Maine Owl

Geological limits loom, create conditions for price march

The notion of "peak oil" almost certainly will gain some media coverage over the next few days. It's a widely misunderstood concept. I guess it's good that this arbitrary psychological benchmark will at least get some attention for peak oil and increase general awareness. Many world events better can be understood if the peaking issue is factored in because important actors respond to competition for energy-bearing resources.

A common error concerning peak oil is that it's taken to mean that the world will be "running out" of petrol sometime soon. In fact, the world has been running out of petrol since the first day it was put into use. It is a finite, depleting resource. But soon? No. It will not run out soon. In fact, just the opposite is true. Because the world is near production rate peak, there is more oil in the world than there ever has been in the 150-year history of the oil age. The problem is there is no current capacity to grow world production even more to meet ever-faster-growing demand from users.

Perhaps the smartest person blogging energy issues today is Jerome a Paris. For the last 2-1/2 years, Jerome has been on $100 watch. There is a remarkable series of posts at European Tribune and Daily Kos, all linked HERE. It's worth going through these, they reveal a lot about the dips and curves in what has eventually turned out to be a relentless price march. More hydrocarbon links always sit on the sidebar.... Additional comments below the fold....

My belief is that it will within a few years everybody will understand that world oil production rate will be in a permanent condition of decline, which means that not everyone gets as much as they want. But I cannot predict exactly when this downslope condition will become permanent. The recent price run-up may well have more to do with monopoly practices that actually keeps some oil off of the market than genuine shortage.

But for whatever reason, the world currently appears to have zero spare oil production capacity. Take your pick of the reason-of-the-day from the business pages. The public data on production capacity is very poor, treated like state secrets in most countries. I would argue that such truth enables and enhances these monopoly practices, expressed after the giant Exxon-Mobil, BP-Amoco, and Valero-Premcor mergers.

We are beginning to see economic waves not unlike the 1970s shocks that followed US peak oil (despite Alaska, US production rate peaked in 1971 and now is half of what it was then). Without some kind of un-destructive demand control and international cooperation, this condition could become economically devastating over time--runaway inflation accompanied by moribund economic stagnation. I refer to food production specifically, now running at 10 fossil fuel calories per 1 food calorie produced. Use your imagination on the possible harms here.

Furthermore, it’s not hard to imagine competition of powerful states for their desired piece of a slowly shrinking pie. Popular policy pieces, like one by Robert D. Kaplan in the June 2005 issue of The Atlantic Monthly openly discuss the coming war with China and how the US is planning for it. Don’t we see in Iraq the beachhead of this policy for a coming era of resource competition? Quite obviously US planners have chosen raw force against the weakest targets for forward base-building — in a region well-endowed with the fuel the military itself needs — as the preferred strategic option.

It remains a possibility that the price of oil could drop, and drop sharply. While that sounds hopeful, it actually could be devastating. The economy has come to depend on the petrodollar in a way it hasn't since the early 1980s. If demand destruction in a worldwide recession does begin to result from creeping distress, the petrodollar financing of the US deficit and recent corporate bailouts could become more tenuous. That’s why it is so important for American screens to be filled with demand-generating pictures of mighty trucks and SUVs all the time. Unfortunately, this situation could be nasty now that the US real estate bubble has burst. If interest rates can't be lowered enough as those now very important petrodollars disappear from the deficit financing system, the strings in the US economy really could get pulled hard.

I don't know what's actually going to happen. But $100 oil should be a serious warning signal to all of us.