Peak Oil: Looking for the Wrong Symptoms?
Posted by Gail the Actuary on February 18, 2010 - 9:56am
If I were to ask 10 random people what they would expect would be a sign of the arrival of “peak oil”, I would expect that all 10 would say “high oil prices”.
Let me tell you what I think the symptoms of the arrival of peak oil are
1. Higher default rates on loans
2. Recession
Furthermore, I expect that as the supply of oil declines over time, these symptoms will get worse and worse—even though people may call the cause of the decline in oil use “Peak Demand” rather than “Peak Supply”.
Let’s think about what happens when oil prices try to increase. From the perspective of a consumer who is already spending pretty much all of his income, it seems to me the result is something like this:
What happens is that many of the consumer’s most necessary purchases tend to be closely tied to the price of oil—things like food and gasoline, and home heating oil. If the price of these necessities goes up, the consumer is likely to cut back on something else. One possibility is to cut back on non-essential purchases—not go out to a restaurant, or not buy a new car or higher priced home. Another possibility, if the consumer is really pressed, is to default on some of the consumer’s promised debt repayments. (The increase in the cost of food and gasoline doesn’t have to be as exaggerated as shown in the diagram for this effect to take place.)
What effect would cutbacks in discretionary spending and loan defaults have? It seems to me that they would look a whole lot like the recession and debt defaults that we have been seeing recently.
It is possible to look at the debt repayment issue another way as well:
As long as resource extraction is growing rapidly, it is easy for economies to grow, because raw materials needed for growth are present in greater and greater quantities. But when oil—a necessity for nearly all resource extraction and for transportation—is present in lesser and lesser quantities, it is difficult for economies to grow. Without economic growth, it is much more difficult to repay debt with interest, because the interest payment must come from somewhere. Economic growth helps provide the necessary margin for these interest payments.
The period we have recently lived through—from1950 to 2005—was a period of growth in world oil supplies and in the availability of other types of resources using oil for extraction. Economies in general tended to grow, and economists came to believe that economic growth could continue forever.
But since 2005, oil production has been flat. In fact, oil production in 2009 was down over the 2005 to 2008 period. This lack of growth in oil supplies led to a run up of oil prices (from $42 in January 2005 to $147 in July 2008, before a drop in prices, and another run up in prices), and has made it more difficult for economies to grow. During the time prices were rising, we have seen increasing disruption of the types expected by higher oil prices—loan defaults and recessionary impacts.
The defaults on loans caused by the higher oil prices have had a feedback impact through the system. When there are loan defaults, banks and other institutions making loans find their balance sheets impaired. This tends to restrict their willingness to make new loans. Without ready access to credit, customers cannot make purchases such as new cars. (Of course, people who have lost their jobs because of recession cannot get credit either.) This lack of access to credit tends to hold down oil prices—through the mechanism we recognize as reduced demand.
One thing that people tend to overlook is the fact that the historic price of oil back when most of our infrastructure was built was quite low--$20 a barrel or less. So even the prices we are seeing now—in the $70 barrel range—are quite high by historical standards. Prices don’t have to be extremely high to have recessionary impacts and to cause debt defaults.
I expect that oil prices in the future will increase (to the extent they do) in a saw tooth fashion, with a rise to a peak, before additional credit restrictions cause a drop in demand, to a new lower level. Meanwhile, our leaders will trot around the world, to Davos and other places, looking vainly for the cause of our current financial problems. If peak oil problems don’t look like they expect, they must not be there!
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Here was my early 2007 outlook for the US, in a post-Peak Oil environment, my ELP essay:
http://graphoilogy.blogspot.com/2007/04/elp-plan-economize-localize-prod...
However, something that I was dead wrong about was my earlier assumption that developed countries would outbid developing countries for declining oil supplies. Consumption in most OECD countries is back to, or below, their late Nineties rates, while China for example almost doubled their oil consumption as oil prices rose at about 20%/year from 1998 to 2008, and we see a similar pattern of rising oil consumption in other developing countries in response to rising oil prices.
So, my forecast for the US is that we are going to be forced to make do with a declining share of a falling volume of global net oil exports, and our model--and multiple case histories--suggest that the the global net export decline rate will accelerate with time.
I interpret this as being because the quality of life gained per unit of oil consumed is far higher in the third world than in the US.
There are few (large) countries more profligate in their energy consumption. A middle income American can better cut their oil consumption by 80% more easily than a Malawi farmer can cut his by 20%.
In the early stages of decline we Westerners will feel like we are the losers, because we can afford to lose so much more (and we are already so high in debt).
However, when the fat has been trimmed, it will be the poor the world over who will really suffer. In the US we can trade probably 100M SUVs for electric bikes and only modestly affect our quality of life. If your only transport to get you produce to market is a 125cc moped, the only alternative is to walk.
(I am from the UK - not that different in the grand scheme of things).
Developing countries have the advantage of not being totally invested in a world with $20 - $40 oil. They can develop to the new normal. They also don't have the excessive amounts of personal debt we witness in the developed world. These people don't have to do the psycological work of adjusting to living on less.
There are plenty of (left wing?) organisations who see income much above about $10,000 as addling little in the way of happiness to the recipient. This seems to be the level required to meet our main physical requirements, food and shelter and money to raise children.
Above this level happiness is defined by income relative to your peers. Money as social status only.
There will be a lot of unhappiness as the US goes through collapse. But it will be at the individual level - collapse will hit us one person at a time, as we lose jobs and income relative to our peers.
Only when incomes fall below $10,000 or thereabouts will cause physical suffering. In many parts of the world $10,000 incomes are rarer than millionaires in the US.
Oh and how short our memories are.
Do you remember how big an issue 'third world debt' was to the well being of developing countries, 10 or even 5 years ago?
How do these "third world" countries' debt compare to the US today? Do you think the average guy on the street in a developing country worries about the collective debt his country has accumulated? He doesn't worry about future liabilities such as Social Security or Medicare. He doesn't have to choose between making a mortgage payment or health insurance payment. He likely doesn't rely on a car to get to work. Much of his food is grown locally and he isn't relying on a 401k for his retirement. His energy requirements are a fraction of his counterparts' in the developed world. Is his vulnerability to rising energy costs more than mine? His world is very localized. He doesn't consider 'third world debt".
Don't confuse 'developing' with third world. The latter term is disparaged today, but a billion people are going hungry as we type.
Of course his world is more localised. He doesn't worry about is pension pot - he doesn't have one and doesn't know anyone who has one. He worries about how he will feed himself when he is too old to work. Mortgage? On that shack? Healthcare? There isn't a doctor within 50 miles. He really hopes his wife survives the birth of their fifth child.
Also, the Kleptocrat who took out the loan for his country's development budget ten years ago has long since retired to a nice quiet first world villa.
However, small scale farmers who borrowed a couple of thousand to improve their land with fertilisers and high yield seed stock are now so deep in debt relative to their chances of paying it back they prefer it kill themselves than pass on the debt to their children.
Mass suicides
Ralph, this has been my point all along. Much of the world is already adjusted to "the new normal" because they've been living it. Most folks in the developed world have no realistic idea of how bad things can get and simply won't be able to adjust. Needed/unavoidable changes to how we live (especially in the US) will require people to psycologically adapt to living on much less. I don't think many Americans can get their head around how hard this can be. In their world view, a life without "growth" is unthinkable. AAngel's post on today's drumbeat briefly speaks to this:
I have family memebers who are mental health professionals. They all report that "business is good and getting better".
The catch is the "new normal" is getting worse. As the debt unwind goes on, it is likely to get worse quickly, as international relations (and oil imports) get more and more iffy.
The developing world has also to adjust to an even lower life style because the US and the EU cannot anymore send billions of $ of aid per year (and generous disaster relief). When the economies of the developing countries contact, then those cheap production lines established in developing countries will shut and masses of people will be unemployed there.
I'm not so sure that in the developing world that food is grown locally,
Economic Comparative Advantage Theory applied to many developing areas in the world, saw the destruction of locally grown food, importing corn/maize
from the 1st world, and rice from a myriad of other places by planting commercial crops or focusing on extraction industry. If 1st world farm exports
fail (preciptiously, say in 24 months)
through high energy, fertilizer, water, costs then it will be very difficult to re-establish anything close to self sufficiency in food in these
developing countries in say 3-5 years. You should assume dramatic die off in the these developing countries.
Many 1st world humanitarian projects in developing countries can even make things worse, by INCREASING the dependency on either high energy or high technology solutions (or both), or long logistical chain, non-locally maintainable systems (using Monasanto seeds in Africa is a horrible idea).
In Swaziland where I have the majority of my experience, I continually unwind these 1st world scenarios. There are some serious tensions here though,
I don't know how to bring clean water to some areas without a well pump; however, I would never tie them to the grid because their ability to fund it even 12 months later as questionable (if power can go up 100% from one month to the next, who could budget for that?). In this case I prefer a solar powered system, my personal experience is seeing systems running for 11 years so far.
Why not a hand pump ?
Schoff, are you familiar with gasified pumps? They're very efficient in a crude and maintainable and probably an ideal solution for your project. Let me know if you're not familiar, as I can give you design parameters. They're very simple and ingenious. They'd run of of propane, methane, gasoline, waste digester fuel, compressed air, or what have you. They can run huge capacities and have near no moving parts. Some pipes, and a couple of crappy valves, basically. Proportions must be tinkered with.
basically, you're right; 50+ years of world bank and IMF intervention in governments worldwide have "guided" poorer nations away from self-sufficiency and informal markets and toward exportable cash crops. There are numerous examples, but I did a paper on Brazil once, where farming villages were recruited to stop growing food for themselves, but to grow sisal instead for the export market. Their per capita income went way up, but they had to buy their food at regional markets. Both the sisal market and food prices were beyond their control, so in good years they did ok (albeit with an unhealthy western-style diet), while in bad years they starved and abandoned the land, becoming refugees in the cities.
Among the things they lost was the ability to make sense of anything that happened to them...this being a typical end for those who will give up local self-sufficiency for cash and servitude in the global market.
Here is how it works.
First you get rid of the Colonials.
The Empire had a nasty experience with Colonials going native in North America.
Next you flood the market with cheap gifts. Say tractors. The object is to destroy home grown industries.
Next you start making cheap loans to the Kleptocracy. These will be amortized instantaneously as the money is put into Swiss Bank accounts.But the interest will remain.
Repeat as many times as amuses you. The object is to get the client addicted.
Next offer to assist getting the economy going. Invent a catchy acronym, say ESAP. Doesn't matter what you say it means.
What it really means is "You will work for me for nothing." "Because I have the high moral ground"
If it doesn't work, hey, what have you lost? Some tractors from Bulgaria.
Right Ghung, Besides many of these countries already have a good supply of solar powered vehicles - they are called donkeys.
I would imagine it some sort of creaming curve with most gains near the base with fewer and fewer meaningful gains after a certain per capita consumption
which is a sort of silver lining
Per capita consumption in the OECD can fall quite a bit without a real fall in living standards or more accurately "quality of life"...
don't panic..changing one's gaming console for the latest one every 2 years is not a disaster
I totally agree with this. But I would also say that the "silver lining" is probably shiftable as well, just with more resistance. Where I live, I commute very far to work and everywhere in exchange for VERY low rent. I have cut my non-work commuting to nothing by aligning trips to town with trips to work. I maybe leave the house once a month for nonwork reasons (also, I don't physically go into work very often). This has been easy to do. No pain at all.
Now if I want to cut it further, past that silver lining, there will be economic pain. So I resist it. But if oil was too expensive, or I lost my job, I would assuredly move into the city. It took a lot of pain to reach that breakthrough point, but once past it, my base oil need drops considerably.
This will replay out through the world over and over. Inflation or deflation, doesn't matter, sooner or later something has to give.
There is some base level of energy we need, obviously, and even some base level of liquid fuels. But not anywhere near what we use today.
The question then is how do we best get from here to there?
@RalphW
IMHO, this is simply not true. Think of all the jobs that depend on luxury consumption. The same can be said, when people said that we can cut our excess consumption by say 50% with little to no affect on our livelihood.
Think of all the industries that are built around excess consumption, and the jobs and the tax receipts.
Depends.
Let us take an example - if instead of 4 people driving individual SUVs, if they car pool - only person to get affected is probably the local gas retailer, though quite a bit of gas can be saved.
You are confusing consumption with waste. No one profits from the fuel wasted in an oversize SUV. Maybe GM, MAYBE, but that profit was nothing compared to the waste.
Industries come and go. Think of all the agricultural jobs lost after the green revolution. Think about the shift caused by out sourcing. Think of how computers/the internet and disintermediation killed the middle man. People adjusted. Things went on.
Your right there is a problem with allocation of wealth in a energy shrunk economy because how do you employ all these service industry folk facilitating consumer consumption?
and that is a real problem granted... as a politician would say.. "a host of challenges"
but the bottom line is there is enough energy "left in the tank" to reduce per capita consumption substantially and build a sustainable future with a sane understanding of population limits.
"...trade probably 100M SUVs for electric bikes..."
Good grief, it's February and people still can't remember the existence of winter, when the roads are icy and even four-wheeled vehicles slide off into the ditch...
Paul, you just gotta have the right tires.
Yah, but why do pix like that always show wide-open spaces where there's nothing else to be hit by, instead of the crowded places where most people really drive - and slide around? No tire can protect you from that.
Jail time might encourage drivers to keep their vehicles under control.
Hit 34 degrees F today - saw several bicycles out and about. I might do some errands tomorrow by bike. The problem with cycling in the northern states in the winter is just one thing - motor vehicles. If we used our FF to plow the roads and horse whipped any motorist that struck a cyclist, cycling in the winter would be a great way to get some exercise and save burning FF.
Not that I expect any rational approach to personal transportation any time soon - hmm.. probably never.
LOL.
An appealing and amusing thought.
But no, they are armed.
Hi Arthur,
A few years ago, in Milwaukee, a guy was cycling on a city street when car full of younger folks pulled up next to the guy and started harassing him - throwing junk, squirting soda, calling him names. After a bit of that fun they pulled away but had to stop at a traffic light. The cyclist caught up with them and starting firing a pistol into the car, killing one of passengers. The cyclist departed down a side street and was never identified or apprehended.
Although one could take some morbid satisfaction for revenge of the underdog, it is really a sad commentary on city life. I suppose the kids in the car could have started shooting back and perhaps killed the cyclist and perhaps some bystanders (which is pretty common with these rage type shootings).
Anyway, it was beautiful here today - 34 degrees, bright sun, low wind - got in a very nice bike ride running an errand into town.
I commute to work by bicycle year round. The biggest challenge in my experience is wind; the cold, dense, winter wind is noticeably harder to pedal through and uncomfortably cold too. Snow isn't so bad because, even this winter, there's snow on the roads only intermittently. While it's falling the snow is better than rain, it's only a problem when it collects on the streets. I find I can ride on either fresh snow or packed snow. Snow that has been packed by car traffic into ruts in some-places but remains loose in others is impassible. Transiting from from loose snow to packed snow, at low angle of approach, is like riding over a curb, it steers the wheel right out from under me. I find it's easier to push the bike and ride home in the afternoon after the streets have been plowed and salted.
Another year-round bicycle commuter here. I don't enjoy the rain so much, but riding in the snow is one of the better things in life, and we do get a few good snowstorms a year. On bad mornings I drive my daughters to school in the car, then park it and ride 6 miles to work. The most dangerous thing about driving in the snow is all the other guys driving in the snow; on the bike, however, I'm on the bike trail mostly and perfectly safe.
Hi emcourtney & daxr,
My single bike is a 2-wheeler and I know exactly what you mean. My wife and I ride a tandem trike. The trike will handle all kinds of ice, snow, ruts (up to 4 to 6 inches) with non of the problems I have on my regular bike.
I wish wind was my biggest problem in the winter. I'm with daxr, the danger from cars triples in the winter. And, the best bike in the winter is a trike - but, visibility becomes even more of a problem. Overall, my winter cycling is limited to days with good visibility and relatively clear roads - just because of cars.
Good grief Paul, how many thousands of years did people survive without SUV's or any sort of powered vehicle at all. Heck I walked 10 miles to school in the snow every day growing up. Well OK it was only 1 mile. But even the advent of domestic animals to ride and haul stuff is quite recent. The crash will come sometime, and whether or not we think we can survive without powered vehicles we (or our children, but certainly our grandchildren) will have to. This is not at all question of what we want, how we want the world to be, what we think we can deal with. This is a question of what we have to deal with when the wells run dry. Those who get in shape now by walking or biking and dealing with some hardship will likely be better prepared for the end of the age of oil.
That's the operative word - they survived and nothing more. IOW except for royalty they lived as mere beasts. So what?
True enough in the abstract, walk through any Walmart to see the need. And yet, in the sense I think you mean here, it's still mainly a game for strapping young folks, especially men, plus a smattering of genetically lucky older folks, just as it has always been down the millennia. But about the other half or three-fourths of the population ... ?
An assumption. They may have been happy and fulfilled just surviving. There is evidence that they lived full, rich lives:
(You probably recognize where the images come from --your own bucket :-)
The one on the left seems pretty good to me. On the right, yeah, somebody always seems to get the s#!t end of the stick :-(
I think the diminished oil demand in developed countries is due to two factors:
1. The developed countries have exported most of their (basic energy intensive) industry to developing countries due to production cost benefits.
2. Developed countries' consumption of oil is done by the end consumer more so than in developing countries, and with less money to spend on "everything else", even when the economy picks up, it takes longer for the cash to reach the pockets of the end consumer (ie. "job recovery"). Thus less oil is spent as a component of "everything else", as the category includes everything from discretionary car trips to "stuff" bought at the local mall (which gets there by diesel-powered truck).
We'll be in trouble when the good times have rolled for a couple of years, as China oil demand continues to rise, developed countries' consumers get in their old habits, and net depletion of oil fields is too big to hide with reserves/temp production increases. Actually, any of the above three is enough to make this a problem, together they are a catastrophe.
CN, I have to agree.
Increasing oil consumption with declining production: a disaster. Say decline is 2%/y and demand increase is 2%/y. Since consumption cannot be bigger than production the difference is allready 4% then.
Demand destruction in the US has been primarily in sectors other than gasoline:
Other oils, i.e. industrial applications, residual fuel oil, i.e. bunker fuel for ocean transport, distillates, i.e. diesel to ship goods around, etc. I assume the experience in other OECD member nations has been similar. Jet fuel has decreased sharply as well, much more than gasoline, which is exhibiting strong signs of inflexibility in its demand.
People in the developed world consume more oil per capita obviously but how much of that is domestically sourced - i.e., American made plastics - I'm not sure about.
Good numbers KLR.
Clearly people are still driving around as much as ever. I am surprised by the size of the drop off in diesel and "other oils", which I presume includes oil used as plastic feedstocks.
Railroad traffic has been down, and they have taken this chance to scrap their oldest, least efficient locomotives. Some city bus fleets are now on cng, though this would be a minor change. Many industrial/stationary engines are now NG rather than diesel, so this may be part of it.
Ultimately, there is still LOTS of potential for reducing gasoline usage - we have barely scratched the surface...
In regard to oil prices, the 2009 annual spot crude price of $62 was higher than all annual prices prior to 2006, and more than four times the $14 annual price that we saw in 1998. While these are nominal prices, it's interesting to compare oil prices to a basket of auto, housing and finance stocks.
In regard to monthly prices, the January, 2010 spot price of $78 is almost twice the January, 2009 price of $42, and the January, 2010 price is higher than all prior January prices, except for January, 2008 ($93).
Furthermore, in the Thirties monthly oil prices hit bottom in the the summer of 1931, and then increased at about 11% per year from the summer of 1931 to the summer of 1937. It appears that global oil consumption only declined one year, in 1930, rising thereafter throughout the Thirties.
IMO, from 2010 forward we are looking at annual increase in oil prices, unless and until the global demand for net oil exports once again falls below the long term declining global supply of net oil exports.
Westexas,
I'm sure you are aware that the plunge in oil prices during the 1930's had a lot do do with the discovery of the East Texas oil field in 1930, the largest oil field ever discovered in the Lower 48.
A lot of the deflation of the era was due to the adoption of agricultural machinery, trucks, diesel locomotives and other labor saving equipment fueled by the cheap oil.
ELM 2.0
(Edited to correct some numbers)
Once again, I'm looking at some numbers that scare the crap out of me. Let's see what you guys think
Let's follow the progression from conventional wisdom regarding oil supplies to what I shall call ELM 2.0.
Yergin and Lynch assert that the worst case is a production plateau many decades from now, either in the 21st Century or in the 22nd Century.
The Peak Oilers say no, we have either peaked or we will shortly peak, and we are looking at a low single digit annual decline rate in global oil production.
The Peak Exporters say no, we are looking at long term accelerating rate of decline in global net oil exports.
But I never really ran the numbers regarding increasing demand in oil importing non-OECD countries. Brace yourselves. ELM 2.0 follows.
First, Sam's best case is that the 2005-2015 annual (2005) top five net exporters net export decline rate will be about 2.8%/year (from about 24 mbpd in 2005 to about 18 mbpd in 2015). Since net export declines tend to show an accelerating rate of decline, his 2005-2025 best case is that (2005) top five net export decline rate will be about 5.5%/year (from about 24 mbpd in 2005 to about 8 mbpd in 2025), which would be a net export decline rate of 8.1%/year from 2015 to 2025.
The observed (2005) top five net export decline rate from 2005 to 2008 was about 2.2%/year (EIA), which is in excess of what Sam's best case shows.
The problem for the US and other OECD countries is that we are being squeezed between an accelerating rate of decline in global net oil exports and rising non-OECD consumption. From 2005 to 2008, China and India's combined net oil imports rose from 4.6 mbpd to 6.0 mbpd, an annual rate of increase of about 9%/year. Note that China's domestic production is showing signs of a peak.
So, for the sake of argument, let's extrapolate this 9%/year rate of increase in net oil imports, and let's assume that they obtain all of their oil from the (2005) top five net exporters.
In 2015, Chindia would be net importing 11.3 mbpd, versus projected net exports from the (2005) top five of 18 mbpd, leaving 6.7 mbpd for other importers. So, the non-Chindia net exports from the top five would fall from 19.4 mbpd in 2005 to 6.7 mbpd in 2015, a decline rate of 10.6%/year.
In 2025, Chindia would be net importing 27.7 mbpd, versus projected net exports from the (2005) top five of 8 mbpd.
Incidentally, another metric is Chindia's net imports as a percentage of (2005) top five net oil exports; Chindia went from 19% of 2005 net exports to 27% of 2008 net exports (from the top five)--a 12%/year rate of increase. Based on Sam's best case projection for the (2005) top five and based on the 2005-2008 rate of increase in net oil imports into Chindia, it appears that Chindia would be consuming 100% of net oil exports from Saudi Arabia, Russia, Norway, Iran and the UAE some time around 2018, eight years from now.
"The problem for the US and other OECD countries is that we are being squeezed between an accelerating rate of decline in global net oil exports and rising non-OECD consumption."
That's the whole thing in a nutshell. Will "we" (OECD) accommodate "them" (non-OECD).
I would put it the other way around. I think that military efforts to try to force oil to our shores will be counterproductive.
I don't think there is a military way to force China to use less oil ...
I agree evnow. But I wonder if we could us military force to make us use less oil? Now there's a conservation approach I haven't heard of yet. The politicians are to afraid to raise motor fuel taxes but perhaps a few strategicly placed claymores down at the Shell station might do the trick. Hmmm....yeah....that's the ticket.
Rockman, I agree, the military could force us to use less oil. The standard way to do that is for us to be at war. Then rationing can be done to save the fuel for military operations. To work we would really have to be at war (not that we aren't now but to date there has been no call for rationing to support Iraq and Afganistan). However, to actually be in a wider war would use more fuel, so the question would be could we enforce enough rationing at home to actually end up saving fuel. And of course we would need a casus belli but that could be created easily enough.
On the other hand the military could just take over the country and close gas stations and seize cars. But then they would have to constantly put down insurrections which would use extra fuel.
On the other hand the government could admit that oil is running out and call on Americans to conserve. No scratch that. Not possible.....
Sad but true oxi
The first thing that comes to mind is how much capital we borrow overseas every single day, to keep our little governmental boat afloat here...
The second thing that comes to mind is how much accumulated debt we have...
of course everyone knows we're like the crackhead-on-the-corner nation when it comes to how much of a hole we've dug with the rest of the world, peak oil just being probably the final straw. Financially, its still amazing to me that anything keeps working.
Westexes, I really do hope you publish soon.
Anyway, it seems this is one of those "yeast in a petri dish" moments when calculations show that you havn't got eons of growth but just a few moments left.
Of course Chindia won't be importing everything because feedback loops will start to kick in. In nature these are things like famine reducing populations. In our case it will be recessions, depressions, sky high prices...
Do you think the Chinese have doen their sums? Didn't you give them a presentation to chew on at one point?? Maybe this is why they are agressively expanding 'renewables' but I can't see any evidence of wanting to put the brakes on their nascent car culture -quite the opposite in fact.
Nick.
I think that our long planned update to the top five paper is getting better with time (I'm finishing up a major oil project, hopefully we will have something out shortly). A chart showing the increase in Chindia's net oil imports as a percentage of (2005) top five net oil exports is going to be stunning--from 19% to 27% in just three years, from 2005 to 2008. Or, alternatively, the non-Chindia share of top five net oil exports fell from 81% in 2005 to 73% in 2008. One can see where the trend is headed.
Westtexas,
I truly think your promised papers will be good reading. But I also wonder whether you have factored in to your projections the certainty that higher oil prices will act as an even stronger disincentive for less-wealthy countries to increase their oil usage than it will for the wealthier economies.
That's what I used to think too, but what the recent data show is a consistent pattern of non-OECD countries increasing their consumption as oil prices rose at 20% per year from 1998 to 2008, while OECD consumption in 2008 was back to, or below, late Nineties levels.
Here are some examples that I used in our ASPO presentation. Approximate increase in oil consumption, from 1998 to 2008:
China: +93%
India: +62%
Kenya: +48%
Morocco: +30%
Also given the fact that some many developed countries like the US are functionally bankrupt--because of vast unfunded government obligations--I'm not sure that "wealthier" is accurate now.
-I think the reason is that we are not talking about countries but groups of individuals and there is a small but ever growing % of Chinese and Indians that match or superceed Western individuals in their capacity to out-spend 'us';
"16% of 3 Billion = 96% of 500Million"
-in addition this "wealthy 16%" are possibly commiting a much greater fraction of their wealth to Energy/Oil and 'maximising its return' rather than simply burning it to go down the Mall. The first computer is used for spreadsheets, word processing, education and productivity; the 2nd is a PS3...
Regards, Nick.
"Most recent"? JODI can fill in the blanks for the latest year. BP Data on annual consumption goes back to 1965. KSA consumption YOY increase over this span of time averages 3.88%, China 7.74%. There isn't much in the way of illumination here - consumption of oil increases linearly in developing nations just as inexorably as population.
Exactly. For example Chindia's purchase power will also have its limits, as these economies cannot grow forever - be it due to the limited resources or due to the limits of their foreign trade balance.
And as soon as the non-OPEC imports hit their economical limits and start to decline OPEC will have less money available for domestic consumption. This will limit the export-land-skewness. But unfortunately this limit will take effect much too late to prevent major economic damage to the importing nations.
I would make that "rising high-value non-OECD consumption." China and India can put an incremental barrel of oil to better use than the US, on average. For example, in India an extra barrel of oil is more likely to be turned into kilowatt-hours to power a PC for another chip designer (lots of private firms there with their own generators because they don't trust the reliability of the grid). An extra barrel in the US is likely to go into something of less value. As net exports decline and prices increase, oil will tend to flow from low-value activities to higher-value ones. Absent supply limits, the OECD countries have been able to afford low-value uses for oil; developing countries, not so much. So US consumption drops as poor people take a few minutes to plan their shopping trip to use less gas, and India's consumption increases as they do more circuit design.
There's probably a Ph.D. dissertation somewhere in trying to do a systems dynamics analysis of how things might play out. Simple economics is not the only factor. If the OECD countries were to stop outsourcing chip design to India, it gets harder for India to put that incremental barrel of oil to a high-value use, and slows the growth in their demand. Anyone want to bet that if unemployment for chip designers in the US is high enough long enough, Congress won't take some action?
The incremental Oil consumption is likely to be for a person who goes from riding a scooter to a car. Or a person who goes from riding a bicycle to a scooter.
Considering how important running a PC is - a generator in a designer facility will always outbid an individual driver.
But. I'd probably argue that even in the above cases India is putting the oil to better use (increasing the standard of living of the driver) than what we will probably do here.
Exports from Iran? Which exports? According to the late Dr. Bakhtiari - rest his soul in peace - 2015 to 2018 could well be the period in which Iran's net oil exports go towards zero. See slides #25 to #27 in my slide show I did in the Treasury Theatre in Melbourne last August http://tinyurl.com/kwku23
Emergency Planning after peak oil 2005-2008 3rd and final oil crisis:
http://www.crudeoilpeak.com/pdfs/1
So, my forecast for the US is that we are FUBAR!
Fubar?
http://en.wikipedia.org/wiki/FUBAR
Without a doubt FMagyar
Well, the rich will outbid the poor, but that may not be measurable by which countries buy the most oil. For instance if China uses it's oil to produce stuff that is sold in the US, then the oil really went to the US, with some value add done in China. Who does the consumption ultimately is more important than who buys the oil in determining who is outbidding who.
Ilargi, over at Automatic Earth had a post yesterday called Did peak oil cause the present financial crisis?
The reasoning in his post is that if one can find other reasons for the financial collapse, that proves that peak oil was not part of the problem. With peak oil, we would expect to get to the current situation, with without derivatives and all other things that contributed to the problem.
Furthermore, there is another connection. When we could no longer get growth from oil, we turned more and more to debt based products and financial instruments, so this, in itself, contributed to the collapse. But peak oil, and its limitations on growth, was really what was behind the shift to more and more unsustainable debt. As Gregor said, when oil become more expensive, the developing world shifted to coal, while the developed world "replaced their lost demand, lost credit, and the loss of cheap energy the best they knew how: with paper".
They're in denial, Gail. I don't go along with all of the stages of grief junk, since it is poor science. There is no doubt, though, that denial is a step, and anger is another. Tea Party is part of the anger.
Meanwhile, the signs continue. 10-yr Treasuries are a 'mid-term' look at the bond market. Today they are at 3.727%. On the 8th, they were at 3.59%. And they trend upwards. Of course, the place to look for sudden death is the short term, as compared to the long term US debt instruments. If you see very short term (now at 0.83%) rise above long term (currently about 4.7%), you can look for real problems in a hurry.
For those who are interested, here's a nice discussion from CNN Money:
http://money.cnn.com/popups/2005/news/yield_curve/frameset.exclude.html
Craig
that makes so much sense to me...
is it surprising that money fleeing the financial sectors headed towards commodities or that the peak price of a barrel was on at the same time as the collapse of Lehmann's
what follows is the the debt unwind... huge volumes of this money just disappeared into the ether
what is the price of oil now relative to the total volume of money compared to July 2008?
would I be surprised if it was higher than it was?
does that question have any meaning anymore (if ever)?
I'm deeply disappointed in Ilargi. I think he's losing it. Stoneleigh, at least, has some interesting things to say, but she tends to sound like a broken record after a few readings.
TOD is increasingly becoming one of the few places to find pertinent articles and insightful commentary.
Ilargi is fine. His take on derivatives is correct. I personally think he discounts the oil issue too much, but he's not losing it by any means.
As for Stoneleigh... come on, being consistent is not broken record syndrome.
Entropy is an interesting perspective.
I think it would be a good thing if they published here once a week, like they used to do, remember the Canadian roundup? Those posts were well ahead of their time, really prescient. We were yapping about $140 oil back then... they were explaining CDS defaults and deleveraging.
It's clear Ilargi has some sort of grudge against TOD and will believe ANYTHING to completely dismiss the possibility that peak oil might have a hand in the current crisis. He will even believe conspiracy theories (that "elites" purposely crashed the economy to time it with peak oil) rather than accept a peak oil explanation.
As for Stoneleigh--she has gone completely off the rails. She mis-applies fractal geometrics to the blatant pseudo-science of "technical analysis" of stock market charts.
She is no better than a reader of entrails.
So the basic moral of the story is: The majority of humanity is continuing to live beyond its means for the nth generation, except there is little "credit" left in the world.
Looks like the ol' Cree-indian prophecy was spot on:
I keep hearing Money makes the world go round....
Nobody ever tells me Energy makes the world go round, except on the OIL DRUM.
Time is needed to develop new technologies, nuclear or other. Where can we acquire that time? Will the newly found natural gas replace oil in the intermediate future and buy us a few decades to get our house in order? I am a big fan of advanced generation nuclear power, especially LFTR and IFRs. My hope is that they may provide safe, clean electricity at a price lower than dirty coal so that we can get the climate change monkey off from our backs. Of course even if we were to find cheap, clean electricity we still have the need for liquid fuel. Could efficient high temp thermochemical hydrogen separation form water be an affordable substitue synfuel when used to chemically reduce carbon dioxide to hydrocarbon?
I would love there to be a tech solution as I'm a techy but look at Westexes timeframe above... We have not many decades but mere years before 'the pickly hits the fan'... The net decline rates are going to be played out as higher prices/volatility/recessions and depression.
How will we transition to an 'electric culture' in these timeframes and with the inevitable reduced access to credit? Will it be left to Governments to further burden themselves upto the eyeballs with subidies for would-be Prius owners? :o)
Oil a $ under $80 as I type.
Nick.
I think it all depends on how fast the oil decline is. If we can cut huge amounts of consumption NOW, we can save our asses for a few years, decades. If its business as usual, we better hope the oil rigs can keep up. The people i hang around with, talk to have no mental capacity to realize that gas stations at some point will go empty.
Hi John,
From my POV, if we have a stable electrical supply, I can manage most other problems. No electricity is a real problem for any hope of surviving (we are really old folks).
BUT, I just don't understand how nuclear or any other technology can prevent a very painful future. IMO, federal government mandated extreme conservation (one child family), and efficiency (100 mpg personal vehicle) is the only way we will have enough energy generation capability to keep the electrical infrastructure going.
And, I see no way that measures like this will be implemented in an appropriate time frame.
For the sake of our grandchildren we need to make an effort to ease the painful future. It is doubtful that the pain can be prevented. In addition to world overpopulation we have the prospect of a planet with a lower carrying capacity due climate change. Stewart Brand in his book, Whole Earth Discipline, suggests that with the urbanization move, women are choosing to have smaller families. He predicts that the growth of the human population will turn negative before reaching nine billion. That may be too optimistic of an outlook. Recycling, substituting additional energy for extraction of minerals from lower grade ores will be necessary. Societies will need to restructure in order to be less dependent on inefficient private vehicles. In India new high-rise buildings house the workplace, shopping mall, recreation, and living space. There is no need for private transportation and the carbon footprint is modest yet about 300 million Indians enjoy a standard of living the is similar to that of middle class Americans.
The life expectancy in this world for people who without benefit of electricity is terribly short. We really need to attend to the infrastructure of our electric grid and develop safe clean and cheap generating capacity. I was thirteen when the REA reached our farm. That was the one of the biggest steps forward in technology of my life. This computer and the communication revolution is also awesome. It is this information age that gives me some hope that the window to the developing world has been opened and if we can give them safe Liquid Fluoride Thorium Reactor (LFTR) technology they will have electricity to operate their factories so that all the world will be better off.
Nobel Laureates, Eugene Wigner and Edward Teller as well as Alvin Wienberg, the patent holder of our current light water reactor, all endorse the LFTR as the best reactor technology for domestic power. Since during the cold war the LFTR could not produce plutonium for bombs, the funding for research reactors of this type was cut off and Alvin Wienberg was fired from his position as Director of Oak Ridge National laboratory. He was fired because of his strong support for LFTR type technology and his instance upon reactor safety.
Now is the time for the federal government to reinvest in the research and in the training of future scientists to carry on clean safe energy development projects. We can do no less for our grandchildren.
"...federal government mandated extreme conservation (one child family)...I see no way..."
Correct. Fuhgeddaboudit. Out in the real world even the merest mention of population gets drowned in rivers of invective against "depopulators" and "eugenicists".
I think "local" is the only practical way to talk about it. That is, focusing on solutions to your own country's problem is the right way, while trying to solve another country's problem is bad; focusing on your own state's problem is the right way, while harping on someone else's state's problem is bad; looking at solutions to your own county's problems is good, while meddling in your neighboring county is probably bad...and so forth.
The last century of trying to address population issues would have gone much better if people minded their own business before minding the businesses of others. For much of the century, the US was the leading cash sponsor of "population control" efforts all over the globe, while politely declining to even have a domestic policy on population. I believe the last time there was an official discussion here was under Nixon, who ended it - saying that people here should be left to decide for themselves how big they wanted their families to be. The hypocrisy was much more obvious to other countries involved than it was to anyone here.
Concerned northener: Thanks for your quote. I have another one:
Indian Chief ‘Two Eagles’ was asked by a white U.S. government official,
‘You have observed the white man for 90 years.
You’ve seen his wars and his technological advances.
You’ve seen his progress, and the damage he’s done.’
The Chief nodded in agreement.
The official continued, ‘Considering all these events, in your opinion, where did the white man go wrong?’
The Chief stared at the government official for over a minute and then calmly replied, ‘When white man find land, Indians running it, no taxes, no debt, plenty buffalo, plenty beaver, clean water. Women did all the work, Medicine man free. Indian man spend all day hunting and fishing; all night having sex.’
Then the chief leaned back and smiled,
‘Only white man dumb enough to think he could improve system like that.’
We've had financial downturns in the past, yet it was cheap energy/resources that provided the cushion that allowed us to bounce back. Now we find that our reliance on oil is a liability rather than our salvation. Oil and finances are now so joined at the hip that we find ourselves facing the perfect financial storm. Oil will not be the stimulus to grow our way out of our current credit/currency delima. In past posts I've been hammered for saying "this time is different". This time it is. The oil bank isn't lending anymore.
Ghung, you have that right. In fact I would say that the longer we look to oil for salvation the more it moves from being a liability to being our downfall.
This time is different. Not only will oil fail us, it will fail the world because thanks to globalization the whole world has become interconnected.
IMO, Peak Oil/Peak Exports was both a trigger and an accelerant--like a hiker dropping a lit match in a dry forest, filled with dead underbrush, just as the wind is picking up, and then air tankers drop napalm, instead of fire retardant. The firestorm was inevitable, it's just a question of what would start it, and how bad it would be.
Yes, that's it. Ilargi didn't disagree with the idea that high oil prices were the trigger, he disagreed with the idea that "peak oil is the driving force in our present financial collapse". "Driving force" and "trigger" are two different things. The forest fire analogy is pretty good, though I don't know about the napalm bit!
But the other question is what role did low oil prices play in the run-up to the credit problems? As in, low oil prices during the 80s and 90s contributed to people's expectations that they could buy more and live farther away than they did before. It also no doubt had effects on economic growth during that period. Again, I wouldn't argue that energy prices were the "driving force" - that probably comes down to demographics and generational cycles - but it contributed, maybe strongly, in the background. Would exurbs have ever existed in a world of $2.50+ gas prices?
I think this way about the fall of Rome. They had a constant inflation problem, and no one has really figured out why. The Romans never really understood it either. But they were constantly drawing down the supply of one of their biggest energy sources, wood, making it more expensive each generation to get their biggest energy source and primary building material. Their manufacturing base followed their wood supply until they ran out of defensible territory for high-quality wood supplies. Then they were in the box we may be headed toward - no ability to bring on new supplies to counter depletion in existing supplies. But they had a renewable resource to work with, so they went through centuries of growth and decline cycles.
That's my understanding of the situation. Based on the historical experience of the last four decades, one might reasonably have expected high oil prices to bring about an "ordinary" recession, but not a near-total melt-down. Based on what we now know about the financial hanky-panky that was going on, one might reasonably have expected that some triggering mechanism, not necessarily high oil prices, would eventually have brought about the kind of collapse that we have actually witnessed.
I do, however, have a couple of questions that I haven't resolved in my own mind. First, the historical experience of the last four decades to which I alluded encompassed a period when it was still possible to increase global oil production. Assuming that we are past, at, or very near peak oil, would the latest oil shock have triggered a merely ordinary recession if our financial house had been in order, or would it have been unusually severe regardless? Second, although GLOBAL oil production has risen enormously over the past four decades, what role did the peaking of U.S. production about 1970 play in the financialization/de-industrialization of the U.S. economy? Did the latter happen precisely because U.S. production had peaked, but global production had not, so that petroleum-fuelled transportation remained relatively inexpensive and permitted intercontinental labor arbitrage?
You were lumbered with a stupid Ideology.
Capitalism.
Capitalism has no moral fiber.
You exported all your skills overseas because of capitalistic logic.
Blind Freddy could see that is was not in your children's interest to abandon the skill needed for survival.
Morals are not an optional extra.
Nor are they cheap.
Spain found gold in South America.
Every Spaniard became a millionaire. They bought all their goods from their neighbors.
And so lost their skills.
Spain went from the powerhouse of Europe, to a pauper state.
So much for their military might and their Armada!
They are showing signs of recovery now, 200 years later.
You can expect the same.
I think this way about the fall of Rome. They had a constant inflation problem, and no one has really figured out why.
Remember... they were importing very significant quantities of wheat from North Africa, and they had a merchant class speculating and forward buying on those harvests.
Large imports and leveraged buying unbalances money.
My model suggests a bit more complex picture (see link below). It is net energy (or exergy) that feeds the economy, not the raw energy (e.g. oil). Because of the declining EROI in all ff energies the net energy appears to peak many years before the expected peak of oil extraction rates. In fact about thirty years +/-. If we anchor the peak of oil production at 2008, that means that net energy from oil, the predominant form for the OECD countries, peaked in 1978 and the economy's ability to do useful work (real goods and services) has been in decline ever since. Save any nominal increases in efficiencies or reductions in wastage (yeah right, that's what SUVs were), our capacity to do work has diminished at an accelerating rate these last thirty years.
The response in the US has been to ship manufacturing and some kinds of service abroad to take advantage of low energy lifestyles and hence lower wage labor. Americans demand higher wages and more costly medical care because we are used to (spoiled is a better word) high energy consumption lifestyles. The import of cheap (plastic) goods to WalMart is another symptom. So what we call globalization may be seen as a long running adjustment to lower energy flows.
Meanwhile, as Gail points out, we Americans and most OECD citizens have shifted to debt financing of purchases with the belief that we would be able to service that debt in the future. That belief is based on our experience with growth in net energy comes expansion and creation of wealth. In the past we always experienced this expansion in the future so we came to expect it would always work that way in the future.
The system was already moribund with the peaking of net energy. Only no one knew it because we don't track net energy, only gross (barrels of oil). Hence people and governments alike grew increasingly dependent on debt and betting on a future that they sadly didn't know would be constricting not expanding. This is also at the base of the creation of many derivative products that are little more than desperate bets on the supposed future. The exotic financial world we see today is nothing more than an illusion that sometime in the future we will grow again and be able to pay it all back with newly created "real" wealth.
What peak oil does is signal that something is wrong. What the spike in oil prices did was act as a trigger that sent a bullet into the already existing bubbles in debt-financed markets. But the build up of those bubbles long preceded the bullet. While many of us have been fretting about peak oil, peak net snuck right past us. We are already hemorrhaging wealth (e.g. infrastructure being let to rust and decay) but it will take time to realize it.
See: Economic Dynamics and the Real Danger
Question Everything
George
When one has to limit the length of the post to 800 words, and is writing for an unknowledgeable audience, one has to do a little simplification. I agree though that peak net energy took place a while ago, and is the problem. And pumping huge amounts of energy into "renewables" with slow paybacks and ultimately low net margins will not make our net energy problem any better--only worse.
Gail, I have a hard time trying to understand your thinking on this matter.
In the future when we really have very little easily accessible fossil fuel energy would you like to have access to some renewable energy or no energy at all? If you'd like to have some then don't you think you had better invest what is still relatively cheap fossil fuel energy to help put in place the infrastructure that you will need to be able to harness the renewables.
How exactly will doing this make our net energy problem worse when the alternative is to continue as we are until our net energy is going to be zero, or worse negative?
So when the 500 lights in your crystal chandelier finally do go out would you prefer a very expensive solar powered LED flashlight that has been paid for with non renewable energy but at least you have it in your hand, or a cheap kerosene lantern but no kerosene? I guess at that point you could burn the furniture for a few days.
I don't see wind as lasting any longer than fossil fuels. It just replaces some of the fuel our current system uses, with the hope that this will make the whole system last longer. You need to have the whole system up--transmission lines, natural gas (or some other type of back up), besides the wind turbines themselves. You also need roads in good repair for servicing the wind turbines, and for maintaining the transmission lines--helicopters, to get to the difficult to reach places. You also need our current system of world trade supporting the whole system, so that replacement parts can be obtained when needed.
Most of the solar is grid-tied. If the grid goes down, these homes will have daytime electricity for several years. That is fine, but not worth nearly as much as say, having electricity at night, or so that a refrigerator or an internet server can stay operating 24/7.
Having LED flashlights and the like depends on having batteries that work. Batteries are short lived, so even if you have the renewable energy, the batteries are a limiting factor.
Yes, I agree that example was more of a metaphor than an actual plan for the future.
Well that is still true today, though my own clientele is tending towards completely off grid systems using tried and true lead acid battery backup. You can run your refrigeration and computers 24/7 on these systems.
That is a description of BAU. I agree 100% that that will not be able to be maintained by any alternative or renewable energy. However I think that the point is we will be living in a very different world than the one you describe. The point is not to try to make the current system last longer at all because we already know that we can't and won't be able to do that.
It's time to start thinking about a completely new paradigm on all levels. I have no doubt that wind and solar will continue to play an ever increasing role in this new paradigm and as far as wind is concerned we have been harnessing it since the dawn of civilization and I'm sure that if humans are still around, we will still be harnessing it long after the age of oil is completely dead. Perhaps you should try sailing a small boat out onto the ocean to get a feel for what the new paradigm might be like. I highly recommend the experience and a lot can be learned from it.
Any energy production technology will need to produce not only the energy needed by society but enough excess energy (that can be used somehow) to take the place of the fossil fuel subsidies currently being used to support it. We currently use fossil fuels to produce wind and solar systems. When the FFs are too expensive will wind and solar provide enough extra power to run the factories that produce them, provide the road maintenance, produce spare parts for maintenance, provide power to extract raw materials or recycle old material? That is the key to true sustainability. These systems have to be able to support themselves to achieve it.
One of the reasons I feel it is terribly important to establish the true, wide-boundary EROI for these systems is so that we can answer those questions. Even if, after all the energy investments are taken into account, the wide-boundary EROI is just marginally greater than 1:1 it might be worth doing, esp. if we as a society are ready to dramatically reduce our energy consumption. The problem is we don't actually know the true EROIs for each unit of usable energy produced by any of these actually is (we don't really know it for oil either, all we know is that it started really high which is what leveraged us into the industrial age). So we don't know if in the end we will experience a net energy loss (EROI < 1) or not. And, don't forget that all of this assumes we actually do have the energy and materials available to scale up while we still have oil. I'm beginning to seriously doubt that. We're already into hock up to our knees because the net energy peak and decline is taking us down.
Perhaps you should try to work out in more detail what you envision this new paradigm actually looking like and how it will work. We have all taken so much for granted vis a vis the availability of cheap FF that it is hard to see, sometimes, the degree to which all of our asset production assumptions (building that sail boat) are derived from that fact. Take away the FFs, which is exactly what is going to happen, and you are left with a unimaginably huge gap between even our so-called basic consumption needs and what alternatives can supply anytime soon.
You are right of course!
I have been trying to come to grips with the details of the the new paradigm that I envision. Most of the time I am reluctant to articulate my vision because of the constant push back from people who are unable to envision anything other than BAU. It really gets old very fast.
Though much of it has already been proposed by the people who are working on things like transition towns, permaculture, alternative currencies etc... Some right here on the Oil drum, Jason Bradford comes to mind. Some of the ideas from comenters such as AlanfromBigEasy.
The ideas from the people at the Post Carbon institute such as Richard Heinberg. Or people like aangle from http://www.postpeakliving.com
There are ideas like those of architect Simon Velez of Zeri Pavillion fame, BTW sailboats can be built from similar materials using similar construction techniques. My list goes on and on.
To be honest I think there are many bits and pieces of the puzzle of what the new paradigm will look like that will continue to emerge as time goes by. What we need is more people who are willing to let go of the known and make the leap into the unknown.
In any case you have given me a bit of an incentive to come up with a clearer articulation of my vision. I will try to put some of my ideas down on paper (computer screen) and present them for discussion.
This problem is called 'the paradox of production' and was explained well some years ago on EB (Energy Bulletin).
I think the Energy Bulletin post you are talking about is one by John Michael Greer called The Paradox of Production. It talks about the huge demand on existing fuels, when one wants to build a whole new infrastructure of a different kind. It says:
It seems to me that you really have to have some means to pay for the fuel to drive up energy costs, though. If the primary way of getting money is taxes, and sources have pretty well dried up, then it won't be possible to pay for the new infrastructure. The lack of debt availability will make the situation worse too. So it is hard to see alternatives being scaled up.
I think I'd want to see more than just a qualitative graph before I'd be persuaded that EROI was already so low on the whole as to have pushed the net peak back by 30 years. The effect isn't linear in the EROI number; if EROI drops from infinity to 20, that's only a 5% relative loss in net energy, or a year's growth back when things were growing robustly, or a small enough effect to be buried in the noise. The real trouble sets in as the number approaches unity, as for corn ethanol.
Thick me. I'm having trouble parsing your words to understand the meaning. You seem to be implying that I jiggled the EROI to move the peak of net back. That isn't the way it works. No matter what the energy cost curve the phase shift of peaks is just about the same. All that is effected with lower costs is the net amplitude is closer to the gross. Of course, if costs were zero then net would equal gross and there wouldn't be any problem.
The model is theoretical but based on physical laws rather than curve fitting on the upside and assumptions about symmetry on the down side. Not sure what you mean by conceptual. Full paper in process.
No, not suggesting manipulation of the EROI at all. Just that a drop in EROI from 100 to 10 would have a similar effect to a drop from 10 to 5, so at the large numbers, a large numerical drop doesn't make much difference to the overall economy. OTOH, a drop of just "1", from 2 to 1, puts things out of business. I'm wondering how low the number can go before there's a real problem.
I'm also really questioning whether we can claim EROI has pushed the peak back 30 years, i.e. from the late 2000's to the late 1970s, which doesn't seem to be reconcilable with the apparent visible reality that since then, there has been a huge increase in a variety of activities, such as car-driving, as well as a huge increase in oil production. Intuitively it seems as though one might need a drop in EROI from effectively infinite (negligible energy cost of producing energy) back then, to substantially less than 2 now (to burn up the entire increase in gross energy production and then some, on the basis that total net energy is not only lower now than then, but so much lower that the peak is not in between.) That just doesn't seem credible (except maybe at the margins tar-sands and ethanol) without quantitative graphs.
Sorry, but I continue to find it hard to get your point.
My model is based on the physics of energy extraction from a fixed, finite reservoir where something dynamic systems modelers call "backpressure" (increasing negative feedback as the system matures) develops over the extraction period. Another aspect of this is the "best-first principle" whereby the early extraction is of the low hanging fruit and later extraction (including finding) gets harder and harder. The hardness is reflected in the energy cost required to extract the next unit of energy from that reservoir. I suppose this is what you mean by qualitative, but others would say it is a model based on first principles.
The energy costs increase as it gets harder to extract. Pretty simple actually. What this results in is a decline in EROI. I basically understand your argument about the ratios but it is irrelevant since the model deals with actual costs not EROI as such.
I suppose it depends entirely on what you mean by huge increase in activities. Sure the financial markets have boomed. The housing market was in an incredible and unrealistic bubble. As for manufacturing in the US, that moved elsewhere. Why? To compensate for the American high-energy demand lifestyle reflected in higher wages. Substitute Chinese labor that has much lower energy requirements for their lifestyle and also replacing some machine-based processes here, and you will soon see that the activity simply shifted to a more agriculture/labor (and lower power requirement) form.
Americans, and most OECD economies, have been living under an illusion of economic growth (based on values of GDP which is a bogus measure) by substituting debt for production of real wealth. For the last thirty years we have been keeping the illusion alive by borrowing to bet on a future that will never arrive. If that is what you meant by increased activity then you are suffering from the same illusion as the majority of others. Meanwhile our infrastructure has decayed. We can no longer muster the resources to tackle important issues like global warming without borrowing from Chinese savings.
If energy costs for extraction were zero, then the peak of net energy would be exactly the same as peak gross flow (peak oil). But that isn't the case. As you increase the costs (declining EROI) both the phase relation and the amplitude of the net curve change. The net peaks before gross. Very simple. By what time frame depends on the growth rate of energy costs, not the abstract EROI ratio per se. A thirty year phase shift is an educated guess, but it is based on the best estimates of costs we have at present.
What does peak oil signal? That depends. It can signal that:
1. Crude oil resources depleting
2. Crude oil producers cannot pump more (technical problems) or are unwilling to do so (political issues, economic strategies)
3. Demand is less than production and thus producers are forced to produce less.
When one says that crude oil production peaked in 2008 is it due to point 1 or due to point 3? In future it well may be that diminishing production is due to points 1 and 2.
You may have missed the point re: net energy peak timing.
To oil analysts, all the world's an ... oil drum. But Ilargi didn't say the sources of trouble were mutually exclusive, and we know very well they rarely are. That post was on "driving force", which IME boils down to the societal "we" in North America and Europe making far vaster promises than could ever be carried out even with abundant oil at $20.
It was a real Rube Goldberg machine. For years, people with negligible earning power flipped houses at each other until finally many became notional millionaires. Once they felt like millionaires, they felt egotistically entitled to live as millionaires. Since they never had the skills or the get-up-and-go to earn that status, they used the houses as free-money machines. That put a call on the goods and services they had never produced (nor could ever have produced.) That in turn led to the Wile E. Coyote moment, and the problem was suddenly exposed.
It's simply easiest for both individual citizens and politicians to live extravagantly and put it all on the never-never, rather than ever say "no". This is hardly a new problem; indeed it long predates fossil fuels and the industrial era. Gluttony was after all one of the traditional "seven deadly sins".
Now, did scarcer oil help push the tottering edifice over? Very possibly.
I agree with you Gail, the more I read the AE the more I question the analysis of their stuff. There appears to be a certainty in their prognostications that they don't support.
David Strahan in his book the The Last Oil Shock devotes a chapter (5 page 115 on) to just this problem and cites several academics who appear to provide a convincing argument as to the underestimation of energy cost and economic activity. Other references such as The Coming Economic Collapse: How We Can Thrive When Oil Costs $200 a Barrel, Stephen Leeb also cites work which shows a correlation between energy prices and economic recession.
FWIW, I do believe the current economics is a ponzi scheme, but energy prices seem to be the fuel and high energy prices the lighter for this economic meltdown. Decoupling a complex system to give definitive concrete answers seems doesn't seem possible, it would be good if the language in AE had a tone more conducive for questioning the areas of uncertainty.
It seems once Illargi is convinced of a conclusion he is little inclined to entertain other possibilities and can become quite belligerent in the process, so it's likely you'll gain little in this debate.
To me, Matt had it dead on here because what we experienced in Sept 2008 was exactly this, a seizure of the credit markets.
This thought was echoed here as well:
So to me it's obvious the 8 year run up in oil prices culminating in $147/barrel oil was the direct cause of that seizure.
I don't agree. Alan Greenspan has now revealed that easy money from 2002 to 2005 was specifically intended to counter threats from the Mideast, which he considered very real. And what comes to mind when we think of the Mideast? - oil. In other words, he wanted to buildup the economy against the threat of oil supplies from the Mideast not being secure.
So oil is exactly the reason why the financial bubble developed, and alternative explanations in this case are simply wrong.
We get lots of explanations--some match reality, some don't. The recession is pretty much a world-wide phenomena. That Alan Greenspan did or didn't do is only a small part of the total, and not an answer to where we are now. Without peak oil, the bubble could perhaps have gone on longer, and been replaced by another bubble.
Gail,
CSPAN Book Review just did a show on Nicole Gelinas's book: "After the Fall".
Here's a link to a video clip: After the Fall
Author Gelinas provides an impressive, whole other view of what got us to where we are today.
Perhaps so, I don't recall running across that revelation; it would be interesting to see substantiation, a link. If it's true, maybe Greenspan was entering senility, which is not altogether uncommon at his then-age. After all, I'm finding it hard to see how adding vast tracts of gargantuan houses to far-flung oil-guzzling suburbs - which is mainly what the easy money accomplished - was supposed to counter a threat to oil supplies, irrespective of whether it can or cannot be said to have built up the economy in some other respect.
You´re probably right, but is that relevant? Surely the whole point to a peak oil blog is that it is assumed to be on-the-topic as far as our future prosperity is concerned. Consider the recently re-subtitled Early Warning (Risks to Global Civilization), another oil blog, for example. If the immediate risk to our global civilization is not peak oil, but a debt implosion, even if it was originally caused by peak oil, who is on-the-topic, you or Ilargi? Sounds like we´re all going to be debt-buggered long before we´re oil-buggered.
My old dad, now sadly deceased, called that ¨picking the fly-shit out of the pepper¨ which I always took to mean trying to figure out what was relevant. Is that why Ilargi left Oil Drum, he figured out that peak oil is true, but not relevant?
I do not know all of the reasons behind while Ilargi left, but I am sure that there were other reasons that were much more important.
Given that you are an actuary, you of all people should understand that our "financial" systems are at their core, just people taking on present-day legal obligations (a fancy word for making promises) with the assumptions --many such assumptions-- that the promissors can and will be able able to fulfill their obligations at a later date.
IMHO, many of the discussions in this thread jump the gun by assuming that the only question is one of a sliding scale between Price of energy ($$/BTU) and resulting profit (a.k.a. returned interest, ROI, $$Out/$$Input) from undertaken business ventures.
But before we get to that space, we first have to solve the binary Yes/No (1/0) questions regarding whether certain transactions can go forward at all (Yes/No) rather than at what price. It is there, I submit, that the seeds of "collapse" emerge.
_________
I realize I've gone too abstract here. So allow me to step back and give a hypothetical example:
Suppose a large company decides to build its new new company headquarters in a downtown area --say, San Francisco.
Suppose they plan for a certain number of low-wage but high skilled employees (e.g., IT people) to show up at that building. Without them the enterprise fails.
Suppose that there is a pool of low-wage/high skilled employees, but they live far away (East Bay) and can't afford high rents inside the city. The only practical way for these employees to get to the city is with electrified rail (for example the BART system in the San Francisco Bay Area).
Everything is going fine until one day, a small plane crashes into the high voltage towers that feed the train system and the Black Swan event takes out the electrical power (or worse yet a major earthquake hits, or a big storm). Due to financial weakness, the utility cannot repair the electrical lines anymore. Maybe in 3 months time, but not now. Say for example, repair contractors are no longer accepting IOU's signed by the Goobernator, Mr. Schwarzenegger and the repairmen simply refuse to do the work. In that case, the trains stop running. It's a Yes/No situation; not a how much money situation. And then the company headquarters fails. That too is a yes/no situation. One domino topples and then the next and the next.
Everything was built up like a house of cards on a set of Yes/No assumptions: yes the electric company will always be able to keep providing electricity; yes the trains will always keep running and yes the necessary but far-away employees will be able to get to work and then company headquarters can keep running in a sustainable way. But then again, what happens when one of the Yes/No answers becomes a long term NO --where long term can be as short as 3 months (the ADHD time horizon of Wall Street)?
Sort of a Liebig's Law of the Minimum issue. It is very easy to put together scenarios where the implicit assumption is BAU continues. Everything is OK, until suddenly it isn't.
Sometimes insight comes from visual clues. Looking at the pie chart on the impact of inflation on debt, and the effect that rising oil prices has on it, I could not help but notice that the debt part remained the same. Yet, today we see savings by families beginning, and debt should therefore be dropping, or so I would think.
More than that, bankruptcy filings and foreclosures will also reduce that debt, so that people may purchase "everything else." Since BAU depends on "everything else" to such a large extent, shouldn't we expect that government focus might turn to making bankruptcy easier? And, since they are not, isn't that a reflection on the power that GS and the rest of the banking cartel has on the body politic? Instead they are intent on inflating their way out. One more symptom of Peak Oil and nearsighted politics.
Sadly, there does not seem to be an easy cure for this disease. As far as the rise in oil price, we will no doubt be required to adjust values far more and far more frequently as programmed inflation takes hold.
Craig
The debt part goes down too--partly from defaults, and partly from people not being able to get credit, once they get laid off of their jobs, or have their salaries cut. Since it is hard to think of nice ways for debt to go down, I didn't show it getting smaller.
Having just finished reading the relevant book for our times, "This Time is Different" by Rogoff and Reinhart, they show that this time is not different. Over eight centuries governments have caused banking crises such as the one we are working through which can lead to currency crises, debasements, sovereign defaults.
It seems like what you are describing is deflation. Our credit bubble is popping. If our central bank is successful in solving the predicament they are in, they will need to default through currency debasement via inflation. Rogoff has said the goal would be about 6%, but it would be difficult to achieve that exact rate. Once inflation is achieved, oil prices will skyrocket. The laws of supply and demand will also determine price. Right now we have decreased price due to decreased demand due to our credit crunch and oversupply issues.
Many years down the road, when oil is well into decline, banks will still create credit cycles of boom and bust.
That said, oil has definitely played a role in this recent cycle we are in, by allowing us to build so many houses, so easily, with energy slaves making all of those new granite counter tops and roads for us.
What I thought was interesting, in their original paper, Rogoff and Reinhart comment on page 15 of their paper:
But they did not understand why this relationship was true. If they thought about my second chart above, they would have figured it out.
Gail, they do say that appropriate regulations such as Glass-Steagall, and then the abolishment of such regulations played a role in the timing of the crisis. They blame political failure as determining the prevention as well as the cause of crises in general, which is consistent with legislating appropriate regulation. Also included under this subject, they discuss financial innovation which certainly added the unsustainable fuel to the bubble's fire.
I haven't read the book, but in the paper, they clearly miss the importance of economic growth to the whole system. This is odd, since the figure out objectively, based on the data, that there is a connection--but they can't figure out what that connection might be.
In the past governments/economies weren't constrained by limits to growth on the scale that we currently face. Of course, if you don't think that we, globally, are not facing severe limits to growth, it's easy to see this downturn as just another "adjustment".
Severe limits to growth don't preclude banks in our distant futures, given the greed in human nature.
Seems to me that Gail's explanation, while it may be true for the U.S., does not explain the whole world situation. One thing that can be said for sure is that the world experiences Peak Oil at the same time and that there is a world price for crude oil.
Yet we have wide variations in response to its advent. China booms with record car production and sales while the U.S. has dropped to second place in sales and third place in production. This does not make sense if consumer income is the main factor in recession and that Peak Oil is the cause of recession. Clearly consumer income in China is a small fraction of U.S. consumer income, yet its high growth rates continue and incomes rise even post Peak Oil.
It seems to me a large factor is the demographics of each country facing Peak Oil. In the U.S. we are in the process of retiring the baby boom generation. They were a big factor in the good years back in the day. Now they are going away from the workforce.
I myself quit working at a regular job at age 47 and am glad I did.
Around here not many men above 50 have regular jobs. IMO when the recession hit a lot of men, and probably women too, simply dropped out of the labor market. In my family the last to quit was my sister who took a pension from the Minneapolis School Board at age 55 six years ago.
It is well known that there have been buy-outs at the auto companies so that new hires can come in at about half the retiree's wage. This is a formal union labor agreement, but the same thing is happening across the country informally.
The result of all this is a drop in real income and a drop in oil demand as fewer people drive to work. The new hires like it because they now have a job. The baby boomers love it since they are out of the rat race. Those I know do not want to go back.
Consequently we have recession, drops in tax revenue and defaults by the young who buy stuff on credit with low wage income. But it is not all bad.
For government officials and businesses, recession is a problem. For the drop outs, retired and semi retired like myself with some side income who live at a very low standard anyway, who cares?
We are not going back to regular jobs come boom or more recession.
The economy just got smaller is all that happened. The next generation is taking over and there are fewer of them so a smaller economy fits nicely.
But for the Empire and the growth fanatics it's a disaster.
I don't think the Baby Boomers are "out of it"; even if (especially if) they are retired. People on fixed incomes are going to get whacked good. And this is true in spades if they are already living on incomes close to subsistence. The smaller economy means a smaller tax base, but government spending keeps going up. There are wrenching changes needed (downward) in salaries and benefits paid to public sector employees and in government funded entitlements to all the dependents with our population. Some people seem to think that the working population of the U.S. is some sort of bottomless money, honey pit that can be taxed and taxed and taxed as much as is necessary, whenever necessary. This assumption is completely wrong. We are no where near as wealthy as some people assume. Already something close to one third of the population is living at either poverty level or at no more than 200% poverty level (meaning that they are poor by most objective standards). The remaining "middle class" is getting very hard pressed. This is where the TEA Party people are coming from (I'm not one of them and I don't mean, or need, to defend their views. But I understand fully where they are coming from).
The timing of the downfall may be a bit different. See this video called Chanos: China bubble ready to burst. The fact that it hasn't happened yet doesn't mean it won't happen. This video has to do with real estate, but we know how this ripples through the economy. China needs all these jobs to keep people employed and happy.
Actually your comment about employment needs amplifying.
A few years ago I used to work as a consultant in manufacturing. I happened to get assigned to do a study in a Mexican factory and was amazed at the number of people in the plant compared to largely automated US plants. Even in Mexico the automated packaging machines are starting to take over--because of higher quality.
Our celebrated 'productivity' is destroying the prospect of a US middle class. Office automation has emptied the office overhead and the internet is emptying the sales offices.
Jobs create 'growth' but what jobs will be left?
Either the government will create them or create subsidies to create them or we can look at a Haiti style 'democracy' with 50%? unemployment. We have a food stamps program because
it provides a market for the food companies.
http://en.wikipedia.org/wiki/List_of_countries_by_unemployment_rate
See the automated future.
http://en.wikipedia.org/wiki/Player_Piano
Even with Peak Oil, I don't believe that automation uses more energy than human beings in our society.
Have you heard the story of the inventor in ancient Rome who was demonstrating a machine to automate the production of building columns to the Emperor Vespasian. The Emperor was impressed but banned the device as mischief.
'How would all the laborers, put out of work, feed their families?'
Your personal anecdote bring up a couple of issues that should be counted upon.
First, there is the megatrend of globalization. I don't like it, but there it is. When you remove trade barriers globally, what happens is that wage rates converge to a global mean. Great news for workers in low wage countries like China or India, very bad news for workers in high wage countries like the US. The problem is, wages are "sticky", and tend not to decline very smoothly. More likely, what you get is the "haves" holding on to what they got, and the "have nots" becoming more numerous; same mean achieved, but at the cost of greater unemployment and underemployment, and greater misery. The adjustments do come, but gradually, and what you describe is very much a part of this process. The older, higher-paid workers are gotten rid of one way or another, to make room for the lower-paid youngsters. This is happening in spite of peak oil, and in spite of what the banksters might have been doing. You are right to point out, though, that the boomer retired to his suburban McHouse is not going to be driving the SUV to work every day; while the newly employed do now have to drive to work, they are only going to be able to afford less costly housing and transportation, so there may be a little energy demand reduction there.
Secondly, there is simply the megatrend of the boomers themselves. They (we) are aging, and certain phenomena are predictible due to this. For one thing, as the boomers reach retirement, they are not going to continue on the ladder of upscaling their housing. Instead, most of them are going to want to downsize considerably. Those builders and lenders that assumed that the exponential sprawl of new McMansion developments were going to continue to expand forever got it very, very wrong. The drop in housing demand almost exactly coincided with the retirement of the first of the boomers. This is just starting, there are going to be very, very many more boomers wanting to sell than there will be younger people wanting to buy for a long time to come. Furthermore, the housing that so many boomers are in now is no longer the type of housing that younger buyers want. The net effect is going to be sustained downward pressure on housing markets, and especially suburban housing markets, for another couple of decades at least. The very bad news is that a lot of those boomers never will be able to sell; they are going to be "aging in place", they just don't know it yet.
Similarly, it should come as no surprise that as Boomers near retirement age, they are going to want to reconfigure their IRA and 401K portfolios away from equities and toward fixed income investments. This should make it pretty obvious that the outlook for the US equity markets for at least the next decade or two is going to be pretty bearish, just for this reason alone. It also means that prices for corporate and government bonds are going to be bid up, which will keep yields (and thus interest rates) driven down. Given this, it should not be quite so much of a mystery why stock markets tanked a couple of years ago and have not fully recovered, or why interest rates remain stuck so low.
Both consequences of the aging boomer megatrend are happening, and were going to happen, regardless of what might have happened with oil or the financial system. That does not mean that what is happening with oil and with the financial system are unimportant, just to point out that it is a complex world, and that there are multiple independent things going on driving events. We tend to want to reduce everything to a single, easy-to-understand cause-and-effect system, but things just aren't that simple.
Excellent post, and I couldn't agree more. People must spend on necessities, and given the way our societies (U.S. and Canadian) are set up, that means gas for the car. Food is obviously a necessity for everyone. They will cut back everywhere else possible, and I expect things like electronics and auto manufacturers to take a big hit, while local and organic farmers make a comeback.
As the price of factory-farmed food approaches that of organic and local, many people will switch - might as well. However, Steve Savage has written a very interesting article entitled "Why Most Food Could Never Be Local," which I have analysed in the context of peak oil: Why Most Food Could Never Be “Local” – What this means in a peak oil world to your food choices, to the 100-mile diet, and to vegetarians: http://www.briangordon.ca/2010/02/why-most-food-could-never-be-%E2%80%9C....
Clearly we will be in big, big trouble if Steve is right, as millions of Americans and Canadians will be stranded without food. Given how we have neglected more efficient means of transportation like rail, and that it appears awareness of peak oil is finally hitting the mainstream (http://www.briangordon.ca/2010/02/has-peak-oil-awareness-finally-hit-the...), perhaps we'll soon see a serious push to rebuild our rail systems.
The net impact of these phenomena are shown in daily new reports. For instance, unemployment in the US, shot up, "unexpectedly" in January. And, for some reason the connection between those lost jobs and the economy appear to be a distant blip on the radar of the basions of BAU. For instance, in discussing the decline in sales during the holiday season at Walmart, we read:
Well, duh... Lay everyone off, and wonder why they stop buying stuff. Yeah, like that's a really difficult concept to grasp? Really!
Craig
Edit:
I meant to include the url for the full story:
http://money.cnn.com/2010/02/17/news/companies/walmart_results/index.htm
The connection between the financial world (credit) and the real world (oil) is likely a bit more reflexive than you make it out to be. Here are a couple of points:
1) Most of the world’s production comes from NOCs. They do not explicitly borrow money, if anything, as they tend to be surplus countries they effectively do not have debt.
2) The balance sheets of the remaining couple of percent of production, E&P companies is are not debt heavy either.
3) Because of the fungible nature of oil one has to look at GLOBAL demand, not US demand. And global demand has remained relatively flat.
4) More and more oil production has moved off-shore which causes the fixed costs as a percentage of total costs of production to increase. That in effect steepens the supply curve, so the smallest incremental change in demand causes large price swings.
5) If one accepts that the middle east is the swing producer, according to the databrowser in 2008 exports INCREASED, yet the economic downturn in the west continued.
6) Debt can be used for two purposes – causing a temporal shift in consumption, resulting a less final consumption because of interest expense, or investment. We have been using debt primarily to increase consumption, not production. What makes the US case so bad compared to other net oil importing regions is that we have a triple debt problem. We have debt
a) on the consumer level
b) on the state level
c) on the federal level.
Europe has relatively little individual debt but significant country level debt. And the EU as a political entity does not issue debt
7) As long as GDP grows at a higher rate than you debt you’re ok. Once that stops you have issues, especially when your asset base as well as your productive capacity have been shrinking for decades.
It will take many years, if not decades to get the consumption/investment back into balance.
Just a few things to take into consideration.
Rgds
WeekendPeak
These are fundamental principles--they apply to the world as much as to the United States. I don't see who is producing what oil as being particularly important to the discussion. What I am writing about doesn't have much to do with the large oil companies--they generally haven't needed to use much debt. The issue is everything from the small natural gas companies, to individual consumers, to businesses, to state and local governments. These can't ramp up their spending well in the face of higher oil prices, so they end up cutting back elsewhere. Debt defaults and recession become a problem.
As demand goes down (because of recession, purchase of fewer cars and new houses, etc), the price of oil drops. This means less cash flow for the big oil companies to reinvest. So they get hit too, but it is on the cash flow end of things.
Demand is not materially going down. It has gone down in the US/west in general, but global demand is pretty flat. And average annual oil prices are still on an upward trajectory.
As the spread between average production costs and the selling price still has a big positive margin, the cash flow for NOCs is strong. And that is a good thing because a lot of those dollars are recycled to the US by buying Treasuries, buying services from US based oil service companies.
The US has chronically been spending more than it has been making on the individual, state and federal level for decades. The positive blip during Clinton was caused by increased tax revenue from the 90’s tech bubble which subsequently collapsed, and the deficit went right along with it. Unwinding those debts will take a long, long time, and it is going to require a different economic model. You don’t become wealthy by spending more than you make, yet that is what we have been doing.
Ultimately we, on an individual as well as governmental level, need a whole lot more discipline. Blaming “the government” or “wall street” is not productive because politicians are elected by the people, and with a voting turnout for presidential elections between 55 and 60% over the last couple of decades there seems to be little interest to actually change things.
Peak oil has imho only a tangential relationship with living above one’s means. To imply causality is quite a leap. The current lack of economic growth is like going to the dentist: unpleasant but necessary.
Whether I spend a dollar on fuel or a dollar for a toothbrush at Wal-Mart doesn’t make a difference to the economy – a fraction of either dollar is going to leave the country and is recycled through treasuries. On a micro level increased fuel costs are annoying because I have to cut down on other spending, but on a macro level the number of dollars I put into the economy remain unchanged.
One of the biggest factors in this lack of growth the US is experiencing is that the amount of debt available is no longer increasing. But debt is not essential if you live responsible in the first place. If you really want something you can’t afford SAVE for it. On an individual level the idea of first spending and then earning is nonsensical except for investment like purchases like real estate, and that is because buying real estate is more of an asset swap than consumption.
Regards,
WeekendPeak
Peak oil is not the cause of the current depression; it is just a contributing factor. The financial collapse was caused by excess debt, just as in 1929. The 2000’s excess debt was concentrated in a speculative housing boom that drove prices up in a few regions of the country (CA, FL,NV,AZ, DC) while other regions had little above trend price increase. Peak oil did not cause the price of land or of building to increase in the previously mentioned areas relative to the nation as a whole.
There was also a lot of debt used to purchase luxury goods, like upscale autos and big screen TV’s. Then there were the parasitic expenditures, like teenagers running up several hundred dollar monthly text messaging bills.
Oil peaked in the USA in 1970, and since then our purchasing power growth slowed; however, oil was not the main problem. The problem was not enough new technologies. The first decade of the 21st Century has no new economy changing technologies. The first decade of the 20th Century had the beginnings electrification (household lighting and appliances), municipal water and waste treatment, automobiles, airplanes, experimental radio, telephone systems, and the beginnings of the highway system.
Globalization and the loss of US manufacturing jobs to imports was another major factor.
The economic response to peak oil is going to be far worse than the situation we have at present. Out economic model does not know how to deal with decline.
We still spend only 3% of GDP in the US on oil. I have to agree with Paul. Oil prices are just one factor in our recession. Gail's unattributed circle graphs seeme exaggerated for food and oil. And they should also sho an increase in debt payments, both personal and public, which reduces the "everything else" category.
If there is a 3% figure as oil useage, I submit that it does not include all of the oil used in manufacture, transportation, packaging and the like.
Also, PO is the limiting factor on growth. Debt is assumed, at least when it is contemplated and analyzed prior to acquisition, on the basis that you will, ultimately, grow your way out of it. You accept that your consumption will drop after you go into debt, but presume that you will make more money each year until that becomes insignificant.
I believe that Gail's point is that a major factor in the debt contraction was the impact of peak oil, and the limitations it puts on our ability to grow, and growth is what BAU is all about.
Meanwhile, I am interested in the GDP figure you used, and hope that your source will have listings by category of that sort. If you would be so kind, I would like to have a url or cite that I might refer to in my research.
Thanks.
Craig
Craig -- Just a guess but I think I've seen that 3% before. It may be the amount we spend for oil divided by the total value of the GDP. If so I'm not sure what the point was. I beleive air is only 20% oxygen. Can we get by well enough with just the 80% balance. Seems to be the same implication: oil is only 3% of the value of all our "stuff". Thus who can't get by with just the other 97% of our stuff?
Perhaps I misunderstood but that seemed to be the message.
There get to be a lot of issues--wholesale or retail cost of oil; whether you should be comparing to wages or to GDP; if you should include oil embedded in other products we import; and whether it matters whether low income people are affected first. When I first used that graph, I said the amounts were exaggerated, and might represent something like a very big increase in oil costs for a low wage earner. My unattributed graphs are ones I made myself.
This is Dave Murphy's graph of the relationship of oil to GDP.
Some people have described the economy as much more highly leveraged off oil now than it used to be. If the oil is gone, we clearly don't go anywhere!
Thanks for the graph, Gail.
So the Petroleum Expenditures fluctuated between some 3 and 7 percent. This is less than I expected, as the peak oil community always pronounces that the oil price is an important element of almost everything (food production, plastics, transportation, heating etc.)
So I wonder if "Petroleum Expenditures" refers to specific oil uses only, e.g. only transportation. Does anyone know?
Update:
Considering the graph below
http://www.theoildrum.com/node/6226#comment-591404
"Petroleum Expenditures" obviously only refer to "gasoline" of the Consumer Expenditure Survey.
So the real percentage of Petroleum Expenditures is higher.
drillo -- I had a similar consideration the other day. It seems some folks would consider such a low PE to indicate a lack of significance. But as I understand the derivation of the number my question is simple: so what if the number is between 3 and 7%? What does that seem to imply to folks: energy is not a significant factor? A simplistic but similar comparison: since oxygen makes up only 20% of the air we breath we should just be able to eliminate oxygen and function at an 80% level? The functioning level would actually be zero -- you would be dead.
Perhaps I'm mis-reading folks but it seems they are making the same point: if energy expendatures make up such a low percentage perhaps they aren't nearly as important as some on the PO bandwagon offer. Actually it implies to me just the opposite: the relatively low cost of energy has allowed us to build a very leveraged society on the back of cheap energy. And as that low cost unwinds we should expect a drastic impact on the world's economies.
Indeed ROCKMAN. The reason for this is also explained in a book ('from mass economy to information economy') written in the '80s after oilprices had risen dramatically.
How is this 3% arrived at?
Does this include all the subsidies like the US military guarding supply!
Absolutely right, sunnata. To say nothing of the cost of 8 years of war in Iraq and Afghanastan... and holding. And the cost of AGW, and the pollution from refineries, dumping of oil, etc., etc., etc. The indirect costs are many times the direct cost.
Craig
Paul, I cannot agree that there has been a lack of new technologies since 1970. Just a few examples of life and lifestyle changing technologies are robotic manufacturing, the PC, internet, VCRs, DVDs,CDs, genetic engineering, digital cameras, playstations, mobile phones, international call centres, LED lights and laptops. Together these give us the ability to telecommute from anywhere in the world and cocoon at home and this means a huge change in lifestyles (saw a programme recently that kids today spend just a fifth of the time outdoors as we did as kids in the 70s due to the new home entertainment options). We wouldn't now be accessing TOD without these new technologies and our knowledge of peak oil etc would then be limited to the old MSM (I no longer buy newspapers and rarely watch TV as the internet is far superior).
Once I was able to grasp the bigger picture, and I really didn't pause for long a any one stage in the process of understanding, it became glaringly clear that peak oil meant the end of growth as we know it.
Then came a period of understanding what the end of growth as we know it meant, and as with oil, growth is connected to everything and therefore absolutely everything will be affected.
Illargi @TAE is once again attempting to separate energy, growth, and finance, saying that there is little or no connection. IMO this is a dangerous position to stick too. Kind of like those who imply or out right state that soil amendment has little or no connection to biomass/agricultural production.
The solutions will come from big picture understanding not the specialized, individual sector details.
Best hopes for doing less.
I ususally appreciate Gail’s posts. But the insistence of linking the ‘financial crisis’, F C, to PO and more pointedly, directly to the price of oil, seems odd to me.
It is very difficult, naturally, to outline the roots, causes, co-causes (many of them reflective) of the F C. Roots may be Reagan’s military Keynesian approach. He doubled the deficit, and created an under-class, the poor. Another root, often overlooked, is that the world’s labor force about doubled in the past 15 years (?) 9/11 woke up some smart people who noted that the US Gvmt. would act irrationally in a new way and would carry out massive bail-outs. Progressive de-regulation and the rapid blooming of wink-wink procedures, actions, ways-of-doing in the finance sector, engineered by that community by buying politicians, infiltrating the Gvmt. and thus creating a semi corrupt network (SEC, rating agencies, hedge funds, banks, The Fed, etc.)
Bush Fils’ invasion of Iraq and Afghanistan, a terrible drain on the economy. The loss of manufacturing in the US, massive trade imbalances, the petro dollar. Those are just some of the highlights.
Others might wish to focus on yet other elements.
All this led to a perfect storm of debt (not only in the US of course) sovereign debt, Gvmt. debt, local communities debt, banking and insurance debts, corporate debt, household debt (varies greatly country to country in the OECD) all entangled in an incomprehensible serpent-like, bites its own tail, creature, often through swaps, derivatives, shoddy insurance, etc.
All of it, kicking the can down the road and ostensibly counting on ‘future’ earnings, payments, returns, much of it done with the prime motive of having the books look healthy, respectable, announcing ‘growth’ or ‘potential earnings’ and keeping going. That the party would end at some point did not escape astute observers or even disconcerted and intuitive people, and so they either took to implementing outright fraud (mild ex.: sub prime mortgages) in a get-yours-while-it’s-good spirit, or blinded themselves to continue BAU.
The F C is nothing but the slow, painful, and badly managed beginning of the unwinding of all that debt. Everywhere, the clocks, the meters, have to be set to lower expectations.
If the argument is that the long shrinking proportion of “commodities”, tallied *per capita* world-wide, including wild game (fish for ex.), forests, water, water-ways, arable land, and somehow figuring in intangibles that intersect between the social, the industrial, the geological (despotism, pollution, etc.) and not just the traditional copper, iron ore, coal, wheat, milk, oil, was in fact a driver for the finance ‘industry’ to ‘deregulate’ and for many to be fooled, fleeced, or cynically follow on, then ..maybe, but it requires elaboration.
Reagan’s moves were political, ideological; scarce resources were not on his horizon, afaik.
Got data?
Haven't really dug into this topic myself, and I wouldn't trust the BLS (source of the chart) any further than they can be thrown. But I feel the same way about the EIA. Is energy really gobbling up an inordinate amount of personal budgets at the moment, more so than in the past? Chart from The Consumer Expenditure Survey—30 years as a Continuous Survey.
Very interesting KLR.
A bit uncertain how to interpret the chart - the description in the piece you link to wasn't entirely clear. I take it the chart shows cumulative change relative to the start year, in absolute outlay in CPI-deflated dollars, per capita? (Hmm, upon rereading my last sentence, I'm not convinced I made it any clearer, but it's as clear as I can manage right now).
This is from the same source, and a bit easier to understand:
So if I understand this correctly, in '08, the share of annual expenditures that went toward gasoline was sligthly higher than in '84 (in excess of 5% vs a bit less than 5%), but the (inflation-adjusted) outlay was down 10%???
I think that must mean that The Pie shrank over that time frame...!
...it's even more pronounced if you focus on the period 1998-2008: Gasoline's share of expenditures nearly double, but the real change in expenditure is -12% or something...
This graph came from the same BLS link:
Not only does it seem to go in a different direction for gasoline products, it seems to make my point about discretionary income on spent on new cars going down at the time gasoline prices go up.
In comparioon, the percentage of GDP attributable to health care has gone from 5.2% in 1960 to 16.2% in 2008. See:
http://www.cms.hhs.gov/NationalHealthExpendData/02_NationalHealthAccount...
The 4th "download" link down "NHE Summary Including Share of GDP, CY 1960-2008. Line 37 on Excel spreadsheat.
This chart leaves some things out, I think. Looking at the nearly 20 years of household records for the house I currently live in (yes, I keep detailed records), the costs of the actual energy haven't, mostly, gone up a whole lot, but the OTHER costs have kept the energy bills climbing even as our household energy use has been slowly dropping (I've been working on this for a while now).
For example, the natural gas bill has a price-per-therm (ccf x thermal factor) that is totally reasonable, but we also pay a charge to Atlanta Gas Light company for the use of their pipes, and this is almost equal to the gas charge many months of the year. Then there is the billing charge, and of course the taxes, and it all adds up.
The result is that my household energy bills have increased, even though the price-per-therm (and per kwh, for electricity) seem pretty stable. The increases, in both number and amount, in the other charges have increased what I consider to be my household energy expenditures.
Those charges are part of the bill, too, but it is easy for organizations like the BLS to leave those out and say that "consumers" are complaining needlessly. Just let me show them my little record book...
My feelings about nat gas prices in Atlanta are exactly the same, except I no longer live there. However, if I still did I would switch to propane or a geothermal heat pump.
I wanted to sell my old house in NE Atlanta and build a super energy efficient one, but back in 2004 there was no decent lot for less than $200,000. Moving to a smaller town I was able to buy an acre of land close to everything for less than $50,000. Taxes are lower also ($1000 versus $4000).
Some of the oil you pay for indirectly. For example, the country resurfaces the roads. You pay for both the asphalt that is put on the roads and the diesel that is used in the machines that put down the asphalt in your taxes. In your taxes, you even pay the salary of the worker who drives the machine which puts down the asphalt. The salary of the worker goes to buy even more things that use oil.
Something similar happens with business expenditure and with charitable expenditures. The businesses and charities wouldn't have money for oil products, and to pay the salaries of people (who in turn use their salaries to buy oil products) unless (directly or indirectly) they got it from individuals/taxpayers.
So it gets to be the consumers/taxpayers who are at the bottom of the upside down pyramid who get to pay for everyone else's oil besides their own. If the price of oil goes up, so do needed tax rates, and so do budgets of the charity, and so do the overhead expenses of the businesses. Ideally, salaries would go up too, to pay the higher costs, but this doesn't necessarily happen.
I agree. That just adds to what was left out of the graphs published by the BLS. Our REAL household energy expenditures are much higher than those graphs indicate.
The economic effects of energy price shocks L Kilian - Journal of Economic Literature, 2008
Published late '07.
My chart:
Transportation expenditures actually shrank in '08, that would be a decrease in vehicle purchases against much higher fuel costs. The BLS doesn't provide easy to access spreadsheets for this stuff so it would be a monumental chore to aggregate all the historical data.
Thanks KLR. Is this data inflation adjusted?
I dunno, it's just numbers I grabbed from the BLS Consumer Expenditure Survey data. As I said I haven't dug into this subject much, and no doubt someone has exhaustively researched it all; TAE probably has a good link up every week for that.
Gail..., whenever I watch MSN..., I hear many causes for the recession and none of them ever mention $147.00 a barrel oil.
I've heard credit crunch, housing bubble, SPECULATORS (reason for GAS SPIKE), deregulation, Wall Street greed, G. W. BUSH, now even OBAMA..., but never, have I ever heard anyone (outside the oil drum) mention the gas spike.
Any thoughts as to why oil is never mentioned? Is it ignorance, or deliberate?
Economists seems to have their own self-reinforcing group of myths and models and they pass back and forth among each other. Each one says what the other says.
When I was at last year's EIA conference, I know that Steven Chu quoted James Hamilton several times, with respect to James Hamilton's economic analysis indicating that rising oil prices were sufficient to explain the recession. According to the abstract of Hamilton's paper:
As oil was rising it was certainly in the news, and for months I remember hearing many times how our economy had proven remarkably resilient in its ability to absorb higher energy costs without going into recession.
I don't listen to the news enough lately to have an opinion of the current commentary, though of course my general opinion of "the news" is the reason I don't listen much.
It’ s not peak oil that is causing the problems in the economy. The problem is GREED. The collapse of the housing market was caused by greedy financial institutions wanting an outrageous return by convincing ignorant people to accept a mortgage without a fixed interest rate. GREED has always been the motivating force with humans. When GREED and power come together people suffer. In the past energy was measured in manpower, outright slavery. Today the powerful have oil to control and dominate people. When the oil is gone the powerful will return to human slavery again. Something that has always existed in human society. Look at the past and you will see the future.
hotrod
In Australia, I would suggest that 80% of mortgages (over 25 rather than 30 years too) are variable rate - it has always been thus. Some people fix all (or part) of their mortgages for 1-5 years, perhaps at the extreme, ten years. This practice has not led to a housing crisis, and never has. Something else must be at work in the US.
I don't think there is any question but that the primary cause of the current recession was peaking of world oil supplies and the resulting high oil prices. Oil production peaked, or as some would say, plateaued, in 2005. Our economy requires continual growth and growth is impossible, in the long run, without growth in the energy supply. There may be a lag between the end of growth in energy and the end of growth in the economy of two or three years. That was exactly what happened.
True, there was a housing bubble that burst. The explosion of home building in suburbia was made possible by cheap oil. When oil became expensive, the bubble burst. While it is true, in hindsight, that it was impossible that home prices could continue to outpace the rate of inflation year after year, nevertheless cheap oil enabled the bubble to happen and high oil was what pricked the bubble.
The sub-prime mortgage crisis was a direct result of the housing bubble bursting, and therefore also caused by peak oil. Cheap oil was the driving force behind the age of exuberance. Cheap oil was the cause of the great exuberance bubble that has lasted for almost a century. Let us not lose sight of the forest because of too many trees.
All that being said, I must comment on the very first lines Gail wrote above:
Before the collapse of oil prices in 2008, I would have been among those who would have said "high oil prices". I thought prices would continue to get higher and higher as oil got harder and harder to get. I wuz wrong! The effect of high oil prices caught me completely by surprise. But I will not make that mistake again. No, oil prices will not stay above $100, in today's dollars, for very long. Higher oil prices will keep knocking the economy down again and again. $200 oil prices? No, it just ain't gonna happen.
Ron P.
I think we have a lot of people now saying that since prices aren't high, oil supply can't be a problem.
It doesn't help that we still have peak oil people talking about high oil prices. They may be too high for the economy to afford, without them being terribly high in an absolute sense.
$200 and more oilprices will come, but not stay for a long time. Maybe 1-2 months.
My own suspicion is that the economy is much more 'aware' of oil prices now. There will be far less time delay between a price spike and the scream of brakes on economy.
Lather. Rinse. Repeat.
---"even though people may call the cause of the decline in oil use “Peak Demand” rather than “Peak Supply”----
I've seen that a lot lately, makes me think of an economist doing spin control as it's discovered even the magic hand can't make oil.
That's because whether the economy is expanding or in recession is due in great part to the speed with which money changes hands, and the higher the price for energy the slower money moves, causing recession. And you're right, the price does not have to be as high as many people once thought for it to slow down.
The situation as I see it now is, as time passes with relatively high priced oil, more and more people have been and will continue to become disenfranchised from the monetary system. As their properties and businesses fall into default, they transition from contributers of the economy to becoming dependent on Fed. and State support systems. But those systems are already straining under huge debt load. At some threshold those systems will be unable to fully support all the disenfranchised, and then we will begin to see unrest.
Question about your thesis in this post: by what mechanism would Peak Oil lead to higher default rates and more onerous debt burden, if not higher oil prices? I don't immediately see one, which makes me think that high oil prices are a perfectly viable symptom of Peak Oil (with the understanding that the higher prices come with higher volatility so that they will not be constantly high).
Jeff Rubin's theory is that the mechanism was indirect. Higher oil prices ==> Fed fears rising inflation ==> Feb jacks up interest rates to fight inflation ==> Adjustable rate mortgages reset at higher interest rates ==> Borrowers can't meet mortgage payments under the new, higher rates.
Of course nothing says that there could not have been both direct and indirect effects.
Isn't it more like Higher Oil Price ==> dollar value drops ==> recession ==> Huge "stimulus" spending bills and bailouts ==> Huge deficits ==> Fed drops discount rate to 0.5% to guarantee inflation as alternative to default!
The housing bubble was a sideshow, partially deflated by the drop in dollar values, etc. It is a handy red herring to take our eyes of the real show, which is peak oil. Housing bubble and climate change... both are diversions. This is all about how we default on our deficit/debt. And it is because the dollar is based on oil today.
Remember, "Oil up, Dollar down." Got it? Stay focused!
Craig
Maybe the question is "How high is high?" After we have been to $147 barrel, people assume that only prices of, say, $120 up are high. It doesn't take prices that high to cause a problem.
But the other commenters are right. There were indirect effects as well. As soon as the Fed saw the price of oil (and indirectly food) rising, they raised target interest rates. The rise in interest rates hit people's pocketbooks at the same time as the higher oil and food prices did. The intent was to drop oil prices back down, but instead the result was debt defaults and eventually recession.
There seem to be a certain development in the signs from the "establishment".
1) First, full denial (CERA/Daniel Yergin et al.).
2) Then IEA and others keep telling us that CLIMATE is important, and that we need to burn less hydrocarbon fuel to reduce CO2 emissions. Especially the 2008 World Energy Outlook is persistant around this issue.
3) Now, several sources claim that the DEMAND for oil and gas is being reduced, e.g:
http://www.canadianbusiness.com/markets/market_news/article.jsp?content=...
http://www.dn.no/energi/article1840299.ece
The only common denominator for the three set of signs above is that no one mentions Peak Oil as a production volume issue. That still is a non-issue, completely steonewalled:
http://www.aspousa.org/index.php/2009/09/interview-with-bob-hirsch-the-s...
I wonder what follows next....
Absolutely true. The mainstream oil sources are all on same base with zero mention of peak oil as having any plausibility, yet they claim peak demand. It's an outrage. Trying to penetrate their denseness on the topic is like shooting an arrow at a cone shaped piece of steel. It always gets deflected.
Well I'm certainly no economist...let me see if I understand.
Gail, you're saying that while we won't see oil prices rise in nominal terms, we'll see deflation in more discretionary sectors of the economy, including the crucial housing sector, thus leading to further housing loan defaults. The nominal price of oil won't rise, but the cost of oil will rise as a percentage of people and businesses' expenditures. (And people will try to rent instead of buy because it costs less?)
Contrast this to a view that oil prices will rise nominally, and the cost of oil will rise as percentage of expenditures that way instead. It's more or less the same thing, except that we would call it an inflationary economy rather than deflationary. People will have the same incomes, but won't be able to buy as much with them. They may hang onto their houses and feed themselves but not be able to buy an iPhone.
Isn't government monetary policy potentially a big factor here? Can't the government have substantial say in which way things go by controlling the monetary supply?
Please enlighten me folks.
Monetarism allows goverments that lend using bonds in their own currency are able to default by printing more money (they pay off the loans by printing the money). This creates inflation. By making money cheaper (say the 0.5% rate the Fed charges banks today), they can also create more money... and inflation is again the result. Today they are doing both.
B/c the interest rates to banks is low, they can lend to their best customers at very low rates. The real interest rate is the inflation rate that is going to result. Meanwhile, corporations have laid off their workers in the US, and no one has any money. Since we are essentially broke and unemployed, we cannot borrow that money. It goes to the wealthiest, who invest in apartments today (since houses have crashed), knowing that if things get bad a Ch-11 or Ch-7 filing will take care of it, no sweat, and the interest is so low that they don't need to charge all that much rent anyway. Plus, as an added bonus, with inflation their debt is erased just like the Federal Budget Deficit. In fairly short order, they will own all of the housing, and we will be back in company houses, company apartments, company towns, and basically screwed to the wall.
That is how the govermnent is taking care of us, Ben. Remember the line Jimmy Cagney, in his frequent and famous roles as gangsters, used to use, "I'll take care of him, alright." Then you will get the idea. Timmy Geithner and Benny Bernanke, "the Banksters," are at the helm. They will take care of you.
Craig
Thanks for the reply. You seem to be saying the Gail is wrong, that we are looking at an inflationary situation, not deflationary. Frankly, I'm not sure what I think, although I tend to agree that with your take on what the government is doing. AFAICT (not an economist mind you), the US government is taking an inflationary approach right now.
Part of my underlying point here is that the economic outcome of peak oil is not merely determined by the peak oil problem itself. It matters how societies react.
I think the credit unwind (because oil production is not rising, and as a result, the economy cannot grow enough to provide the "lift" needed to prevent debt defaults) is a big part of what is happening going forward. The credit unwind appears in various forms--for example, the interest rates on their credit cards are being jacked way up (partly to make up for all of the defaults.) Auto loans and loans for small businesses are being denied.
With less credit going forward, consumers (and many businesses) still have to pay their old debt, but can't get new. This puts them in a cash crunch, so they have to cut back on discretionary spending, and as a result, the economy shrinks, and there are more layoffs. If the oil price does ever attempt to go up again, it makes the situation worse. But it is the credit unwind that really keeps the recessionary cycle going, after oil prices would seem to be lower.
My own take is that this analysis is overly simplistic. Many people, especially those living in big cities and in the third world do not have a car; and public transport prices tend to rise with inflation or a little more. Thinking of my own situation, we downsized to one car about 6 months ago. It is a diesel VW Golf which gets around 50mpg and we spend about $100-$150 pm on diesel. Our combined incomes exceed $15,000 per month so even if oil prices tripled the impact on our household budget would be minimal.
Far more worrying is the question of whether I will keep my job. My wife is in mental health and as noted above her business is booming and she can find new work immediately. I am a chartered accountant (CPA in the US) and I also hold a Master of Sustainability Science degree. But I am 54 and people do not hire the plus 50's. This issue is also a symptom of PO. The young and the older are losing their jobs and cannot find work if they lose the job they have.
If I don't have a job it doesn't matter what the price of fuel is, we will become a no car family. And that is the issue. What is the impact of resource depletion (especially oil) on the economy? Merely saying it is "recession" doesn't describe the actual workings by which the economy fails to support the population, however I suspect it is death by a thousand cuts. A little here and a little there. And that will be the experience of PO. People will lose their jobs, businesses will go bust, families will break up, crime will increase, mental health will worsen. Ultimately it will be general systemic failure, though it will never actually be recognised because it will take 10-20 years. All the while the establishment will deny PO. It is "financial", "economic", "recession" and it can all be "fixed" with a little more stimulus or what ever the government flavour of the day happens to be.
Back to comment again, as I just completed an article on the likely response of the U.S. and Canadian governments to a peak oil-induced depression: How Will Governments Respond to “Peak Oil?” - http://www.briangordon.ca/2010/02/how-will-governments-respond-to-%e2%80...
Overall, the outlook is not promising. I know a lot of people who believe that our governments will suddenly 'wake up' and then rise to the crisis, but I am not so optimistic. At best, they are likely to take 'baby steps' like Obama's recent announcement of funding for nuclear plants that do nothing to address the root cause: endlessly increasing growth and consumption.
Ultimately, we will live sustainably whether we like it or not.
I'd like to return to the fundamental question raised by the subject of this post: 'What would be a sign of the arrival of peak oil?'
As I see it, there are two very different concepts of peak oil: i) it ceases to be physically possible to increase oil production (short of economically unfeasible means), and ii) oil producers elect not to increase production, for whatever reason, e.g., poor return on investment, resource conservation strategies (leaving it in the ground), or geopolitics (the oil weapon). The former is largely a matter of geology and extraction technology, while the latter involves a whole array of complex forces.
High prices are a necessary but not sufficient condition to declare peak oil, as they can be caused by things other than physically constraints, such as speculative game-playing and political machinations.
This leaves me to conclude that there is but one absolutely certain sign that peak oil has arrived: persistent shortages and supply problems not caused by outright war or deliberate embargo. That is, if even after a certain amount of price-induced demand destruction has reduced the amount of global oil consumption and we still have prolonged serious oil supply problems, even at high prices, then I would conclude that the producers are physically incapable of producing any more than they currently are.
For those old enough to remember, one of the main differences between the oil shocks of 1973-74 and 1979 and the relatively recent run-up in oil prices, is that the former involved an actual unavailability of oil, regardless of its price, and a resultant panic mentality. When gasoline was up to $4.00, people vigorously complained but they were not in an outright panic mode. I think that is a major difference that is not fully appreciated.
Global Cumulative Crude Oil Production Versus US Oil Prices
2002-2005 & 2005-2008 (EIA, crude + condensate)
Here are the average total global crude oil production numbers per day by year, versus average annual US spot crude oil prices:
2002: 67.16 mbpd & $26
2003: 69.43 mbpd & $31
2004: 72.48 mbpd & $42
2005: 73.72 mbpd & $57
2006: 73.46 mbpd & $66
2007: 73.00 mbpd & $72
2008: 73.71 mbpd & $100
Relative to the 2002 production level of 67.16 mbpd, in the following three period, 2003-2005 inclusive, the cumulative three year increase in production was 5,164 mb, versus a three year increase in oil prices of $31. So, for every dollar increase in oil prices, three year cumulative global crude oil production increased at 167 mb per dollar, again relative to the 2002 rate.
But then we have the 2006-2008 data.
Relative to the 2005 production rate of 73.72 mbpd, in the following three year period, 2006-2008 inclusive, the cumulative three year decline in production was 632 mb, versus a three increase in oil prices of $43. So, for every dollar increase in oil prices, three year cumulative global crude oil production fell at 15 mb per dollar, again relative to the 2005 rate.
Good questions Gail and observations Westexas
Your observations about peaking of conventional crude oil in 2005 resulted from Non-OPEC oil production peaked in 2004 and OPEC cutting back production in 2005.
The influence of peaking oil is shown earlier. i.e. prices in 2002 are already much above those in 1998. I think the influence of oil beginning to peak will best be seen when
the RATE of increase of NET EXPORTS begins to decline.
Then Importing countries no longer have their desired exponential growth so they begin to bid up the price of oil and their demand per capita begins to begins to increase, reducing their desires.
An earlier warning sign was peaking of the global oil consumption per capita which occurred in 1978.
Gail, these could be combined to give a metric of the oil consumption per capita in oil importing countries.
I think a graph of that would be very illuminating.
This per capita oil consumption in oil importing countries is likely to be driving global oil prices - which in turn dry up discretionary income - which decreases GDP and increases unemployment - which increases housing & loan defaults - which leads to increasing recession.
Saudi Cumulative Net Oil Exports Versus US Oil Prices
2002-2005 & 2005-2008 (EIA, Total Liquids)
One of the primary contributors to the 2002-2005 increase in production, followed by the 2006-2008 decline was Saudi Arabia, but let’s look at Saudi net oil exports, which are defined in terms of total liquids, inclusive of natural gas liquids and refined products.
Here are the average Saudi net oil export numbers per day by year, versus average annual US spot crude oil prices:
2002: 7.1 mbpd & $26
2003: 8.3 mbpd & $31
2004: 8.6 mbpd & $42
2005: 9.1 mbpd & $57
2006: 8.4 mbpd & $66
2007: 8.0 mbpd & $72
2008: 8.4 mbpd & $100
Relative to the 2002 net export rate of 7.1 mbpd, in the following three period, 2003-2005 inclusive, the cumulative three year increase in net exports was 1,716 mb, versus a three year increase in oil prices of $31. So, for every dollar increase in oil prices, three year Saudi cumulative net oil exports increased at 55 mb per dollar, again relative to the 2002 rate.
But then we have the 2006-2008 data.
Relative to the 2005 net export rate of 9.1 mbpd, in the following three year period, 2006-2008 inclusive, the cumulative three year decline in net oil exports was 841 mb, versus a three increase in oil prices of $43. So, for every dollar increase in oil prices, three year Saudi cumulative net oil exports fell at 20 mb per dollar, again relative to the 2005 rate.
Note that in early 2004, the Saudis reiterated their support for the stated OPEC policy of maintaining an oil price band of $22 to $28, and they made good on their promises to support lower prices as they significantly increased net oil exports in the 2003-2005 time frame, but then in early 2006, they started complaining about problems finding buyers for all of their oil, “Even their light/sweet oil,” even as oil prices continued to increase. Apparently no one thought to ask them in early 2006, as oil prices traded over $60 per barrel, why they didn’t offer to sell another two mbpd of oil for $28 per barrel.
The price of oil was depressed following the collapse of the former Soviet Union until the hurricanes of the early 2000's. Normally we would have much lower oil prices than we have now until well into the economic recovery, which may not have even started yet, at least if you exclude China and India.
Peak oil approaching is recognized by investors who are pricing various oil companies at 5 or more times there prices pre Gulf hurricanes. Some compaines like Canadian Oil Sands Trust (COSWF) sold for a split adjusted $1.25 per share in 1998 and sell for $28 today.
It is possible that we will reach a point of economic depression like the 1930's where the demand for oil will drop so much that it will offset depletion for a while; however, investors will hoard oil instead of holding fiat currencies and stabilize the price.
Is there an assumption here that there will be an 'economic recovery', and if so, on what is this based?
Many if not most business analyst think the recession in the US ended in the 4th quarter. From John Mauldin's newsletter Vol. 6, Issue 10 dated Feb. 15 titled "Is the recession over?"
*Industrial Production: bottomed about 4 mo ago
*Real manufacturing and trade sales: bottomed about 4 mo ago
*Personal income less transfers: stopped declining 6 mo ago and now flat
*Nonfarm payrolls: stabilizing (lagging indicator)
Job growth has been getting weaker after each recovery. It was weaker after the 2001 recession than the 1990-91, the first so called "jobless recovery" and it looks to be even weaker with this recession. The manufacturing jobs lost in each recession have not come back.
We're back to the condition of the 1870's Long Depression when we exhausted the potential of steam power and railroads and had to await new technologies. Electrification came to the rescue in the mid 1890's. The highest ever growth rates in the US economy were from the mid 1890's to about 1910.
@ joule
Strictly speaking, peak oil is simply the moment of maximum global oil production. Thus prices are not a "necessary" condition to declare peak oil (and neither are shortages). I judge from EIA/IEA numbers and credible statistical analyses (broadly speaking, 'Hubbert type') that peak oil may well have happened somewhere in the 2005-2008 period. It will take a few years to be sure about this, but no economic phenomena have any bearing on it. So let's not get the definition and consequences of peak oil confused.
As for the consequences, what Gail is saying is that the major consequence ('sign') of peak oil will be neither high oil prices nor shortages but an intractable, grinding recession. So far, I have to say she seems to be right.
jaffedben, just a curiosity question: if "maximum global oil production" occurred because demand collapsed and never returned to previous levels (war, plague, conservation, whatever) even if it would have been fairly easy to increase production to much higher levels - would this still meet the definition of PO? Does it really matter what causes PO?
It seems that the most important issues is whether the PO event is unforeseen and causes great hardship or whether it was a well planned and voluntary affair - not holding my breath for the latter.
I think it's obvious to say Yes. And I think that is more or less the same point Gail was making in this keypost.
The latter is obviously not happening, but that doesn't mean that the former has to happen either. I know many folks have developed fairly dire predictions about what kind of crisis the peak moment would precipitate, but the actual peak moment might not look any worse than 2008 -- indeed that may have been it. For many people, that economic crash was unforeseen and caused great hardship. (It may also be that actual peak is still to come, and will be different.) Personally I'm in the "Long Descent" camp that thinks this issue will unfold over the whole course of the coming century. Rome didn't decline in a day. ;-) So far events are not contradicting this view, however it's very early.
The symptoms of peak oil... I became peak oil aware in May 2005 after coming across Kunstler's "Long Emergency", followed by reading Heinberg and Deffeyes, and later discovered and began following TOD. The people I would talk to about peak oil who didn't blow it off always had two questions: "What's going to happen?" and "When is it going to happen?". Well, wouldn't we all like to know? My original thought was, as Gail observes, the typical one - Prices will gradually rise, forcing reduced usage. Simple market supply and demand. I was sure enough of that to start looking into buying oil futures at $100 or so. But this was all being discussed on this forum and Leanan, our eternal voice of reason, regularly cautioned that we could have an economic slump that would undercut the price of oil. Eventually I determined that peak oil would be manifest in some combination or series of the following three events, each of which causes or results in lower oil usage:
1. Increasing prices for energy (market factors dominate).
2. Economic recession/depression due to drag on the economy of increasing embedded energy costs.
3. War/ national emergency of some sort, real or contrived, resulting in rationing/ energy use restrictions/ dislocations in the supply systems.
For the conspiracy buffs, Item 3 could be the last ditch effort to deal with peak oil by TPTB without actually acknowledging it. Anyway, my two cents worth.
OT, but reading an interesting book, "The Power Makers" by Maury Klein. It's a history of steam and electrical power development over the past few centuries. Pretty fascinating stuff.
- Walt
Jeff Rubin is the most notable economist talking about this. In fact, he is pretty shocking.
http://www.energybulletin.net/node/51306
This makes me wonder if oil will mostly stay in the inflation adjusted price band $50-$100 right through to the last drop. I'd call this the oil price stasis model. If global economic activity is somewhat proportional to oil output then it must decline taking demand with it. That overrules the classical idea that reduced supply with fixed demand means higher prices. In this case reduced supply also means reduced demand because the two are coupled via oil dependence.
An analogy is that someone suffering hypothermia doesn't feel cold. It takes an outside observer to notice the victim is unwell. If the oil price stasis concept is valid it has major implications
1) the market won't know when to find alternatives due to lack of a price incentive
2) reduced oil supply could drag coal and gas demand with it, thereby helping solve global warming.
Boof -- I like your "statis". It seems to be a rather simple yet accurate description of the last few years. But I'm not convinced about #2. My guess is that economies will look increasingly to coal as way to buffer the system: an economic down turn looks to coal as a stabilizing option to minimize the roller coaster cycle. Despite its damage to the environment increased coal consumption can provide long term stability to economic expansion. And I've seen nothing yet to indicate industrialized societies are not willing to drown the world's shorelines if that's what it takes. Lots of "green" verbage by the politicians...no meaningful green action IMHO.
http://en.wikipedia.org/wiki/Stasis
Regarding you number 2, I think you are right. I think reduced oil supply will bring down the credit system, and by doing so, will drag oil and gas with it (also nuclear, wind and solar). I think the amount of CO2 emissions are likely to be far below what any modelers have considered possible. (Of course, the population may be lower, too.)
Social change or engineering by the beheading of money making corporations in the way of taxation and government controls, will cause "peek oil" before we run out or our home loans default. That's what Mrs. Clinton and Mr. Obama ran on these issues of "corporate greed" and that wealth to be returned to the middle class. Oil has always been and always will be political. This November will change this outlook though. If Iran goes "nuke" like they will, the whole deal changes.
Gail,
The price of oil--even adjusted for inflation--has increased rather markedly. Certainly doubling in the last 10 years. See
http://inflationdata.com/inflation/inflation_Rate/Historical_Oil_Prices_...
Now, ironically, we are in a period of deflation...deflation in terms of labor and production costs. Economists are quick to note the efficiencies we have made: in terms of labor costs (globalization), production costs (technology), and size of companies(economies of scale).
One would think that oil would follow this deflationary trend...but it is not... In short, it is taking a larger and larger share of the cost of every item made and sold.
When we run out of so-called "efficiencies," then the cost of energy will rattle our cages.
I have just finished watching CNN which reported that Iran could possibly be within 6 months of producing a crude nuke....a blast target 2 miles across within a 1200 miles radius (their missile range).
I have a hard time believing that the world...make your own list of countries.... will allow this to happen. When a probable attack on the facilities take place, all hell will break out. Straits of Hormuz closed? Who knows what will happen. It could be a real mess. This could make the worry of peak oil look pretty benign.
Just a thought.
I wonder about this drumbeat of reports about Iran making an atom bomb. Maybe, just maybe, they actually are trying to develop atomic power for use in a post-petroleum world. If they are smart enough to actually build an atom bomb, surely they are smart enough to read and believe the discussion here on TOD.
Gail, your observation about infrastructure is spot-on. In fact, much of the infrastructure in developed nations was built at oil costs considerably lower than $20/bbl. Here is an example from Japan, which I read in one of Japan's national daily newspapers. In the time period centered around the Tokyo Olympic games (1964), a very large amount of infrastructure was built in Tokyo's 23 wards. This included much sewage pipe. In 1964, the price of oil was about $3, if memory serves. Now, according to the report I read, about 1,500 km of that sewage pipe has come to the end of its lifetime and needs to be replaced. What's preventing that work from proceeding very far is the difficulty (lets be honest -- the impossibility) of using $70+ oil to rebuild infrastructure built with $3 oil. As you can see, this is a disaster in the making. What's now a convenient international city will turn into a foul cesspool.
In the 1960s Japan's economy was hot, thanks to the copious flow of cheap, high-quality oil. The situation is much different now, and there is a flood of applications for a "debt moratorium."
http://www.nni.nikkei.co.jp/e/fr/tnks/Nni20100215D15JF645.htm
The problem of infrastructure maintenance and replacement has grave implications for modern societies because obviously the high cost of energy will make it impossible to repair or replace all of the crumbling infrastructure of developed nations. Some very hard choices will have to be made, and in fact are being made already (in the US, for example, some paved roads are reverting to gravel). And there is going to be a storm of muni bond defaults. A very tough period of adjustment lies ahead.
You mention that there is going to be a storm of muni bond defaults. The first handful will have coverage from the so called "monoline bond insurers" that provide default coverage for many of them. But then the insurance companies will go bankrupt, since they were not set up to handle more than a handful of "independent" defaults. Clearly, these defaults are not independent (they are arising from the same issue), but no one ever considered that possibility in setting the rates or in capitalizing the insurance companies.
Rice Farmer, Japan presents an interesting case study of a country very deep in recession and also very dependent on commodity imports, such as steel and oil. The U.S. is also in recession and imports a large percentage of its oil.
Contrasting those two countries are China and India which are not in recession. They get the majority of their energy from domestic supplies of coal. They import oil, but on a much smaller scale.
So out of a comparison of the two sets of countries, could it be said that China and India are not in recession due to lower energy costs?
Also, if those countries were to attempt to wean themselves off of coal with greater usage of renewables, would it actually work? Wouldn't they pay much more for energy and reach a point like Japan and the U.S. where the cost of energy slows the economy?
If true, then the only way countries can continue BAU is to use cheap fossil fuels, which means any kind of Copenhagen accord would be very unlikely.
It's probably a case of civilization having overshot its resources due to lack of planning. If there were such a thing as world planners that understood the relationship between energy, expansion, and population, they would have been strictly controlled growth with an eye towards sustainability. But that did not happen, so that's where we are. No one took responsibility for planning or considered the economic and environmental consequences.
That's the trouble with failing to plan ahead. I suppose Shakespeare would have asked, "Is it better to have driven a Hummer up to the ski slopes to eat food from around the World and party hardy for a while, or to have lived a simpler life sustainably far into the future?"
IMHO, the short answer is yes, because the net energy of renewables like wind and solar is lower that that of fossil fuels. Also, we need to take into account the cost of initial ("up-front") fossil fuel energy inputs needed to make and deploy the renewable infrastructure, and also to maintain it.
India and China are already importing coal, however, so they will have to deal with this problem soon.
Excellent point, Gail. As I wrote already several times, the decisive parameter for peak oil is not
the nominal oil pricenor
the real oil price(= inflation adjusted)but
the bubble-adjusted and purchase-power adjusted oil price.This is the price, which is adjusted for economic bubbles (e.g. due to speculative exagerrations or bad debts) and adjusted for the ability to pay (supply-drive economists would call it "willingness to pay").
Until recently the purchase-power increased, and so did oil consumption (= oil production).
Now we'll see how far the available (bubble-corrected) purchase-power will decline due to the crisis and how this relates to oil consumption, e.g. in the US. I might expect there is a good correlation.
This relative parameter is important because after peak oil both the nominal and the real oil price are unpredictable: The nominal oil price depends on inflation (depending on trade balance, monetary politics etc.) and the real price depends on the market situation - which largely depends on the ability (or willingness) to pay for oil.
The only parameter, which certainly will (continue to) go up after peak oil is the purchase-power adjusted oil price.
We should keep an eye on it!
An interesting way of looking at things, thanks!
IOW: Don't obsess over the numerical value of "price." It's really "cost" that matters.
There are two basic ways analyze prices, fundamental analysis and technical (trend) analysis). I am one of the 10 of 10 who says oil prices will definitely be higher.
Fundamentals
1. Higher oil prices will be required to tap into higher marginal cost supply
2. Simple supply/demand charts. As price goes up, demand at that price goes down. Price will be the mechanism to force people to use less energy. People will not give up large SUVs, long flight vacations, large homes until price forces them to.
3. Some parts of the world such as the mid-east will continue to consume more oil even at higher prices as that will fund further growth.
4. The world is not in recession or even close to it. The world is a lot larger than the U.S., Britain and parts of Europe. I just heard a very bright analyst say he expects China to grow at 11% this year. 11%! for two billion people. That's at current oil prices. Compound that a few years for 2 billion people and add 1 billion for India.
5. China plans to have 200 cities of 1 million or more by 2030. That's more than all of Europe. The only thing that can derail that growth is higher commodity prices.
6. Oil prices are measured in U.S. dollars and the U.S. has the most rediculous debt. The dollar will have to fall as inflation kicks in and U.S. growth stagnates
7. Oil prices have a fairly high correlation with U.S. money supply and the U.S. will be have to print money to pay off the debt, this is called monetization.
Technicals
Follow the trend lines. That is what the oildrum has been doing. The trend is up.
It will be interesting to go back and look at your list:
That is true--the catch is, will the higher marginal cost supply really be tapped into.
I can think of a lot of things that can derail that. Lack of oil. Famine. Drought. Lack of export market for their goods. New cities standing empty, because no one can afford to live in them. Check back in a few years.
Every debtor would like to do that. The question is whether they will succeed. Shadow Stats data suggests they have been less than successful so far.
Interestingly, Barclays and Bank of America came out today (Yahoo search "Bank of America" and "oil") with a prediction of $100 plus in 2010 and $137 by 2015. This is one of the first times I have seen these kind of predictions by mainstream brokerage houses. The article sites some of my points above and ends with "The crunch may hit before the West has fully recovered" and "It is a new world order".
I only hope it is that low but I also wouldn't bet against Matt Simmons higher predictions. My guess is we'll see at least $150 to $200 and likely higher. If $200 a barrel is $6-$7 a gallon, that is what it might take to force a transition. I believe many people have already made the psychological/financial/useage adjustment to $4 a gallon.
Hi wallstreet,
I tend to agree with you, but here is some "common wisdom" from an investment website (suite 101):
and
So, these folks doubt that oil will exceed $100 in 2010 - I read much the same in other places. There does not seem to be much recognition for the potential of game changing factors in the future.
I am highly doubtful on your money supply chart. On Yahoo go to images and type in "US money supply". You will see a lot of different results than above (many showing money supply skyrocketing). Also the very fact the government stopped publishing Mm3 in 2005 (when some view it as the best measure) is suspicious in itself.
wallstreetexpress,
If you are saying that the population of China is 2 Billion, you may want to reconsider a few calculations, as it seems likely to be closer to 1.3 or 1.4 Billion.
https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html
It seems, we may have a few problems Houston? -
1) The Trend is a useful tool, but it only shows you what has happened in the past and therefore gives some future indicators, IF the basic fundamentals remain the same.
2) The Economic Fundamentals may be a little broader than you have considered, they also interlock, interact & influence each other and they are changing.
By way of explanation, the following are THE Basic/Fundamental factors, which influence the modern economy, in addition to Politics.
D+ E + A + P+ I +C = EA
D = Debt
E = Energy (Oil & other Fossil Fuels)
A = Aging (Population)
P = Population (Total)
I = Innovation
C = Climate Change
EA = Economic Activity
Given that Debt is at an all time high & going higher, that Oil Production has Peaked & is declining, that Baby Boomers are now at the start of Once in History retirement process, that the Global Population Growth rate is slowing quickly & will reverse in around 20 years and that we face substantial unknowns in the Climate change arena, it is very likely that -
1) Economic Activity will decline, as Demand declines, arising from the Boomer Bust & slowing Population growth rate.
2) The funds required to tap into higher cost Oil, such as Canadian Tar Sands, shale, Artic & Deep water Oil, will be stunted, as it becomes obvious that Demand will never again experience the growth that applied to the last 65 years. In fact, the Exponential Economic Growth Fairy is DEAD!
With Debt, an Aging Global population, a falling Global Population Growth rate & Declining Oil Production , all being negatives to the Global economy going foward, the Global economy will struggle to avoid the greatest economic depression in the history of human civilazation and at the very least, it will have to cope with a monumental Recession!
PS - Your opinion on the capacity of monetization to fix Debt, is just a little inflated!
My mistake on Chinese population, you are correct at 1.4 billion. However, that doesn't change the point that they are 4-5 times our size, growing at potentially 11%! this year, bought more cars than the U.S. last year and have trade flow surpluses and increased internal consumption.
I also agree with you to a point that an aging population will cause difficulties and recession. However, I believe that will also likely result in inflation as productivity does not keep up with demand, especially at higher commodity costs. That is stagflation and that is what I predict (and what happened in the 70's during the last oil crisis).
Falling population growth rate is different than falling population. Search Yahoo "estimated world population" and wikipedea shows UN projections of 7.5-9-10 billion up from 6.8 billion today by 2040.
Funny punn on inflation...I'll grant you that... but.... It is easier politically to cause inflation than recession. Inflation is a hidden tax governments can pass though to the public. The government has the option to print as much money as there is paper in the world (much more because they can print larger denominations) and they will use it. Given a choice of unemployment or inflation (or at least much higher inflation), governments will likely choose higher inflation. It will force most of an entire society to consume less rather than just the part of it that is unemployed. That is why it will occur. Much more efficient... (and also probably much more productive in terms of letting people produce and also keeping people busy and not striking/or revolting).
If that isn't enough, a totally different take that arrives at the exact same conclusion would be to argue that when the U.S. government in particular owes more than it can pay to other countries and foolish investors who hold treasury bills and bonds, it will make it much easier for the U.S. to repay the debt with inflated dollars.
Gail,
My apology, I meant to say in my earlier post, you wrote a really good article, AGAIN!!!
Your mixing debt as a U.S. phenomenon with oil prices that are set in a world economy. Much of the first world's wealth no longer comes primarily from the use of energy. Also, the value of most of the debt owed is determined at the point of repayment. We have the option of repaying China in inflated dollars.
The only thing that matters in Peak oil is the price curve, and the anticipation of future price trends.
Someone makes money on individuals interest payment. Trying to mix all these possible trends together ignores some really basic economics. Both the U.S. government and many individuals have too much debt. But surely you understand the difference between correlation and causation.