The Oil Drum: New York City

Helping New Yorkers understand, prepare and adapt to the implications of Peak Oil

Monday, August 08, 2005

"What is Peak Oil?" (Part 2)

Last week, I wrote a short post as a primer for people new to the concept of Peak Oil. I really encourage anyone new to the subject to read some of the links at the bottom of that post because they are quite compelling reads. As my second post on this series I want to focus a little more on timing since most people understand that oil is non-renewable and that "one day" we will "run out". Peak Oil is more of a series of events that in hindsight will represent the period of time when the world's increasing demand for oil cannot be met by increasing supply as it has been for the last 150 years of industrial development. Saudi Arabia has managed the oil markets as the swing supplier ever since the US hit its own peak production in 1970.

Back in the Spring as oil prices were in the $50 range, Bush met with Prince Abdullah (now King Abdullah) and basically got a firm "No" that they couldn't increase production to cool off prices. As Matthew Simmons has clearly laid out in his book Twilight in the Desert, Saudi Arabia has probably been operating at full capacity for the last few years and has no additional capacity to expand production. Without a swing producer and no production slack within OPEC or outside of OPEC, supply is now limited by geology, not economics or politics. That ends the first half of the oil age. What follows is my hypothesis of how the post-peak may play out:

Phase I: Oil Prices Increase to Curb Demand Growth
The recent increases in the price of oil from $20 to $60 in 6 years may be the first phase of this process where supply cannot increase as fast as demand at a particular price. Thus the market price for oil is limiting demand growth rate so that it better matches supply. In a simple way, oil is now being bid up by many people who would like to have it, but some who can afford it and others who will not be able to afford it at a given price. Witness the impact of $60+ oil on the developing world (in particular Southeast Asia) versus the Developed World and you can see who is winning this bidding war and who is limiting their demand growth. But this phase just slows the growth in the increase of oil consumption, so economic growth simply slows down as inflation starts to creep up, producing economic instability in many parts of the world. Prices may have to reach over $100/barrel to actually decrease demand. At this point, unless whole societies are transformed to rely on much less oil, prices will continue to increase steadily.

Phase II: Supply Shrinks and Oil Markets Close
Eventually supply will reach a point where the decline rates in the large super-giants that have been overworked, will not be made up for by the ability to increase production in newer fields. If this happens quickly (say a 5-10% yearly decline in supply), this will have a severe worldwide economic impact causing such rampant inflation in the cost of basic goods that many standards of living worldwide will fall dramatically. Some currencies will become so devalued that they may not be able to be exchanged for goods on the international market. As a result, the oil trade may collapse completely on the basis of money for oil. In its place would be a sort of barter system of food or other commodities or manufactured goods for oil. Order may breakdown in some developing countries as economies collapse due to lack of fuel.

By then it will be apparrent to all that oil is a very precious strategic commodity that needs to be secured by military means. China may embark on military operations in Central Asia to get "their share of the pie". Other countries may follow suit and many petty resource wars may occur at a regional level in Africa and Latin America. If there is a major conventional war between the major military powers (US, China, Russia) and some of the oil exporting countries (Iran, Iraq, Saudi Arabia, Venezuela, Nigeria) then even more energy will be wasted securing the remaining oil resources. Even without major wars, I believe the world will revert to a neo-mercantile system of economic/military blocs, which has been the norm of human history except for the post WWII era fueled by cheap oil.

Phase III: From Global to Local
The end of the global oil market will be the end of global trade. Each economic/military bloc will have to become economically self-sufficient. Transportation of people and goods within these blocs will be expensive as oil and other quality fuels will be extremely scarce. Each local area will need to meet its own needs for survival of its citizens. Food production (dependent on petroleum based fertilizers) and logistics may not be able to meet the demands of the 6 billion people that had previously supported by the enormously cheap energy over the last 150 years. Famine and disease may create a Malthusian solution to population overshoot. We will have to live within the means that we can self-produce in a sustainable manner.

This is the nightmare scenario and I haven't even discussed the interaction of climate change and soil erosion. It may happen in the next 5 years, it may not happen for 10-20 years. It can be avoided or greatly mitigated if urgent action is taken at all levels of society. All the warning signs are going off right now.

Ultimately I do believe that local areas will have to become more self sufficient as we transition from an easily extracted energy source like oil to whatever combination of alternatives that will be of much lower quality and not as easily extracted or produced. That is why I have focused the attention of this blog to preparing NYC for peak oil.

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