The worsening oil crisis and views of a German military think tank

Fatih Birol, chief economist at the International Energy Agency, has stated several times that “the age of cheap oil is over.” Our global economy has depended on cheap oil in order to function well and in order for long-distance supply chains to remain viable. However, the dynamics of supply and demand could result in a situation where oil prices are highly volatile, swinging from very high prices to very cheap prices in short periods of time. Such dynamics have been described by Dr Colin J. Campbell, a retired petroleum geologist and analyst, as the “bumpy plateau.” When the physical limits of oil production have been reached, any increase in oil demand as a result of investment in economic growth causes rapid price increases until these prices start to make global trade expensive. As a result, demand for oil falls because of the inability of companies to afford energy expenses and this drives down the price — sometimes very dramatically. Can the world survive such a volatile future?

Tom Whipple is a retired CIA analyst with 30 years of experience in the agency and has focussed on peak oil since his retirement. On 10 Oct., the website Oilprice.com featured a piece by Mr Whipple that claimed –- among a variety of analyses -– that economic contraction in Europe looks likely. He stated that if there is a debt default in Spain and Italy following a likely default by Greece, then this would not only seriously impact Wall Street but also the Chinese export market. He added that there is growing recognition amongst researchers that oil prices exceeding $90 a barrel result in negative economic consequences in nations belonging to the Organisation for Economic Co-operation and Development (OECD).

According to Mr Whipple, US consumption of oil thus far this year has declined by approximately 4 per cent over the same period last year. Even though China’s economy continues to grow annually at around 9 per cent, this could be seriously hampered if the debt crisis in OECD nations escalates into wide-scale defaults. Even oil-producing nations look vulnerable given their dependence on food and water imports. Mr Whipple predicts that the debt crisis could lead to permanently falling oil prices, which would lead to serious implications for investments in new oil fields as these require oil prices ranging from $60 to $90 a barrel. Oil shortages in the world market would result in the need for national governments to ensure supplies to essential sectors, such as food and heating. A large-scale increase in unemployment would also need to be managed.

What are the political and social implications of such oil shortages? While economists may be discussing this subject, it appears that the administrations of most governments have not given it sufficient attention in recent years. Interestingly, there have been a few Western military think tanks that have addressed the subject of peak oil — and have made some disturbing future predictions. In particular, a report leaked last year to the Internet from the German military has a lot more to say on the subject than official reports that have thus far been made available to the public. The central administration of the German government, along with the administrations of governments such as the US and Britain, have not done a sufficient job in bringing military reports of this type to public attention, especially when compared with other things they bring to attention.

While a 2010 report by the US Joint Forces Command stated that by 2015 the global shortfall in oil production could be as great as 10 million barrels a day, the German study — produced by the Bundeswehr Transformation Center, part of the German Ministry of Defence — delved into much greater detail of the repercussions. The authors state it is already too late for a transition to a global economy that no longer depends on fossil fuels to function. Thus, the world is seemingly destined towards a future of economic damage that will get worse and worse. The study explores the dangerous impact of high oil prices on the industrial agricultural system, which produces the majority of food on the world market. The cost of fertilizers and pesticides would increase, as would the cost of transporting food across significant distances as many nations are dependent on food imports. The report further explores how a period of “transformation unemployment” is likely to develop as a result of attempts by businesses to transition to less oil-dependent practices or ways of sourcing their supply chains. Many businesses would find this difficult or impossible, and the unemployment crisis would be destined to get worse and worse.

The combination of increasingly widespread unemployment and the restricted abilities of people to drive as far as they used to could lead to significant crises in many democracies. In times of crisis, Europe has a sad history of voting for more nationalistic and authoritarian parties. The German report warns that government budgets risk being seriously impacted, given they would have to pay for the food, fuel, water and shelter of a lot of people. As businesses continued to fail, the impact on government tax revenues would also be increasingly negative. The report describes the need for governments to ensure supplies are rationed directly by the government to the people and that the market is restrained in terms of its resource usage.

On an international level, the report warns that countries will become increasingly unable to assist other nations given the extent of their own internal problems. Thus, international institutions and relief infrastructure could seriously erode. The authors of the report warn there is a “false assumption [that] a phase of slow reduction in the amount of oil leads to an equally slow reduction in economic capacity”. They counter this assumption, stating a that a future of permanent oil decline in which the world no longer has a sufficient supply of oil to meet even rather suppressed demand could result in a quite rapid, negative chain of events. Once investors start losing confidence in any possibility of future growth, it would impact the market and potentially create a situation in which “the global economic system and every market-based economy collapse.”

The collapse of physical infrastructure, such as roads and bridges, could also result if the sum of the world’s oil is already invested in keeping people alive and protected from the elements. There are two sentences in the report that are particularly candid about the risks we face; they state: “A shrinking economy over an indeterminate period presents a highly unstable situation which inevitably leads to system collapse. The risks to security posed by such a development cannot even be estimated.” If the security risks cannot be estimated, then how can our governments prepare for the future? There is a stunning silence among many governments with respect to this issue. The fact that this German military report was leaked to the Internet is very telling. Governments do really not want us to know the gravity of the situation. But why? Perhaps they want to maintain their elective capacity and offer false hope? But then they keep selling us this elixir of perpetual growth when deep down they know that our living standards are going to get worse no matter what they or anybody else try.

todayszaman.com