking about.

There can be individual companies which do well in a down economy, but it is very difficult to predict which ones those will be when making loans. As a result, interest rates need to be very high (to cover debt defaults). The high interest rates because of the risk margin make it even more likely that businesses will be unable to generate enough income to pay back the debt. The whole system just does not work well.

I will agree that in a zero-growth or declining economy, debt only works as something very small scale, short-term and personal. As such, it is unlikely to loom very large in the overall scheme of things.

I don't see how the huge debts that we have piled up can possibly be paid off. Some massive defaults are certainly in our future.

I think short term debt can always work, to some extent--buying goods on credit, and paying for them within 30 or 60 days, or financing a ship on a voyage. It is trying to run the whole economy and all investments on debt that doesn't work.

Hello to my friends from I believe this is my first post over here. Gail, nice work, as usual. I enjoy reading your stuff very much.

My comment may seem a little broader than a response to Gail's post, but her post got me thinking about things so here goes.

I was re-reading parts of Overshoot recently, and Catton talks about the difficulty of a person who sees the world through a given paradigm being asked to see the world through a different and foreign paradigm. (Unfortunately, the word "paradigm" is way overused and has lost a lot of its meaning, but there is a lot to Catton's point.) Thus, if the ecological paradigm is simply not part of a person's cognitive equipment, it doesn't make them bad or stupid or ill-intentioned, it just means that they are seeing a different world than the person who is tuned into the peak oil and resource depletion premises.

It reminds me of the way the early scientists might have felt back when the world was flat and the sun revolved around it and witches tormented communities. The scientists of that time must have been excited by their new discoveries and the underlying order of the world that the discoveries suggested. At the same time, though, it must have been profoundly alienating for these people to have to live in communities that were simply seeing the world through a pre-scientific paradigm. The early scientists had their share of paradigm-straddling behavior as well, as Newton's work in alchemy demonstrates.

The difference between the peak oil adherents of today and the scientists of the past, however, is that the scientists had reason to be optimistic about the transformative effects of their discoveries, whereas the peak oiler of today doesn't have nearly as hopeful a message for the world. (OTOH, however, we don't burn peak oilers at the stake the way they did early scientists, so maybe things are just tough all over.)

One of the odd things about a lot of peak oil analysis today is that whether we peaked in 2005, 2008, 2012 or 2020, it really doesn't matter. The fact is that we are at or near the peak, and the well-discussed export land model, EROEI and other aggravating factors are likely to create the proverbial cascade of failures that we like to talk about.

What I wonder about at this point, though, is what the point is of obsessive attention to the details of when the peak will occur, what its precise macro effects will be, etc. When I first began spending time with the topic of peak oil, it was as if I needed the obsessive focus on the topic in order to become familiar with Catton's ecological paradigm (sort of like polishing a lens to make it provide a clearer image). Once the new paradigm is in place, however, the reality of resource depletion and its effects stand out in stark relief, and suddenly paying attention to peak oil on a day to day basis begins to feel silly, since I no longer have anything to prove to myself, and I know that I am going to have limited success in sharing these truths with other people who have not yet asked some of the hard questions that will fracture their own limitless growth paradigm.

Ultimately, I see peak oil as the social and cultural equivalent to the realization that the human body is not immortal, following a lifetime of being conditioned to believe that it was. Once one becomes acclimated to the new paradigm of human mortality, however, it isn't necessary to follow old people around and document their physical and mental deterioration (though one might do this for a while to confirm that the new paradigm is accurate). Our industrial capitalist society is not sustainable, it will perish, just like the human body can be filled with vitality in youth and then be drained of that vitality a few years later. I imagine that the deterioration of society will probably look like the mirror image of its ascendance, with dwindling GDP, marked by small growth spurts and larger declines (perhaps 7 years of recession, 2 years of growth, 7 years of recession and so on--it might be worse, of course).

When we are deciding how to view the world, though, I wonder if there isn't a place for kindness and compassion for the cornies, cargoists and other clowns in the infinite growth economics circus. I think that one has to fully develop his own ecological paradigm in order to understand the futility of trying to make others see what they are simply not equipped to see.

The problem is that many of us desperately want to DO something to educate, mitigate...anything except sitting around and watching humanity destroy itself in a fog of silly delusion. As Catton notes, however, the time for effective or meaningful mitigation strategies has probably passed. Rather than seeing this as an unhappy realization, however, maybe it should be viewed instead as the inevitable social analog to the mortality of the individual--we are only here on this earth for a while, and that's the way nature made us; so too it is with human societies. The are born, they grow, they decline and they perish.

We're just pissed off because we got a sneak peek at how the story ends while everyone around us is busy building their own personal pyramids and wallowing in delusions of infinite-ness.

I'm not completely convinced that, on balance, people are better off with complete knowledge in this area. Faith, even when badly misplaced, can provide the basis for an interesting, peaceful and productive life. It doesn't really matter for most of the folks reading this, though, since the peak oil bell is not one that you can un-ring.

IMHO, decline management is the name of the game right now. We might very well have a fast, catastrophic collapse no matter what we do, and the worse case doomer die-off scenario might come to pass. On the other hand, I am not yet willing to abandon hope that we just might be able to manage a slide rather than a cliff, and to glide down to a permanently lower, sustainable level. This is, however, "managed decline" by definition. If we don't get serious about decline management, and soon, then it won't happen, and the worst case will happen instead.

Ideas and theory about decline management need to be thrashed out right now at places like this, and very quickly they then need to move into the general culture. This is our only chance.

Yes, I think that decline management is a useful area of focus. Unfortunately, as optimistic as the managed decline scenario is from an ecological perspective, those with a non-ecological paradigm will view it as defeatist and even anti-social. (It's frustrating to be called a doomer for carrying an umbrella when it's cloudy.)

Clearly, there is tremendous potential for mitigation strategies to soften some of the future blows humanity will be absorbing, in the same way that eating right and getting exercise will help mitigate the ravages of old age for an individual. These steps do not conquer death, but they assist, as you note, in the process of decline management, and allow one's life to be of maximum length and quality.

As analogies go, I REALLY like this one: smoking cigarettes is to the individual as burning fossil fuels is to an industrial society--it gives you a kick, helps you focus, makes you look cool, but chops large chunks off of the overall duration of life.

I think that people sometimes get TOO caught up in the idea of sustainable societies, which is probably not a realistic goal, since our human instincts and remarkable intelligence are unlikely ever to be able to respect self-inflicted limitations for any period of time. Even primitive societies that appear to be sustainable are largely sustainable because of environmental limitations, not self-imposed cultural and economic limitations with a multi-generational perspective, though there is potential for cultural institutions such as religion to implant "stealth" sustainability practices within a culture, though that often comes with a lot of other unpleasant baggage (human sacrifice and the construction of resource depleting monuments are two examples that come to mind).

I suppose that Mother Nature will ultimately IMPOSE some sustainable boundaries around human society (if we make it that far), but in my view sustainability that is imposed by the environment is probably a failure of human culture and society to come up with solutions to its own problems and such outwardly imposed sustainability will probably take the form of some very unpleasant events followed by social reorganization on a vastly reduced scale (and then the process will begin again, either with new human societies, or perhaps with the next iteration of earth's ecosystem--maybe the reptiles will rule the next one, as they have previous ones).

To me, the optimal outlook would fully acknowledge that there is not really any kind of durable sustainability when it comes to human civilization--we care too much for the individual and tribe to put the needs of the species ahead of smaller social units (especially those social units in positions of power). A better approach might be to simply slow down everything we are doing so that at least some of our future limits are self-imposed and organized, as opposed to outwardly imposed and chaotic.

Thanks for your comments! Happy to have you commenting here!

I'm not completely convinced that, on balance, people are better off with complete knowledge in this area. Faith, even when badly misplaced, can provide the basis for an interesting, peaceful and productive life.

I think there is some truth to this. Some of us are analytic types, and are interested in this kind of thing, but a lot of others aren't. I am not sure we want to push our views on them. The logical steps--of trying to maintain the status quo with new infrastructure--probably isn't the right approach to solving the problem.

Ugo has some interesting things to say about the issue of telling the story to others in his post up today. This is a link to the Short version.

So, Peak Oil, why is is so?

I'm sure that many of you know the history, so I shall not bore YOU with too many details.

However, Hubbert's Primary predictions, were -
1) The US would reach Peak domestic production in 1970, which history has shown was very accurate.
2) Global production would Peak around 2000, I believe history will again show that to be fairly accurate, with 2005 being the effective Peak.

So, history, is in or at hand?

It is particularly worth noting the "RESERVE INCREASES" of various OPEC countries in the period 1983-1990. These increased reserves magically appeared during Production Fixing negotiations and there is considerable doubt on their Authenticity!

Also worthy of note is the Time to Depletion of various countries, where it is apparent that the US Oil situation itself, is already depleted. But the US is also close to those with the large future reserves, being Saudi Arabia, Iraq & Abu Dhabi.

Tactics, Tactics!
Why would you think this alignment was necessary?

And so, now & the future?

I have to say, I have no doubt, that there have been, are & will be, players in the game, who will seek to gain from the situation and that will not be restricted the financial & market players!

However, the overridding issues are the strength of the Global Economy, the medium to longer term Production Capacity of Oil & the medium to longer term position of the Global Population, in terms of Growth (or more precisely lack of it) & Aging!

There is already " a tug of war" going on, between the have's & the have not's, sounds like humanity, in general.

The have's, those with the Oil & Power, would like to keep it that way, but there are others, who think it's their time?

Whilst the future is not fixed, there are some more likely scenario's -
The first, is where the Political & Economic status quo continues, in the medium term.
Oil Production & Usage resume an upward swing.
The likely economic result would be a massive spikes in the Oil Price, as those in power know that Supply (Reserves) would dwindle faster.
With each such Price Spike, economic activity would drop, thus reducing the Price, following lower usage.
This saw thooth pattern would continue, but on a downward trend, for some years, until the process of lack of supply/production forced cutbacks in the Globalised economy, to the point where economies resumed being local.

An alternative would be to discover a replacement for Oil, in its many used, including Transport, Power generation, Chemical Production, the list is long.

Regrettably, I see no viable replacement, on the horizon, nor under it.

If this alternative exists, it has been extraordinarily well hidden!

We keep trying to find replacements, but aren't doing well.

I think the best option short term might be natural gas, especially in the US where we seem to have a surplus of natural gas, but that would require some effort, and prices higher than today. It is not a liquid, but existing vehicles can be adapted to use it. It wouldn't go too far, but it might make a dent.

Electricity really isn't a replacement for liquid fuels unless we build much better batteries, with materials that are not scarce. I know work is being done is this area, but we are not far enough along.

IMHO you'd better give ethanol another look.

Ethanol is the most likely replacement fuel.
Corn ethanol can replace 10 billion gallons of gasoline( out of 127 billion gallons) by law and with a cellulosic ethanol industry a lot more.
The cost for making a new car E85 compliant is ~$100 according to Steven Chu.

Remember ethanol is energy positive and natural gas is energy negative.
1.5 gallons of ethanol takes 90 cubic feet of natural gas to produce and that's equivalent to 1 gallon of gasoline.
126 cubic feet of CNG is equivalent to 1 gallon of gasoline.
Thats 40% more natural gas to make CNG car fuel than ethanol.

Things seldom operate in isolation and that is also true for Oil.

Following is an article written a little while back, which brings some major influencing factors together.
My apologies upfront, for the length of the article, but sometimes you need to paint as much of the picture, as possible, to even glimpse a small part of it.

Let me say from the start, that the world and its financial system are now more interlocked than any other time in history and that the butterfly effect is very real. We have also stepped into the unknown, into a new paradigm and there is no going back!

There will be many opinions, some will say China is now the motor of the world, some will say modern computers, some the US, some Oil, some this and some that. The truth is there are over 6 Billion opinions and most opinions would be at least partially true, given a particular time frame.
It would be correct to say that China has been a very significant force in global economics, certainly in the last 10-15 years. The impact of computers and related electronics, over the last 50 years, has truly moved the world.
And, over 150 years, the US and Oil have been inseparable, as the driving forces of the global economy. Such a large part of the global economy today can be traced back to the US and it’s partnership with Oil.
But, in back of everything, the steady and un-relenting growth in population has always been the engine of economic growth, at national and global levels.
However, that motor is stopping!

Population Growth & Aging -
It took all of history, up to the year 1800 AD, for humanity to reach our first Billion people. Baby Boomers had their origins in the population explosion that started as the Great Depression was ending; they were a large part of our 3rd and 4th Billion.
The population explosion really took off in 1945, it Peaked in 1956, then levelled out to 1964, before slowing significantly since then. Now, at over 6 Billion people, we are starting to exhaust the earth’s capacity to support human species.
A continuation of past growth would have seen the global population increase to 10 Billion by 2050 and 20 Billion by 2150. Clearly, that is not likely to happen, as population growth is slowing and the global population may start to fall, in the not too distant future.
Why, because we are now bumping into immovable objects, such as Peak Oil, Climate Change and Peak Food Production, all driven by the Global population.
With a few relatively minor interruptions, the period 1945 to 2005 was the greatest Global economic BOOM in history. In particular, the period 1995-2005 was a Growth Tsunami, driven by the Peak earning and spending capacity of US & other Global Baby Boomer consumers.
In addition, around the same time, technology drove massive gains in productivity, leverage multiplied and interest rates in the US remained artificially low, for far too long, following the events of 9/11.
This was a perfect storm, for making money.

Peak Oil -
To make life more interesting, Oil has also gone from $10 to nearly $150 a barrel, in just a few short years and whilst there may have been some external influences, the main reason for this huge increase was Supply & Demand.
And, while there are arguments for Abiotic Oil, Coal & Gas, there are drawbacks for these "replacements" and in some cases they may create more environmental problems.
Oil prices have since retraced to lower levels, in expectation of a substantial fall in oil usage, arising from a slowing economy. Any return to the old economic Growth, would again see Oil spike to $150.
Transport, Plastics, Medicines, Chemicals, the list is almost endless, that are dependent on oil, no wonder the US has had such a long lasting love affair.
When historians look back, they really will say, "did they just burn all that oil".

Climate Change -
Climate is our greatest asset, but changes are also starting to impact us now, as can be seen in the lack of water in some parts of the planet, increased storm severity in others and the melting of Glaciers and Polar Caps.
We have already passed major climate tipping points, the planets climate is set to get very difficult for humanity, including a possible new ice age. Sure, we can take the chance that the scientists have it wrong, but then if their right, this could be an Extinction Event.
Do we have the right to play Roulette, with the survival of future generations?

Peak Food Production –
With the total global population busting at the seams, we must make sure everything possible is done to ensure food production is provided for the increasing population, right?
Wrong, instead, we are diverting large parts of agricultural production away from food production and into the production of diesel, as a replacement for Oil.
Even if we wanted to boost Food production, Climate Change is and will continue to, raise serious questions on our present and future capacity, to deliver enough food, to keep a growing global population fed.

Whilst the sub-prime debacle in the US has its own distinct origins, including NINJA mortgages (Greed), it has highlighted falling Real Estate values and New Housing starts, which has separate Demographic origins.
In economic terms, the primary driver of the real global economy is consumer demand. The largest demand driver is the 45-55 age group, primarily in the USA, due to their earning and spending capacity.
Demographic levels are already being re-shaped, as nearly two Billion Baby Boomers have commenced a 20 year transition from being big spenders, to big Retirement savers, to thrifty Retirees, before leaving us forever, in increasing numbers.
This massive aging of the global population is changing the dynamics of the world economy, with the bulk of Boomer wealth likely to pass on before they do and as the generations following behind the Baby Boomers, are relatively less in numbers, with birth rates down to 50% of the Boomer rate.
In particular, Real Estate and New Housing markets, particularly in the US & Europe have already fallen and continue to do so, arising from a lowering in demand, led by thrifty and retiring Boomers.
As if housing issues were not enough, the aging process is also introducing massive unfunded Health and Social Security costs.
So, we now see:
1) Supply & Demand constraints in Oil.
2) Massive de-leveraging of financial markets, including some $500 Trillion in Derivatives.
3) Increasing Government Budget deficits, due to the current Global Financial Crisis.
4) Massive increases entering the system for Health and Social Security Costs.
5) Problems arising from Climate Change and Food production.
You can guess what awaits with Taxes, in the near future, to pay for past indulgences.
And, with Debt levels already at historical highs and past fixes, either not able to be used or possibly set to cause more harm, than help.
Now, we are just past the Peak of a once in history Population Growth Mega Cycle.
Now, expectations build of a slowing economic future, next is reality.
Now, the perfect storm is reappearing, this time it is a Cat 5 in financial demolition!

The very basis of modern life will be shaken, the magnitude of the quake, will be 9.9.
Whether we arrived at this situation, by accident or design, we are never likely to know, although events suggest a mixture of both, seems probable. So, the design has now been set in motion and we are now into the first quarter, of the highest stakes game, ever played!
Unlike the Great Depression, we are now truly between a rock and a really hard place.
The truth is, there is no magical, Hollywood, easy fix.
The truth is, there is no pot of gold at the end of the Kansas rainbow.
The truth is, things are going to be tough, for quite some time.
Had corrective decisions been made earlier, then it may have been possible to reduce some of the worst side effects, regrettably, that did not happen.
Regrettably, if we opt for a better now, then future generations will pay for our mistakes and indulgence. That reasoning is not acceptable and can not succeed!
As we look to the future, we need to look thru different eyes, thru different thought processes.
The days of Smoke & Mirrors, of Shock & Awe, of the Desire to Acquire & Retain Power, of Self interest, at the expense of societal interest, must end.
Can we make those changes, the answer is YES!
Will the required changes be made? Now there, is a $64 Trillion question!
The answers will come on these boards and others, in other forums, in politics, in business and the answers will need to come quickly.
There are discussions that must take place and Mindsets that must change; the time has come to look beyond borders and elections.

Good luck & watch the Debt

I agree with most of what you have to say. And debt is a big problem now and in the future.

It would be very surprising, indeed, if you had agreed with everything!

Why? Because, there are over 6 Billion of us, now and we pretty much have 6 Billion perceptions of the world.

Why? Because, at any given point in time, we are the sum product of our genes and our environment!

Finally, I agree, Debt is a BIG problem. It was heading in that direction, when I wrote the article back in mid 2006, but subsequent events have moved it further up the pecking order, toward the top of the dung-heap.

I agree with Gail on just about everything here, not least the conclusion that there will be an ongoing reduction of economy and demand. And the last paragraph: "At some point, there may be a major break", etc.

I would however suggest a problem of horrendously sloppy terminology which does not help, such as here:

and the economy to continue to collapse. Thus, what we will see will look more like collapsing demand than collapsing supply.

Maybe I'm insufficiently expert in the hypeic version of English used on the wrong side of the Atlantic, but I would have thought the words "shrink", "reduction" etc were the correct clear precise terms here, and that "collapse" would be better reserved for something more radical and discontinuity-indicating. As:

"and the economy to continue to reduce. Thus, what we will see will look more like reducing demand than reducing supply.

I'd also suggest that the most important date was not the 2008 price/supply peak but the break of the growth curve in 2004-5.
We've arguably also seen peak globalisation too.

I see little to argue about with Globalisation, its 15 minutes of fame are gone, forever!

The question is, how long will it take to revert to a local economy?

That will be answered by historians, but I suspect the answer may come sooner than expected.

It would be easier to revert to local economies if our resource bases hadn't been depleted by poor farming practices, water table draw down, and mining of easy to get minerals. Now we have to adapt a high population to a world with lesser resources, and also without the passed down knowledge of how to make the most of those resources.