Peak Oil is You
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Page added on June 6, 2014
Peak Oil Revisited…
In a lecture to the Columbia University Center on Global Energy Policy in February of 2014 Steven Kopits, who is the Managing Director of the consultancy, Douglas Westwood explains how conventional “legacy” oil production peaked in 2005 and has not increased since. All the increase in oil production since that date has been from unconventional sources like the Alberta Tar sands, from shale oil or natural gas liquids that are a by-product of shale gas production. This is despite a massive increase in investment by the oil industry that has not yielded any increase in ‘conventional oil’ production but has merely served to slow what would otherwise have been a faster decline.
More specifically the total spend on upstream oil and gas exploration and production from 2005 to 2013 was $4 trillion. Of that $3.5 trillion was spent on the ‘legacy’ oil and gas system. This is a sum of money equal to the GDP of Germany. Despite all that investment in conventional oil production it fell by 1 million barrels a day. By way of comparison investment of $1.5 trillion between 1998 and 2005 yielded an increase in oil production of 8.6 million barrels a day.
Further to this, unfortunately for the oil industry, it has not been possible for oil prices to rise high enough to cover the increasing capital expenditure and operating costs. This is because high oil prices lead to recessionary conditions and slow or no growth in the economy. Because prices are not rising fast enough, and costs are increasing, the costs of the independent oil majors are rising at 2 to 3% a year more than their revenues. Overall profitability is falling and some oil majors have had to borrow and sell assets to pay dividends. The next stage in this crisis has then been that investment projects are being cancelled – which suggests that oil production will soon begin to fall more rapidly.
The situation can be understood by reference to the nursery story of Goldilocks and the Three Bears. Goldilocks tries three kinds of porridge – some that is too hot, some that is too cold and some where the temperature is somewhere in the middle and therefore just right. The working assumption of mainstream economists is that there is an oil price that is not too high to undermine economic growth but also not too low so that the oil companies could not cover their extraction costs – a price that is just right. The problem is that the Goldilocks situation no longer describes what is happening – another story provides a better metaphor – that story is ‘Catch 22’. According to Kopits the vast majority of the publically quoted oil majors require oil prices of over $100 a barrel to achieve positive cash flow and nearly a half need more than $120 a barrel. But it is these oil prices that drags down the economies of the OECD economies.
For several years however there have been some countries that have been able to afford the higher prices. The countries that have coped with the high energy prices best are the so called “emerging non OECD countries” and above all China. China has been bidding away an increasing part of the oil production and continuing to grow while higher energy prices have led to stagnation in the OECD economies. (Kopits, 2014)
Now lets put that in a bigger context. In a presentation to the All party Parliamentary Group on Peak Oil and Gas Charles Hall showed a number of diagrams on slides to express the consequences of depletion and rising energy costs of energy. I have taken just two of these diagrams here – comparing 1970 with what might be the case in 2030. (Hall C. , 2012) What they show is how the economy produces different sorts of stuff – some of the production is consumer goods – either staples (essentials) or discretionary (luxury) goods. The rest of production is devoted to goods that are used in production – investment goods in the form of machinery, equipment, buildings, roads, infrastracture and their maintenance. Some of these investment goods must take the form of energy acquisition equipment. As a society runs up against energy depletion and other problems more and more production must go into energy acquisition, infrastructure and maintenance – less and less is available for consumption, and particularly for discretionary consumption.
Click on images to enlarge
Whether the economy would evolve in this way can be questioned. As we seen the increasing needs of the oil and gas sector implies a transfer of resources from elsewhere through rising prices but the rest of the economy cannot actually pay this without crashing. That is what the above diagrams show – a transfer of resources from discretionary consumption to investment in energy infrastructure. But such a transfer would be crushing for the other sectors and their decline will likely drag down the whole economy.
Over the last few years central banks have had a policy of quantitative easing to try to keep interest rates low – the economy cannot pay high energy prices AND high interest rates so, in effect, the policy has been to try to bring down interest rates as low as possible to counter the stagnation. However, this has not really created production growth – it has instead created a succession of asset price bubbles. The underlying trend continues to be one of stagnation, decline and crisis. The severity of the recessions may be variable in different countries because competitive strength in this model goes to those countries where energy is used most efficiently and which can afford to pay somewhat higher prices for energy. Such countries are likely to do better but will not escape the general decline if they stay wedded to the conventional growth model. Whatever the variability this is still a dead end model and at some point people will see that entirely different ways of thinking about economy and ecology are needed – unless they get drawn into conflicts and wars over energy by psychopathic policy idiots. There is no way out of the Catch 22 within the growth economy model. That’s why de-growth is needed.
13 Comments on "Peak Oil Revisited…"
J-Gav on Fri, 6th Jun 2014 12:33 pm
We’re forever blowing bubbles, that’s all we know how to do anymore (and in the ‘we’ I now include China).
Growth economy = Catch 22 – a proper conclusion. However, make no mistake about it, there’s a world of pain in moving away from the growth economy fix too …
mack on Fri, 6th Jun 2014 1:10 pm
This article pretty much says it all.
Head line in the L.A. Times this morning reads “ECB Drops Rate Below Zero” ” In an effort to spur growth and avert the dangerous threat of deflation in the sluggish Eruozone economy the European Central bank cut its benchmark interest rate to a record low and took the unprecedented step of lowering the bank deposit rate below zero.” The article goes on to report that the rate has been reduced to -0.1% in order to spur banks to make more loans and weaken the Euro and lift the the 0.5% inflation rate. Experts say this was done in Denmark in 2012 and had little effect. I think Central banks around the world are running out of tricks. After they’ve gone negative what else can they do?
Davy, Hermann, MO on Fri, 6th Jun 2014 1:16 pm
Negative is actually an increase in rates but on savers. This is absurdity. I told my family a few years ago that soon what we know now will be no more. If we look around there are so many things that are changed forever and never to return. We still have the usual consumer society stuff but the basic structures of our society and our economy have undergone changes that would have been unheard of a few years ago. Can you imagine 10 years ago an economist saying in 10 years rates would be negative…We are living in the surreal!!!
J-Gav on Fri, 6th Jun 2014 1:42 pm
Davy – Yep, surreal …Who would’ve said 10 years that countries would be monetizing their debt? That was supposed to be anathema too, remember? Different world now …
Northwest Resident on Fri, 6th Jun 2014 1:53 pm
And who would have imagined ten years ago that IBM and other major blue-chip companies would be buying back massive quantities of their own stock in order to keep their stock price inflated?
It is indeed a much different world today than it was ten years ago. And ten years from now, it will most definitely be a vastly different world than the one we live in now.
mack on Fri, 6th Jun 2014 3:23 pm
I think we will find that all the decisions made in the 20th century will be the wrong decisions for the 21rst century. Climate Change, over population and Peak Oil are the 3 forces that will reshape the 21rst century and all the centuries to come.
Perk Earl on Fri, 6th Jun 2014 3:30 pm
”In an effort to spur growth and avert the dangerous threat of deflation in the sluggish Eruozone economy the European Central bank cut its benchmark interest rate to a record low and took the unprecedented step of lowering the bank deposit rate below zero.”
I’m astonished at the lack of outraged response from the MSM, the politicians, the people, from the world as a whole regarding this latest development. savings now actually lose money in a euro bank? I thought the whole idea behind banks was we’ll keep your money safe in return for being able to lend it back out at a higher rate than passbook interest, and the depositor will make interest also. A fiscal symbiosis.
Whatever happened to those routines people would tell kids – put a certain amount of your money in the bank and after x # of yrs. you’ll be a millionaire. No, now you do the same thing and after x yrs. you’ve got less than your deposits. Huh?
The desperation is getting palpable yet people still seem to be oblivious to the danger ahead and seemingly not even putting up a fuss!
Juan Pueblo on Fri, 6th Jun 2014 3:42 pm
Perk, I LOL when I first read about it. This is a brave new world indeed. The rules get invented on the go as necessary or convenient.
Nothing is safe, nothing is sure.
Everything will change, except the basic survival needs, which will always remain the same.
J-Gav on Fri, 6th Jun 2014 5:09 pm
Perk – On his site, Mish titled his response something like: “ECB hauls out pea-shooter and misses the target.”
There’s desperation in the air for sure. They know they can’t push much more without provoking rebellion (already happening here and there) but they’re pretty much out of ammo.
GregT on Fri, 6th Jun 2014 5:13 pm
” savings now actually lose money in a euro bank? ”
Not only in Europe, but here in NA as well. It just happens to be hidden better here. With monetary inflation at around 3% and savings accounts paying less than 1% in interest, it might appear that savers are making money, but in reality every dollar that you have is worth less. You are actually losing net worth by putting your money in the bank.
J-Gav on Fri, 6th Jun 2014 5:55 pm
NW – Almost forgot to congratulate you for picking up on that ‘detail.’ Without the stock buy-backs, so many BIG companies would be in such deep do-do that it isn’t funny anymore (if it ever was).
GregT on Fri, 6th Jun 2014 11:38 pm
Davy,
” I told my family a few years ago that soon what we know now will be no more. ”
Just curious, what kind of a response did you get?
Davy, Hermann, MO on Sat, 7th Jun 2014 6:43 am
Greg, my family and friends respect me with my doomer message. I was dead on with 2008. I started predicting that event in 2005. My family are 1%er’s. Not the 1% of the 1%ers but doing well. They are too caught up in being rich, happy, and comfortably to change their lifestyles. My brother is supporting my lifeboat effort here on the farm with funds. He could do so much more but at least he is making this effort. I have come to recognize that they must continue to play this game to be successful in the business they are in. So I recommend to them dance next to the cliff. Translation: Be aware life is close to collapse but continue to play the game because to not play the game is a dramatic step. Some people can do it by leaving the BAU life and go to a ecco village or something. Yea, Greg, they respect me but they cannot leave their optimism. They also look at me as a little bit on the crazy intellectual side. Kind of like a mad scientist but in a good way.