Linda Leatherdale / CANOE Enews – 2005-04-10 23:44:00
Will Oil Crash Bring a Mad Max Future?
Linda Leatherdale / CANOE Enews
(April 6, 2005 ) — If you like scary reading, go to www.lifeaftertheoilcrash.net. There, doomsayers called “peak-oil analysts” — once considered kooks by energy experts — warn we’re at the precipice of an energy crisis that will bring our global, industrialized world to ruin.
After scanning the website’s bone-chilling predictions of what’s ahead for a world addicted to oil, I finally got a clue as to what that weird futuristic movie, Mad Max, was all about.
Tell me it can’t happen.
But here we are: Oil hitting a new record of $58 US a barrel, self-serve regular gas at 91 cents a litre in Ontario (higher elsewhere) — and yesterday the economists at CIBC World Markets warning oil will hit $100 a barrel by 2010.
Others say we’ll be there sooner than that, and even a $200 US barrel is possible. If true, forget worrying about $1 a litre gas … $2, here we come.
And don’t count on OPEC, which is pumping 27.5 million barrels a day into the world market. The oil cartel seems powerless in trying to limit price spikes with more production.
Even looking to Canada, with our untapped “non-conventional” oil reserves, won’t help. First, it costs 15 times as much money to generate oil from our oil sands. And at best, we might produce 2.2 million barrels a day by 2015.
The big question is, have we hit “peak oil,” where worldwide demand outpaces worldwide production — and when we start sliding down the slippery slope of the bell curve where prices skyrocket, oil-dependent economies crumble and resource wars explode?
This peak-oil theory, also known as “Hubbert’s Peak,” comes from Shell geologist Dr. Marion King Hubbert, who in 1956 accurately predicted the world oil-price shock of 1970. Hubbert also warned of a global production peak in 1995.
For decades, he was dismissed by economists, petroleum executives and government officials. Until now.
Today, the debate has shifted from not whether oil will peak, but when.
Many geologists agree 2005 will be the last year of the cheap-oil bonanza, and what’s ahead is an “unbridgeable supply-demand gap opening up after 2007” that will lead to major fuel shortages and severe blackouts starting in 2008.
Richard Heinberg, in his 2003 book, The Party’s Over: Oil, War, and the Fate of Industrial Societies, predicts a peak in 2007 or 2008.
Others cite later dates — like British Petroleum exploration consultant Francis Harper, who believes the peak will happen between 2010 and 2015. Peter Odell of Erasmus University in the Netherlands sets a date of 2035. And the US Department of Energy is far more optimistic. Washington believes there won’t be a peak until 2037.
No matter. Unless strong action is taken to wean the world from oil, the fallout is real, they warn.
Meanwhile, these high prices mean record profits for a growing global oil oligopoly, with nine mergers from 1998 to 2005, like BP/Amoco, Exxon/Mobil, Chevron/Texaco, Shell/Pennzoil Quaker State and Phillips/Conoco.
Yet exploration budgets haven’t grown much, and no new refineries have been constructed in the US since 1976. Is anybody worried?
Yesterday — as oil settled down 97 cents US at $56.04 US, from Monday’s record high of $58.28 US — U.S. Federal Reserve Board chairman Alan Greenspan was putting on a brave face.
Speaking at an oil refiners’ conference in Texas, he said high prices had slowed oil demand growth, contributing to a faster pace of oil inventory building.
“If sustained, these market technicals could encourage enough of an inventory buffer to damp the current price frenzy,” said Greenspan, who called a lack of world refining capacity “worrisome.”
Of critical importance, he said, was a move to fuel-efficient vehicles. Believe me, I don’t think we’ll have a choice.
IF 16% of recent first-time home buyers say they’re house poor and finding home payments hard to handle, wait until their home heating and electricity bills arrive.
In a Decima survey conducted by BMO Bank of Montreal, not only did buyers complain they were struggling, but 77% of house hunters said they didn’t seek financial advice from a banker, financial adviser or mortgage broker.
“That could be a big mistake,” said Maria Racanelli, BMO vice-president of personal banking. “While securing a great mortgage rate is important, developing a realistic plan on how to manage both your regular payments and unexpected expenses often makes a huge difference in maintaining a comfort level.”
CIBC, meanwhile, kicks off a new round of mortgage rate cuts today with fixed rates falling by as much as 0.15%. A five-year is unchanged at 6.25%. Negotiate, and you can shave more than 1% off posted rates.
“Are We ‘Running Out’?
Oil will not just “run out” because all oil production follows a bell curve. This is true whether we’re talking about an individual field, a country, or on the planet as a whole.
Oil is increasingly plentiful on the upslope of the bell curve, increasingly scarce and expensive on the down slope. The peak of the curve coincides with the point at which the endowment of oil has been 50 percent depleted. Once the peak is passed, oil production begins to go down while cost begins to go up.
In practical and considerably oversimplified terms, this means that if 2000 was the year of global Peak Oil, worldwide oil production in the year 2020 will be the same as it was in 1980. However, the world’s population in 2020 will be both much larger (approximately twice) and much more industrialized (oil-dependent) than it was in 1980. Consequently, worldwide demand for oil will outpace worldwide production of oil by a significant margin. As a result, the price will skyrocket, oil-dependant economies will crumble, and resource wars will explode.
The issue is not one of “running out” so much as it is not having enough to keep our economy running. In this regard, the ramifications of Peak Oil for our civilization are similar to the ramifications of dehydration for the human body.
The human body is 70 percent water. The body of a 200 pound man thus holds 140 pounds of water. Because water is so crucial to everything the human body does, the man doesn’t need to lose all 140 pounds of water weight before collapsing due to dehydration. A loss of as little as 10-15 pounds of water may be enough to kill him.
In a similar sense, an oil-based economy such as ours doesn’t have to deplete its entire reserves of oil before it begins to collapse. A shortfall between demand and supply as little as 10-15 percent is enough to wholly shatter an oil-dependent economy and reduce its citizenry to poverty.
The effects of even a small drop in production can be devastating. For instance, during the 1970s oil shocks, shortfalls in production as small as 5% caused the price of oil to nearly quadruple. The same thing happened in California a few years ago with natural gas: a production drop of less than 5% caused prices to skyrocket by 400%.
Fortunately, those price shocks were only temporary.
The coming oil shocks won’t be so short-lived. They represent the onset of a new, permanent condition. Once the decline gets under way, production will drop (conservatively) by 3-6% per year, every year.
Almost all independent estimates from now disinterested scientists indicate global oil production will peak and go into terminal decline within the next five years.
Many geologists expect that 2005 will be the last year of the cheap-oil bonanza, while estimates coming out of the oil industry indicate “a seemingly unbridgeable supply-demand gap opening up after 2007,” which will lead to major fuel shortages and increasingly severe blackouts beginning around 2008-2012.
The long term ramifications of Peak Oil on our way of life are nothing short of mind blowing. As we slide down the downslope slope of the global oil production curve, we may find ourselves slipping into what some scientists are calling a “post-industrial stone age.”
The Impacts of Oil
Because petrochemicals are key components to much more than just the gas in your car. As geologist Dale Allen Pfeiffer points out in his article entitled, “Eating Fossil Fuels,” approximately 10 calories of fossil fuels are required to produce every 1 calorie of food eaten in the US.
The size of this ratio stems from the fact that every step of modern food production is fossil fuel and petrochemical powered:
• 1. Pesticides are made from oil;
• 2. Commercial fertilizers are made from ammonia, which is made from natural gas, which is also about to peak.
• 3. Farming implements such as tractors and trailers are constructed and powered using oil;
• 4. Food distribution networks are entirely dependant on oil. In the US, the average piece of food is transported 1,500 miles before it gets to your plate;
In short, people gobble oil like two-legged SUVs.
It’s not just transportation and agriculture that are entirely dependent on abundant, cheap oil. Modern medicine, water distribution, and national defense are each entirely powered by oil and petroleum derived chemicals.
Most of the consumer goods you buy are made with plastic, which is derived from oil.
All manufacturing processes consume voracious amounts of oil. For instance, the average car — including hybrids — consumes the energy contained in 25-50 barrels (or about 1,200-2,400 gallons) of oil during its construction, while the average computer consumes 10 times its weight in fossil fuels during its construction.
All electrical devices — including solar panels and windmills — make use of silver, copper, and/or platinum, all of which are discovered, extracted, transported, and fashioned using oil-powered machinery.
Nuclear energy requires uranium, which is also discovered, extracted, and transported using oil-powered machinery. Nuclear power plants also consume a tremendous amount of oil during their initial construction and continued maintenance.
Most importantly, the modern banking and international monetary system is entirely dependent on a constantly increasing supply of oil. Since as explained above, all modern economic activity from transportation to food production to manufacturing is dependent on oil supplies, money is really just a symbol for oil.
Consequently, a declining supply of oil must be accompanied by either a declining supply of money or by hyperinflation. In either case, the result for the global banking system is the same: total collapse. This may be what led Stephen Roach, the chief economist for investment bank Morgan Stanley, to recently state, “I fear modern day central banking is on the brink of systemic failure.”
Most people new to the idea of Peak Oil tend focus on finding alternatives to oil, while wholly ignoring the more fundamental issue: the ramifications of Peak Oil on our monetary system.
Due to the intricate relationship between oil supplies and the global financial system, the aftermath of Peak Oil will extend far beyond how much you will pay for gas. If you are focusing solely on the price at the pump, more fuel- efficient forms of transportation, or alternative sources of energy, you aren’t seeing the bigger picture.
The Oil Industry Is in Crisis Mode
If you want to know the harsh truth about the future of oil, simply look at the actions of the oil industry. As a recent article in M.I.T.’s Technology Review points out:
If the actions — rather than the words — of the oil business’s major players provide the best gauge of how they see the future, then ponder the following. Crude oil prices have doubled since 2001, but oil companies have increased their budgets for exploring new oil fields by only a small fraction. Likewise, U.S. refineries are working close to capacity, yet no new refinery has been constructed since 1976. And oil tankers are fully booked, but outdated ships are being decommissioned
faster than new ones are being built.
In addition to lowering their investments in oil exploration and production, oil companies have been merging as though the industry is living on borrowed time:
December 1998: BP and Amoco merge;
April 1999: BP-Amoco and Arco agree to merge;
December 1999: Exxon and Mobil merge;
October 2000: Chevron and Texaco agree to merge;
November 2001: Phillips and Conoco agree to merge;
September 2002: Shell acquires Penzoil-Quaker State;
February 2003: Frontier Oil and Holly agree to merge;
March 2004: Marathon acquires 40% of Ashland;
April 2004: Westport Resources acquires Kerr-McGee;
July 2004: Analysts suggest BP-Amoco and Shell merge;
April 2005: Chevron-Texaco and Unocal merge;
What do you think could possibly be motivating these companies to take such drastic actions?
You don’t have to contemplate too much, as recent disclosures from oil industry insiders indicate we are indeed “damn close to peaking.”
In March 2005, the energy analysts at John C Herold Inc. — the firm that that foretold Enron’s demise – confirmed industry rumors that we are on the verge of an unprecedented crisis.
“Is the Bush Administration Aware of Peak Oil? Yes.”
In late 1999, Dick Cheney stated:
By some estimates, there will be an average of two-percent annual growth in global oil demand over the years ahead, along with, conservatively, a three-percent natural decline in production from existing reserves. That means by 2010 we will need on the order of an additional 50 million barrels a day.
To put Cheney’s statement in perspective, remember that the oil producing nations of the world are currently pumping at full capacity but are unable to produce much more than 80 million barrels per day. Cheney’s statement was a tacit admission of the severity and imminence of Peak Oil as the possibility of the world raising its production by such a huge amount is borderline ridiculous.
A report commissioned by Cheney and released in April 2001 was no less disturbing:
The most significant difference between now and a decade ago is the extraordinarily rapid erosion of spare capacities at critical segments of energy chains. Today, shortfalls appear to be endemic. Among the most extraordinary of these losses of spare capacity is in the oil arena.
Not surprisingly, George W. Bush has echoed Dick Cheney’s sentiments. In May 2001, Bush stated, “What people need to hear loud and clear is that we’re running out of energy in America.”
One of George W. Bush’s energy advisors, energy investment banker Matthew Simmons, has spoken at length about the impending crisis. Simmons is a self-described “lifelong Republican.” His investment bank, Simmons and Company International, is considered the most reputable and reliable energy investment bank in the world.
Given Simmons’ background, what he has to say about the situation is truly terrifying. For instance, in an August 2003 interview with From the Wilderness publisher Michael Ruppert, Simmons was asked if it was time for Peak Oil to become part of the public policy debate. He responded:
It is past time. As I have said, the experts and politicians have no Plan B to fall back on. If energy peaks, particularly while 5 of the world’s 6.5 billion people have little or no use of modern energy, it will be a tremendous jolt to our economic well-being and to our health — greater than anyone could ever imagine.
When asked if there is a solution to the impending natural gas crisis, Simmons responded:
I don’t think there is one. The solution is to pray. Under the best of circumstances, if all prayers are answered there will be no crisis for maybe two years. After that it’s a certainty.
In May 2004, Simmons explained that in order for demand to be appropriately controlled, the price of oil would have to reach $182 per barrel. With oil prices at $182 per barrel, gas prices would likely rise to $7.00 per gallon.
If you want to ponder just how devastating oil prices in the $200 range will be for the US economy, consider the fact that one of Osama Bin-Laden’s goals has been to force oil prices into the $200 range.
A recent report prepared for the US Department of Energy has confirmed Mr. Simmons’ dire warnings. Entitled “The Mitigation of the Peaking of World Oil Production,” the report observed:
Without timely mitigation, world supply/demand balance will be achieved
through massive demand destruction (shortages), accompanied by huge
oil price increases, both of which would create a long period of significant economic hardship worldwide.
Waiting until world conventional oil production peaks before initiating crash program mitigation leaves the world with a significant liquid fuel deficit for two decades or longer.
The report went on to say:
The problems associated with world oil production peaking will not be temporary, and past “energy crisis” experience will provide relatively little guidance. The challenge of oil peaking deserves immediate, serious attention, if risks are to be fully understood and mitigation begun on a timely basis.
. . . the world has never faced a problem like this. Without massive mitigation more than a decade before the fact, the problem will be pervasive and will not be temporary. Previous energy transitions were gradual and evolutionary. Oil peaking will be abrupt and revolutionary.
As one commentator recently pointed out, the reason our leaders are acting like desperados is because we have a desperate situation on our hands.
If you’ve been wondering why the Bush administration is spending money, cutting social programs and starting wars like there’s no tomorrow, now you know: as far as they’re concerned, there might not be a tomorrow. The worrisome thing is they might be right.
When seen in the light of Peak Oil, the Bush Administration’s Machiavellian foreign and domestic policies are perfectly logical.