Sunday, February 1, 2009

Peak Oil and the Global Economy

Recent news headlines reveal that the U.S. economy is deteriorating rapidly: “Be Prepared for More Cutbacks,” “Mass Layoffs Continue at Rapid Pace,” and “Economy’s Plunge is Worst in Quarter-Century.”

The Work Bank forecasts that the recession of 2008 will extend into 2009 and probably to 2010:

“A pronounced recession is believed to have begun in mid-2008 in Europe, Japan, and most recently, the United States. This recession is projected to extend into 2009. The possibility of a serious global recession cannot be ruled out. Even if the waves of panic that have inundated credit and equity markets across the world are soon brought under control, the crisis is likely to cause a sharp slowdown in activity stemming from the deleveraging in financial markets that has already occurred and that is expected to continue.”

The World Bank sees some signs of optimism for 2010, but concludes that “global recession is likely to be protracted” and “an even sharper recession is likely.”

A variety of analysts of The Wharton School, forecast a deep recession extending through 2010 and possibly beyond.

Gerald Celente, Editor and Publisher of "The Trends Journal," forecasts a global economic collapse beginning in 2009 (interview summary, not quoted directly):

The global economy will collapse in 2009, resulting in the worst recession in the post WW II period. The commercial real estate sector is highly leveraged and will collapse beginning in late February or early March as major retailers fail, leaving vacant rental space that will not be filled. This will lead to further failures in the finance and banking sectors and higher unemployment which is at 13% and growing.

Some two-thirds of the U.S. economy is based on consumerism, which is declining rapidly due to increasing unemployment. Declining personal income means a shrinking tax base and a need to raise state, local, and federal taxes and user fees.

This economic collapse, Celente believes, will lead to the "Greatest Depression," more corporate fraud, increased street crime, taxpayer revolts, rioting, and revolution. Survival is now a real concept as people lose investments and jobs. A return to frugality and self-sufficiency will characterize the economy in years to come.

Financial analyst Gail Tverberg explains the economic crisis in terms of a “Tower of Debt.” Because most debt ultimately rests on personal income, as personal income declines most debts are at risk: unfunded pension liabilities, unfunded Medicare and Medicaid, Social Security debt, publicly held federal debt, government sponsored enterprises (such as Fannie Mae and Freddie Mac), state and local government debt, financial businesses, businesses, and household debt (mortgages, credit cards, and education loans). This supports Gerald Celente’s forecast. When personal income declines (due to increasing unemployment), consumerism declines, retails businesses fail, highly leveraged commercial centers fail and default on loans, causing banking and financial institutions to collapse.

ASPO-Ireland examines the economy in light of Peak Oil (excerpts from the ASPO Newsletter):

“Oil demand had begun to outpace supply around 2005, when the production of Regular Conventional Oil passed its peak. The shortfall was however relatively small and was partly met without undue difficulty by a modest reduction in consumption.

But as prices began to firm, oil traders and other speculative financial institutions began to take a position in the market, which had the effect of driving up the price. Gradually the process built momentum as huge notional profits were reaped from the appreciating asset. In a conventional market such movements would soon be countered by increased production, but in the case of oil, there was no spare capacity to release, and the speculative surge fed on itself leading to an extreme escalation in price which reached about $150 a barrel by July 2008. However as this peak [in prices] was approached, the traders began to conclude that a limit was close and began to buy future options at lower prices, which began to undermine the price in a self-fulfilling process. In parallel the high prices began to undermine many other aspects of the economy with for example airlines and automobile manufacturers facing difficulties. They themselves relied heavily on debt, which itself was traded between banks without adequate genuine collateral, and were forced to unload their speculative oil positions in order to try to shore up their failing businesses. Gradually the whole edifice collapsed, and oil prices fell to around $50 a barrel, although nothing particular had changed in the actual supply/demand relationship.

The flaw in the system was to treat a finite resource whose production was largely controlled by the immutable physics of the reservoir as if it were a normal commodity capable of responding to ordinary market pressures. If the price of potatoes increases, farmers can grow more and the market responds, but oil is different.

Governments responded to the crash by pouring yet more money, itself lacking genuine collateral, into the system in the mistaken belief that this would restore the position of assumed eternal growth, and quite possibly the stock market will respond positively as traders sense a new upward direction. They have no real interest in reality: their job being to try to reap rewards from short term movements.

But if there is an economic recovery, that would serve to increase the demand for oil, which is in a sense the lifeblood of the modern world, and oil prices would again begin to surge. Probably, it will take several such vicious circles before governments and, more important, people at large at last come to grasp the reality of the situation, which will likely prompt radical changes in the human condition.

Meanwhile, desperate efforts are being made around the world to shore up the crumbling financial system. For example, the Bank of England has radically reduced interest rates in a country facing a severe recession, effectively taking money from savers to give to spenders.

The Government has evidently failed to grasp the underlying causes of recession and hopes that pumping a bit of money into the system will restore it to its previous condition. That was premised on eternal economic growth, which is a somewhat unrealistic proposition for a Planet of finite dimensions, but Governments subject to re-election are by nature short-term in their thinking.

One is led to conclude that the entire Stock Market, including especially the oil market, has become a thoroughly debased speculative institution. In earlier years, investors clubbed together to build a specific project, such as a canal or railway, with the resulting dividend being the prime motivation. Things seemed to have gone wrong when such investments were traded on markets by financial institutions which naturally can have no serious knowledge of the underlying business or the true value to be placed upon it.”

Energy investment banker Matthew Simmons, like ASPO-Ireland, notes that today’s low oil prices and credit shortage will reduce investments needed for oil production, resulting in lower oil production in the future, followed by increasing oil prices as demand out strips supply, which will then cause another economic downturn in the future. Simmons also notes that the aging oil infrastructure of drilling rigs, rusting platforms, pipelines, and refineries must be renovated, requiring trillions of dollars in investments at a time when credit is tight..

Independent studies indicate that Peak Oil occurred between 2005 and 2008 and that global crude oil production will now decline from 74 million barrels per day to 60 million barrels per day by 2015. During the same time, demand will increase. Oil supplies will be even tighter for the U.S. As oil producing nations consume more and more oil domestically they will export less and less. Because demand is high in China, India, the Middle East, and other oil producing nations, once global oil production begins to decline, demand will always be higher than supply. And since the U.S. represents one fourth of global oil demand, whatever oil the U.S. conserves will be consumed elsewhere. Thus, conservation in the U.S. will not slow oil depletion rates significantly. More and more oil is expended in oil production and processing as lower grades of oil are extracted from an increasing number of smaller oil fields that are located in hard to access ocean depths. These factors will increase the oil production decline rate above the six percent that is forecasted in a few years

These Peak Oil factors suggest that there will be no economic recovery following the economic collapse of 2009 and that the recession will deteriorate into a permanent economic depression that will worsen over time.

In 2007, the U.S. General Accountability Office (advised by a panel of 13 scientists of the National Academy of Sciences) examined the potential of alternative energies for replacing liquid fuels (that are vital for transportation and food production):

“An imminent peak and sharp decline in oil production could have severe consequences. The technologies we examined [ethanol, biodiesel, biomass gas-to-liquid, coal gas-to-liquid, and hydrogen] currently supply the equivalent of only about 1% of U.S. annual consumption of petroleum products, and DOE [U.S. Department of Energy] projects that even under optimistic scenarios, these technologies could displace only the equivalent of about 4% of annual projected U.S. consumption by around 2015. If the decline in oil production exceeded the ability of alternative technologies to displace oil, energy consumption would be constricted, and as consumers competed for increasingly scarce oil resources, oil prices would sharply increase. In this respect, the consequences could initially resemble those of past oil supply shocks, which have been associated with significant economic damage. For example, disruptions in oil supply associated with the Arab oil embargo of 1973-74 and the Iranian Revolution of 1978-79 caused unprecedented increases in oil prices and were associated with worldwide recessions. In addition, a number of studies we reviewed indicate that most of the U.S. recessions in the post-World War II era were preceded by oil supply shocks and the associated sudden rise in oil prices. Ultimately, however, the consequences of a peak and permanent decline in oil production could be even more prolonged and severe than those of past oil supply shocks. Because the decline would be neither temporary nor reversible, the effects would continue until alternative transportation technologies to displace oil became available in sufficient quantities at comparable costs. Furthermore, because oil production could decline even more each year following a peak, the amount that would have to be replaced by alternatives could also increase year by year.”

There is no plan nor capital for a so-called electric economy. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and surface mining equipment.

The independent scientists of the Energy Watch Group conclude in a 2007 report titled: “Peak Oil Could Trigger Meltdown of Society:”

"By 2020, and even more by 2030, global oil supply will be dramatically lower. This will create a supply gap which can hardly be closed by growing contributions from other fossil, nuclear or alternative energy sources in this time frame."

With increasing costs for gasoline and diesel, along with declining taxes and declining gasoline tax revenues, states and local governments will eventually have to cut staff and curtail highway maintenance. Eventually, gasoline stations will close, and state and local highway workers won’t be able to get to work.

We are facing the collapse of the highways that depend on diesel and gasoline powered trucks for bridge maintenance, culvert cleaning to avoid road washouts, snow plowing, and roadbed and surface repair.

When the highways fail, so will the power grid, as highways carry the parts, large transformers, steel for pylons, and high tension cables from great distances.

With the highways out, there will be no food coming from far away, and without the power grid virtually nothing modern works, including home heating, pumping of gasoline and diesel, airports, communications, and automated building systems.

Governments, business and individuals should prepare for the impacts of Peak Oil.

18 comments:

Jan R. Markle said...

If gasoline became scarce, do you imagine it happen so fast that the government wouldn't have time to ration gasoline? Surely rationing would allow the trucks that deliver food and those that repair roads and power grids etc. first priority (since without the highway or grid repair, we couldn't have food or electricity). Also, trucks bringing supplies for building electric buses and trains would have priority since surely, by then, government would finally realize that we need them. I just wonder if there is gas rationing, how we will have enough gas to get to the store to buy the food, especially if most of us don't have any "jobs" due to the depression that would inevitably result from that amount of oil scarcity? At that point hopefully we would be re-organized around our local community which could create our own little economy, with our own issued local currency, based on the skills that we each offered.

texas thunder said...

If US would open all coasts and Alaska to drilling (Alaska unknown as illegal to even explore most) then government would have lease monies coming in, taxes on oil later, less payments to foreign governments, more energy...time to develop real alternates. The decision to not drill our own resources is the most stupid decision at this time for any government at any time while others world wide scramble for more oil.

Clifford J. Wirth, Ph.D. said...

Hi Jan,

Rationing gasoline will stretch things out, but eventually state governments will lack the resources to maintain roads and subsidize heating oil so that people don't freeze to death in their homes. The latter will be the first priority.

Reorganization in communities has limits. How do people heat their homes without oil and natural gas and when their is no gasoline to cut and move wood? How do we make clothes, shoes, canning jars, locally? Sure it is easy to set up a factory to make canning jars, but what happens when there is not electric power and no spare parts for the machinery that makes canning jars?

I doubt that governments will recognize the importance of the power grid, as they are currently avoiding discussion of Peak Oil and have not even studied the impacts of Peak Oil.

Clifford J. Wirth, Ph.D. said...

Hi Texas Thunder,

If you do an Internet search of drilling in these places, you will see that the optimistic Department of Energy conclude that these places will not yield sufficient oil to offset the decline in oil production by much.

SellCivilizationShort said...

By the way, while America and Canada and possibly Mexico have a lot of land and roads and cars, countries such as Japan and Taiwan also import energy but use it over a smaller area. This, together with strong manufacturing, might make peak oil very different in Japan and Taiwan than it will be in the USA.

Frank Gifford said...

Great post Clifford. Your collapse scenario is frightening to many folks. However, I would like to point out that the levels of environmental degradation are such that a complete collapse of industrial civilization in the near future is actually good news for the children of future generations. By adapting a certain mindset, and preparing for a very different kind of existence, those of us from the "boomer" generation can survive, and maybe even thrive. Check out how at EntropyPawsed
Thanks, Frank

Clifford J. Wirth, Ph.D. said...

Hi Frank,

A complete collapse of industrial civilization means an end to transportation of food to metropolitan areas which lack the acreage to support their populations.

Roger Sowell said...

Dr. Wirth,

Interesting post, but I respectfully disagree. Please see my blog posting for my analysis, found at http://energyguysmusings.blogspot.com/2008/09/peak-oil-not-big-deal.html

Sincerely,

Roger E. Sowell

Clifford J. Wirth, Ph.D. said...

Hi Mr. Sowell,

On the right column of my blog you will see a Peak Oil Impacts Report which reviews the scientific studies on Peak Oil and the alternatives.

These studies indicate that Peak Oil is a catastrophe and that alternatives will not make up the liquid fuels gap for declining oil production.

If you read these studies and then find other studies that provide real alternative solutions and plans for implementation, please let us know.

Roger Sowell said...

Dr. Wirth, I read your publication, and there are plenty of alternative solutions.

As I wrote on my blog, vehicle technology cuts demand for oil far more than economic expansion increases the demand. CNG vehicles also decrease the oil demand.

Hydrogen from sunshine also frees up natural gas from power generation and makes CNG available for vehicles.

The world is awash in natural gas, and the price is around $4.50 per million.

Please, give us engineers a bit of credit! I have heard the cries of Peak Oil for 40 years now. We are not running out of oil. Never have, and never will.

Respectfully,

Roger E. Sowell

Clifford J. Wirth, Ph.D. said...

Mr. Sowell,

As discussed here:

http://www.peakoilassociates.com/POAnalysis.html

The engineers at the National Academy of Engineers and at the U.S. Army Corps of Engineers have recently studied the issues you raised. They see no practical solutions for for the liquid fuels crisis. And even if there were solutions, there is little credit, capital, and fossil energy to pay for the trillions of dollars of infrastructure. If you have specific plans for how you can develop and implement these solutions, it would be best to take them to the National Academy of Engineering and post them on Theoildrum.com, which is where many people discuss proposed solutions.

Also, at Theoildrum.com, you can find several recent posts that indicate the U.S. is facing a serious natural gas peaking crisis.

Vehicle technology will not cut demand. Most people can not sell the gas guzzler to buy an expensive new tech vehicle. And the manufacture of vehicles uses up lots of fossil energy.

Best regards,

Cliff Wirth

Roger Sowell said...

Dr. Wirth,

I certainly respect your views and carefully considered arguments. But the fact is, as I have written on many occasions, that hybrid cars do use less fuel, and energy alternatives are already being implemented.

If the alleged crisis is real, then speculators could make a fortune buying call options on oil companies, or in oil price futures.

The world is bigger than the U.S.A., and imported LNG is a very big factor that should not be overlooked.

Hydrogen from sunshine is the trump card.

Thank you, and I enjoyed your blog and reading your material.

Roger E. Sowell, Esq. BS Chemical Engineering

Clifford J. Wirth, Ph.D. said...

Dear Mr. Sowell,

Here is what the National Academy of Sciences and U. S. Army Corps of Engineers say about hydrogen.

In 2004, the National Academy of Engineering identified significant problems with a hydrogen economy in, The Hydrogen Economy: Opportunities, Costs, Barriers, and R&D Needs:
“There are major hurdles on the path to achieving the vision of the hydrogen economy; the path will not be simple or straightforward. Many of the committee’s observations generalize across the entire hydrogen economy: the hydrogen system must be cost-competitive, it must be safe and appealing to the consumer and it would preferably offer advantages from the perspectives of energy security and CO2 emissions. Specifically for the transportation sector, dramatic progress in the development of fuel cells, storage devices, and distribution systems is especially critical. Widespread success is not certain. The committee believes that for hydrogen-fueled transportation, the four most fundamental technological and economic challenges are these:
1. To develop and introduce cost-effective, durable, safe, and environmentally desirable fuel cell systems and hydrogen storage systems. Current fuel cell lifetimes are much too short and fuel cell costs are at least an order of magnitude too high. An on-board vehicular hydrogen storage system that has an energy density approaching that of gasoline systems has not been developed. Thus, the resulting range of vehicles with existing hydrogen storage systems is much too short.

2. To develop the infrastructure to provide hydrogen for the light-duty-vehicle user. Hydrogen is currently produced in large quantities at reasonable costs for industrial purposes. The committee’s analysis indicates that at a future, mature stage of development, hydrogen (H2) can be produced and used in fuel cell vehicles at reasonable cost. The challenge, with today’s industrial hydrogen as well as tomorrow’s hydrogen, is the high cost of distributing H2 to dispersed locations. This challenge is especially severe during the early years of a transition, when demand is even more dispersed. The costs of a mature hydrogen pipeline system would be spread over many users, as the cost of the natural gas system is today. But the transition is difficult to imagine in detail. It requires many technological innovations related to the development of small-scale production units. Also, nontechnical factors such as financing, siting, security, environmental impact, and the perceived safety of hydrogen pipelines and dispensing systems will play a significant role. All of these hurdles must be overcome before there can be widespread use. An initial stage during which hydrogen is produced at small scale near the small user seems likely. In this case, production costs for small production units must be sharply reduced, which may be possible with expanded research.

3. To reduce sharply the costs of hydrogen production from renewable energy sources, over a time frame of decades. Tremendous progress has been made in reducing the cost of making electricity from renewable energy sources. But making hydrogen from renewable energy through the intermediate step of making electricity, a premium energy source, requires further breakthroughs in order to be competitive. Basically, these technology pathways for hydrogen production make electricity, which is converted to hydrogen, which is later converted by a fuel cell back to electricity. These steps add costs and energy losses that are particularly significant when the hydrogen competes as a commodity transportation fuel—leading the committee to believe that most current approaches—except possibly that of wind energy—need to be redirected. The committee believes that the required cost reductions can be achieved only by targeted fundamental and exploratory research on hydrogen production by photobiological, photochemical, and thin-film solar processes.

4. To capture and store (“sequester”) the carbon dioxide by-product of hydrogen production from coal. Coal is a massive domestic U.S. energy resource that has the potential for producing cost-competitive hydrogen. However, coal processing generates large amounts of CO2. In order to reduce CO2 emissions from coal processing in carbon-constrained future, massive amounts of CO2 would have to be captured and safely and reliably sequestered for hundreds of years. Key to the commercialization of a large-scale, coal-based hydrogen production option (and also for natural-gas-based options) is achieving broad public acceptance, along with additional technical development, for CO2 sequestration.

For a viable hydrogen transportation system to emerge, all four of these challenges must be addressed.” (Emphasis added)

Regarding the hydrogen economy, the U.S. Army Corps of Engineers (2005) concluded that “there are tremendous problems to overcome; once we have solved the production, transmission, and resource issues, then the switch to hydrogen may occur. This is a long term issue and the hydrogen economy is decades away. The tools to make it work, such as safe nuclear reactors, windmills, and fuel cells are still in the development or early adoption phases. To realize the potential benefits of a hydrogen economy – sustainability, increased energy security, a diverse energy supply, and reduced air pollution and greenhouse gas emissions – hydrogen must be produced cleanly, efficiently, and affordably from regionally available, renewable resources.”

Best regards,

Cliff Wirth

Victor Saraiva, Editor said...

Roger:

You seem a man in total denial of reality, ("We are not running out of oil. Never have, and never will.")!!!
One could accept such a comment from an ignoramus, or a high school dropout, but from a chemical engineer???

Replenishment of shale, oil deposits take millenia... are you in tune with the developments of former third world countries that are now becoming significant energy consumers? I somewhat understand your point that alternative sources and technologies along with depressed demand as a result of economic forces (crises)can alter the demand formula enough to alter the depletion scenario somewhat, but it will not be nearly enough to avoid the dire consequences of the peak oil downward slope that humanity will face in the coming decades.
Wake up man, smell the coffee, people need to prepare for a major change of lifestyle, the sooner the better, and apologists for the current status quo are part of the problem.

Charles-A. Rovira said...

Thank you for your comment on my blog.

I responded and I feel that my show "Peak Oil shows, both podcast and on-air, are a fitting addition to the incredible amount of information you are putting out, (In fact get in touch with me concerning our doing an on-air interview together some Friday afternoon.)

Here is the text of my reply to your excellent fact-filled and informative comment.

Thank you once again.

-Charles-A.

----

Its a pleasure to hear from another person who is aware of the situation, who gets it.

Peak Oil is an inevitable consequence of consumption at a rate faster than production. (And environmentalists are quite ready for its arrival.)

But peak oil is not a harbinger of death, doom or of gloom.

Its a harbinger of change, of creative destruction.

Peak oil is yet another point of change on the cumulative continuum of history.

The price of oil will continue to rise until it cannot be afforded.

So what? Literally ... So What?

While I applaud your being awake and aware, I am hosting podcasts (at MSBPodcast, in iTunes) and I have an internet radio show on Fridays at 17:00 (5PM) EST (at Saint Peter's College) which take a more hopeful message to the, uh, masses. (I don't kid myself that I am "Oprah".)

The question I pose and try to answer is "What's coming next?"

Roger Sowell said...

Dr. Wirth, and Mr. Saraiva,

I appreciate your comments! Actually, it is precisely because I am a chemical engineer, and an energy attorney, that I make the above claims. I know whereof I speak.

The hydrogen future is not along the path of water electrolysis and fuel cells -- that is indeed hopelessly uneconomic under any scenario.

The game-changer is hydrogen from sunshine, if you will read my blog entry it is explained. http://energyguysmusings.blogspot.com/2008/09/peak-oil-not-big-deal.html

Petroleum oil or synthetic oil will be used for petrochemicals, asphalts, and lubricants long after transportation has switched to other fuels.

I repeat: We have plenty of oil, and will not run out. Have a little faith in the engineers!

Sincerely,

Roger E. Sowell

Greg T. Jeffers said...

Excellent Blog! Please keep it coming - I intend to source your blog at my own...

Greg Jeffers

Michael Dougherty said...

Very well done and researched. We are in a perfect storm of problems right now, including collapse of human systems and deep degradation of the environment.

Even amongst our brightest, the first impulses are technowhiz just-in-time fantasies about the "one big stroke" that will heal all and return us to the good old days of a consumerist society. We must cross this bright line of denial and embrace the extraordinary challenges that will come.

I appreciate your willingness to speak plainly about what we face. It is unclear to me that we are up to the many ramifying problems.

These are the most difficult of times facing our deeply immature culture. We are not ready, we are not being led, and we are not emotionally equipped to live with less. The prescription for social unrest seems complete and 2009 will tell the tale.

I hope I am wrong, but I don't see any reason to believe we are up to dealing with what we face. With the environment past the tipping point, this looks like a forced march to extinction.

Great work and very sound.

Michael Dougherty
Arkansas