Oil Limits Overview and Links to Some Posts

Where does a person start when reading about oil limits and their impact? I tried to answer this question with respect to my own writings, in a new tab I added on the top called Getting Started. Here I summarize my version of the peak oil story and offer links to some of my posts. I thought I would repeat it as a post, to call attention to it, and offer a chance for comments.

Overview

We live in a world that is finite. While there are huge amounts of oil, gas, coal, and minerals (such as uranium, gold, silver, copper, and lithium), we tend to extract the easiest to obtain, highest quality resources first. Eventually, we find it is more and more expensive to extract additional quantities of these items. Aquifers that are slow to replenish become more and more depleted. Top soil tends to erode faster than it is replaced. Pollution tends to be a problem too, with the most obvious example being carbon dioxide added to air and water.

Economists have set up their economic models as if we would never reach limits. In fact, we seem to be reaching limits now, especially in the area of oil supply. World oil production has been approximately flat for six years now (since the beginning of 2005), even as producers have strained to raise production. OPEC claims to have a huge amount of spare capacity, but there is little evidence that this is really the case. They also claim to have very high oil reserves, but the reserves have never been audited, and are believed by many to be seriously overstated.

There is great confusion regarding what happens when we reach limits in oil supply. People expect that if oil starts hitting limits, the symptoms will be high prices and shortages. In fact, the symptoms as often as not seem to be recession and an inability of would-be purchasers to afford the goods that are being produced with the high priced oil. This at times looks like an over-supply of oil–the opposite of what people expect.

The issue is not a lack of oil, but a lack of cheap, affordable oil. If oil prices could rise high enough (and people’s pay checks could rise to accommodate this increase in price), there would likely not be a problem–we could just extract more higher priced oil. The fact that things seem to work in this manner helps solve the mystery regarding how there could be a huge amount of oil still in the ground, but oil supply still not be growing.

Research suggests that once oil prices reach a high enough level (estimated by Steven Balogh to be $85 barrel in 2009 $), high oil prices start sending the economy into recession. Eventually, recessionary forces overcome the price rise, and oil prices drop. In time, demand rises again, and oil prices rise again, until the higher price once more leads to recession. This up and down pattern leads to an oscillation of oil prices, never raising prices high enough to really increase production. This failure of oil to reach very high prices also means that “renewables” do not become competitive either.

As noted above, world oil production has been approximately level since the beginning of 2005. It seems to me that peak oil problems started about the time that oil supply first stopped rising, and prices started rising instead. Oil prices began rising as early as 2003, and in 2004, the Federal Reserve started raising target interest rates in response to higher oil and food prices. Eventually, higher oil prices and higher interest rates in response to the higher oil prices helped prick the housing bubble. Thus, the debt defaults and recessionary problems we have been experiencing in the past few years seem to be very much related to limits in oil supply.

A chart I made some time ago. It seems to me that our problems started approximately when oil supply stopped increasing, represented by the departure of the blue line from the green line. I am not convinced the decline in oil production will follow the pattern shown in the graph. This is just one idea.

We don’t know precisely when oil supply will start declining, but, in a sense, it doesn’t matter. Having oil supply that doesn’t increase is already a problem, because countries like China and India and oil exporting nations are taking more and more of the available oil supply, leaving less and less for developed nations like the United States.

Going forward, I expect that the we will see significant debt defaults and more recession. Liebig’s Law of the Minimum (saying in effect, that if we lose an essential input, then a whole process will stop) is likely to mean that oil supply shortfalls are likely to have much wider influences than their magnitude would suggest. One area that is vulnerable is our financial system. It operates much better during periods of economic growth (because it is easier to repay debt with interest), and a reduction in oil supply is likely to result in economic decline. If there are serious financial problems, international trade is likely also to be adversely affected.

Eventually, I expect that collapse is likely. The timing is not certain, but because of Liebig’s Law of the Minimum and the very connected nature of our systems today (oil, electricity, food, financial, international trade, Internet, medicine, etc.), it seems to me that this collapse could take place in as little as 20 years. We cannot of course know with certainty, but it seems to me that we should be at least looking at this possibility, and planning accordingly.

Suggested Posts

I have tagged a number of posts as Introductory Posts. These can be found by clicking the “Introductory Post” tag at the top of the right sidebar, or by clicking Introductory Post here.

I might point out Our Finite World: Is this a Problem. I wrote this back in early 2007, outlining some of my basic views. My views have changed very little. You will note that even back then, I was talking about the likely outcome of peak oil being recession and problems with the financial system.

With respect to oil, one post giving some background with respect to our supply problem is Peak Oil Overview – June 2007. Another related post is Oil Production is Reaching its Limit: The Basics of What This Means.

A very popular post with respect to alternatives has been What are our alternatives, if fossil fuels are a problem? A post showing the relative energy supply from different types of fuels over time is Our Energy Supply: Some Basics.

I have written quite a few posts related to financial issues associated with peak oil, both at The Oil Drum and at Our Finite World. Several of these are listed in at the Financial Implications link near the top of the right sidebar. Others include

What happens when energy resources deplete?

Where we are headed: Peak Oil and the Financial Crisis

One financial post that is on both blogs that should perhaps be mentioned is Delusions of Finance. I correctly predicted many of the problems that took place in 2008, at the beginning of 2008. This is a post explaining what I saw that others did not.

With respect to planning for the future, Oil and the Economy: Why it is important to figure our approximately where we are headed is a good post to start with.

A post which looks at the connection between oil consumption and employment is Part 1 of  The Oil-Employment Link Part 1 and Part 2. Part 2 looks at how this might play out, and what policies might be appropriate. It is on the scary side, and might not be for new readers.

A post giving an idea which may be a partial solution is What we can Learn from Gift Economies.

Also, check out the posts listed on my listing of some of my posts from The Oil Drum. In addition, Energy Bulletin has a listing of my posts they have republished.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to inadequate supply.
This entry was posted in Introductory Post, Oil and Its Future and tagged . Bookmark the permalink.

9 Responses to Oil Limits Overview and Links to Some Posts

  1. Jb says:

    Thanks Gail. I made good use of the ‘Share’ button and hope many readers are headed your way.

    This morning on Squawk Box they did a story on the Alaska pipeline: http://www.cnbc.com/id/15840232?video=1738621189&play=1. I was shocked to hear that the pipeline is uneconomical at under 350k b/d. Below that, there isn’t enough oil flowing (presumably at a given price) to maintain it and make the venture economically attractive. I’m sure there are technical difficulties as well. Obviously they are using this to push for more oil development in the state and I have no doubt they’ll get it. Can any of us imagine the pipeline shutting down? The loss of jobs up and down the west coast would be staggering, our demand for foreign oil would go up, and more of our FRNs would end up in oil producing countries that fund anti-American interests. We are headed in the wrong direction.

    Thank you.

  2. fishsnorkel says:

    “We infer that energy limits economic activity through direct causal mechanisms. The evidence for this inference is presented above and comes from three sources: (1) theory, the application of the second law of thermodynamics to complex adaptive systems; (2) data, the robust relationship between per capita energy use and per capita GDP across both space (the 220 nations of the world) and time (24 years); and (3) analogy, the similarity between biological and socioeconomic metabolism. We find the last to be especially compelling. Just as a body has a metabolism that burns food energy to survive and grow, a city or national economy has a metabolism that must burn fuel in order to sustain itself and grow. Just as higher metabolic rates are required to sustain and grow larger, more complex bodies, so higher rates of energy consumption are required to sustain and grow larger, more developed economies that provide greater levels of technological development and higher standards of living.” Brown et al, Energetic Limits to Economic Growth (2011) http://www.aibs.org/bioscience-press-releases/resources/Davidson.pdf

  3. Owen says:

    >>
    Research suggests that once oil prices reach a high enough level (estimated by Steven Balogh to be $85 barrel in 2009 $), high oil prices start sending the economy into recession.
    >>

    We need to be very careful of how this is modeled, and I mean this from the perspective of oil price increases having a substantial positive effect on financial asset pricing.

    Specifically, the concept of wealth effect and the fact that CVX and XOM are both Dow stocks. An oil price spike will cause CVX and XOM prices to also spike and in a short term this likely can spike the Dow Jones Industrial Average, which would drag up the S&P as well.

    This yields the wealth effect as shareholders discover themselves rich and go out and spend money.

    It takes a significant period of time for spiked oil prices to smash an economy. They have to exist long enough to compress margins and have those appear in the quarterly earnings reports. Only when earnings display the ramp up in input costs and the inability to pass those costs along to strapped consumers asserts do words like “collapse” make any sense.

    So the modeling equation would be oil price X (some coefficient, linear or not) X calendar days of duration at that price. Not merely price alone.

  4. Owen says:

    I have not, but I have just downloaded it and begun a careful review. I have spent a few hours over the years at DuPont Circle so I am familiar with the work that comes out of Brookings Institution. I have good confidence my time will be well spent .

    Thanks.

Comments are closed.