[Soft_Landing]

I could have put this in a few forums, but i decided to put it here. This forum doesn't get enough traffic!

IEA - Is the world facing a third oil shock?

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While political oil embargo less likely some argue global economy faced with supply crunch ("peak oil") with similar devastating results

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not to be missed!

[pup55]

The famous blackout of August 2003 affected 50 million people. According to

http://www.elcon.org/Documents/Economic ... ackout.pdf

the economic impact of this event has been estimated variously between 4 and 11 billion dollars for that one event. this includes lost wages, lost production, air travel distruptions, spoil food, etc. etc. that we are all aware of. A middling estimate from the above source is $6.4 billion. The state of Ohio claims it cost them just over $1 billion.

According to the above source, the power generating loss was 61,800 MW. The duration of the power loss varied from place to place. In Ohio, it was as long as 36 hours. I was in southern Ontario that day, and about half the power was back on maybe the following noon. So, maybe the average outage was 24 hours.

61,800 MW times 24 hours is about 1.4 megawatt-hours, which is 1.4e9 kwh. At a rate of 3412 Btu per kwh, this comes to 5.06e12 Btu.

A barrel of oil is 5.8e6 Btu. Therefore the loss in the above number of BTU's concentrated in that one incident came to approximately 850,000 BOE (barrel of oil equivalents).

So this particular disruption, short term that it was, "cost" the economy approximately $7300 per BOE equivalent, give or take.

This is kind of an interesting number. For one thing, it suggests that the economic drain of not importing a million barrels of oil is $7.3 billion. At that rate, our current rate of GDP increase of 3% would be wiped out with the shortage of about 48 million barrels of oil taken unexpectedly out of the economy (that is, this is the difference between where we are now and a zero-growth economy). (GDP is $1.16e13, 3% of that is $3.49e11 which is the current annual growth, divided by $7.3 billion)

For another thing, it suggests that even though the price of a barrel of oil is only about $45 at the moment, the economy gets $7300 in usefulness out of it. So, even at the feared $185 per barrel, people will still be willing to fight for it. This can be back-worked the other way, by figuring out how many BTU's of energy the economy consumes, divide by the GNP, and so you know the energy conversion rate of the US economy, to get another number to "check" this against.

The point: When demand exceeds supply, any unexpected "bounce" in availability caused by any screwup in the system whatsoever will affect all of the downstream systems to some substantial economic effect. Long term losses can be compensated for, to a certain extent, by planning, but crazy supply irregularities, such as this one, will really cause a lot of headaches.

http://www.enasewell.com/Tax%20Credits.htm
http://www.bea.doc.gov/bea/newsrel/gdpnewsrelease.htm
http://mwhodges.home.att.net/energy/energy-a.htm

[Metronome]

Interesting pup55, very well said and I agree.

The August blackout should serve as an example for what is to come, at some point at least. Reports equally indicate that during that blackout, the crime rate shifted incredibly. "No alarms, no problem!"

-May all beings find Happiness

[Soft_Landing]

That's a neat post, Pup55, I like it.

Of course, it's a pretty rough approximation, I would suggest, to equate electricity energy deficiency with oil/other energy deficiency. Also, the assumption that extrapolation of the rate of financial cost can be continued to the end of economic growth in a linear fashion is quite arbitrary.

On the other hand, I can only imagine that such linear extrapolation is conservative. Surely the financial damage caused by twice the energy shortage is more than double in dollar terms.

It's a tough problem to try to analyse, and I think your perspective is a really useful angle to try to quantify the problem.

[pup55]

Thanks for posting the Forbes article.....

[quote]Today, Americans consume about 98.2 quadrillion btus of energy a year, 61.6 quadrillion of that is from oil and natural gas. GDP is about $10.4 trillion (in 2000 dollars), so the U.S. now needs just 5.93 thousand btus per dollar of output.

Not too far off from the 7300 BTU/dollar estimate above.

Two data points, and within 20%!

Maybe time for some more fun with numbers!

[k_semler]

Thanks for posting the Forbes article.....

Today, Americans consume about 98.2 quadrillion BTU of energy a year, 61.6 quadrillion of that is from oil and natural gas. GDP is about $10.4 trillion (in 2000 dollars), so the U.S. now needs just 5.93 thousand buts per dollar of output.

Not too far off from the 7300 BTU/dollar estimate above.

Two data points, and within 20%!

Maybe time for some more fun with numbers!

OK, if all petroleum were to disappear from the market in the US, the average person would have at their disposal 1257731.9587628865979381443298969 Buts given a population of 291 million people. This would equate to 3445.8409829120180765428611777997 BTUs per person per day. As the energy content of 1 gallon of gasoline is approximately 125,000 BTUs, ( http://www.energyquest.ca.gov/ask_quest ... trans.html ), This would mean that the available amount of energy available to a nation of 291 million persons per day would be equivalent to the net energy available of only 0.027566727863296144612342889422392 gallon of gasoline, or 104.351417 ml of gasoline equivalent. This would be enough to power my personal vehicle 0.474147719 miles, or 763 meters, 66 centimeters, 7.87 millimeters.

Also, the equivalent to 2000 food-calories per day is the equivalent to 8000 BTUs, ( http://www.wohlforth.net/whaleandsuperc ... pacts.html ), so this would mean that everyone in the nation would be required to reduce the amount of calories consumed to 861.460247 calories. Considering the fact that the amount of calories required for a human being to survive is 1,200 to 1,920, ( http://my.webmd.com/content/article/79/ ... 4026_00_11 ), the restriction to this amount of calories would be literally a starvation diet.

Given the above facts, if the continual growth industrial society is to continue, the only option is to find a substitute for petroleum that has as much energy per volume. If we are lack finding a substitute, a massive die-off is inevitable, on the order of at least half of the population of the united states. This is just factoring in the united states energy consumption. If anyone has the facts of energy usage for the world, I am sure the numbers will quite prove that without a complete substitute for petroleum based products, industrial civilization cannot continue. And if industrial civilization cannot continue, the energy requirements of 6.4 billion people on this planet will not be met for even basic survival, and a massive die-off is inevitable.

Not quite such an optomistic future when the numbers are in front of you, is it?

[pup55]

A recalculation of the “economic value” of a barrel of oil from the Forbes article gave a lower value than mine from the blackout, approximately $1000 per barrel of oil, based on 5.93 thousand BTU’s per dollar of output. This is actually a lot less than the blackout value (my bad) but still can be used for another interesting estimate of the economic effects of oil depletion on per capita GDP. We take the current oil consumption, and assume various depletion amounts (percent per year), multiply by the GDP leverage effect, and you get the amount of GDP we do not make because we could not get the oil to do it. Subtract that from the current GDP, divide by the population, and end up with an estimate of per-capita GDP effects of oil depletion. I assumed a 1.5% per year population increase, and the current estimates of GDP and US oil consumption, and plugged in various depletion rates to see what was happening. The OADC had a nice article the other day to the effect that the current global “depletion rate” is 1 million barrels per day. Take 25% of that, the US share, and multiply by 365 you get about 9 million barrels for the US per year, which is a little more than 1%. Based on $1000 GDP generated per barrel of oil (the least efficient of the two estimates) and 1% depletion, you get the following spreadsheet.

GDP Oil Barrels/Yr Dollar effect GDP less Pop GDP Per
Yr Cons Depleted of depleted oil Depletion Capita
0 1.16E+13 7.30E+09 2.75E+08 $ 42,360
1 1.16E+13 7.23E+09 7.30E+07 7.30E+10 1.16E+13 2.79E+08 $ 41,472
2 1.16E+13 7.15E+09 7.23E+07 7.23E+10 1.15E+13 2.83E+08 $ 40,604
3 1.15E+13 7.08E+09 7.15E+07 7.15E+10 1.14E+13 2.88E+08 $ 39,756
4 1.14E+13 7.01E+09 7.08E+07 7.08E+10 1.14E+13 2.92E+08 $ 38,925
5 1.14E+13 6.94E+09 7.01E+07 7.01E+10 1.13E+13 2.96E+08 $ 38,113
6 1.13E+13 6.87E+09 6.94E+07 6.94E+10 1.12E+13 3.01E+08 $ 37,319
7 1.12E+13 6.80E+09 6.87E+07 6.87E+10 1.12E+13 3.05E+08 $ 36,543
8 1.12E+13 6.74E+09 6.80E+07 6.80E+10 1.11E+13 3.10E+08 $ 35,783
9 1.11E+13 6.67E+09 6.74E+07 6.74E+10 1.10E+13 3.14E+08 $ 35,040

Note first of all with the rate of population growth of 1.5%, you have to increase GDP by that much just to break even per-capita. So with a growth of 0, even with a depletion rate of 0, the per-capita GDP falls.
We remember from the Argentina example the other day that a 10% decrease in GDP was the “riot point”, the point at which there was enough financial pain suffered by the public to cause riots in the streets. If you are willing to accept that, the “riot point” at 1% depletion takes place within about 4 years. Of course, the Argentines might be more or less willing than we are to take to the streets, and also, this might depend a lot on how suddenly the problem hits, but nice to pick some point for comparison.

So here is the last column presented for various depletion rates:

USA Per Capita GDP at various Oil Depletion Rates
Rate of Net Oil Depletion
Year 0 -0.01 -0.03 -0.05 -0.07
0 $ 42,360 $ 42,360 $ 42,360 $ 42,360 $ 42,360
1 $ 41,734 $ 41,472 $ 40,949 $ 40,426 $ 39,903
2 $ 41,117 $ 40,604 $ 39,594 $ 38,605 $ 37,636
3 $ 40,510 $ 39,756 $ 38,293 $ 36,889 $ 35,543
4 $ 39,911 $ 38,925 $ 37,042 $ 35,272 $ 33,610
5 $ 39,321 $ 38,113 $ 35,840 $ 33,747 $ 31,823
6 $ 38,740 $ 37,319 $ 34,685 $ 32,309 $ 30,170
7 $ 38,167 $ 36,543 $ 33,575 $ 30,952 $ 28,641
8 $ 37,603 $ 35,783 $ 32,507 $ 29,672 $ 27,225
9 $ 37,048 $ 35,040 $ 31,481 $ 28,463 $ 25,913

As you can see, it makes an enormous difference what the rate of decline is. At 7% depletion, the “riot point” is reached in about 18 months. Naturally, if you use a higher estimate of the GDP/dollar leverage effect, the results are much more severe. I will spare you the spread sheet, but suffice it to say that at a GDP leverage effect of $7000 and a depletion rate of 1%, the “riot point” is reached in about a year.

So, knowing this, if you are one of the peoples’ employees running the show, what to do to minimize the effects of depletion on the per-capita GDP so as to keep from being strung up from one of the flagpoles on the front of the NYSE?

You could borrow money and distribute it to the economy, thus propping up the GDP. We are currently doing this right now, by borrowing from foreigners, domestic fat cats, and the future generations. It is tempting to allow the currency to inflate, and pay back with inflated dollars, but the foreigners and fat cats hate it when we do that, because it costs them wealth, so they will only let us do it for so long before they put up a stink, and quit loaning us the money. When/If the bond market collapses, you will know that this has happened.

We could use our military and make sure the “depletion” is not evenly distributed. In other words, we keep our supply, or even let it grow, and somebody else has to conserve. This will only last for so long. We will at some point run out of teenagers willing to do this.

We could use less oil voluntarily, but no one will have the stomach to propose it politically, after what happened to Jimmy Carter. Conservation, by the way, is just a redistribution or “non distribution” of wealth between us and the Saudis. The pie is still getting smaller, unless we actually figure out how to extract more dollars of GDP per barrel. Also, note that the more we conserve, that is the more dollars of economic value we extract from each barrel, the more sensitive we are to the effects of further depletion, per the above example.

An interesting approach would be to change the income distribution. This would redistribute the “pain” of reduced per-capita GDP by artificially pumping up the lower classes so they will not riot. Currently, we are doing exactly the opposite, by fattening up the upper classes and letting the lower sink or swim, in the theory that this is good somehow. This will also not last for long.

Alternately, you could delay the problem by slowing down the rate of population increase. In my opinion, doing this by reducing birth rate by edict in the USA cannot be done without reaching the riot point immediately. We have the option of closing our southern border, and deporting the part of the labor force that is in the country illegally, but that will also cause an immediate riot so will not happen until the per capita GDP of Mexico is sufficently high to encourage people to go the other way.

Of course, if there is no depletion, or there is actually oil supply growth, the Russians are right and there is infinite oil available, we do not have to worry about any of this.

On the other hand, if you are the Iranian Oil minister, or Chavez in Venezuela, or Putin, or even Osama, and you know the above, and you want to cause some mischief even faster, pretty easy to see what to do.

Maybe we are at the riot point now, per yesterday’s demostrations in NY. We will see.