We often hear the statement, “When oil supply is lower, oil prices will rise because of scarcity.” Now, we are getting to see firsthand whether oil prices really do rise, as oil supplies become more scarce.
Figure 1. Figure from the OPEC Monthly Oil Market Report for August 2019 showing world and OPEC oil production by month.
Figure 1 shows that world oil supply hit a peak in November 2018 and has declined since then, mostly because of a decline in OPEC’s production. So, total oil production seems to be down for about eight months, relative to the peak in November 2018.
Despite this big cutback by OPEC in its oil production, prices have not responded as OPEC had hoped:
Figure 2. Average monthly spot Brent Oil prices, based on EIA data.
Last week, I gave a fairly wide-ranging presentation at the 2016 Biophysical Economics Conference called Complexity: The Connection Between Fossil Fuel EROI, Human Energy EROI, and Debt (pdf). In this post, I discuss the portion of the talk that explains several key issues:
- Why we are right now seeing so many problems with respect to wealth disparity and low commodity prices (Answer: World per capita energy consumption is already falling, and the energy/economy system needs to reflect this problem somehow.)
- Why the quest for growing technology leads to growing wealth disparity (Answer: The economy must be configured in more of a hierarchical pattern to support growing “complexity.” Growing complexity is the precursor to growing technology.)
- Why rising debt is an integral part of the energy/economy system (Answer: We could not pay workers for making long-lasting goods and services without using debt to “pull forward” the hoped-for benefit of these goods and services to the present, using debt and other equivalent approaches.)
- Why commodity prices can suddenly fall below the cost of production for a wide range of products (Answer: Prices of commodities depend to a significant extent on debt levels. A major problem is that when commodity prices rise, wages do not rise in a corresponding manner. Rising debt levels can mask the growing lack of affordability for a while, but eventually, debt levels cannot be raised sufficiently, and commodity prices fall too low.)
- The Brexit vote may be related to falling energy per capita in the UK. Given that this problem occurs in many countries, it may be increasingly difficult to keep the Eurozone and other similar international organizations together.
- My talk also touches on the topic of why a steady state economy is not possible, unless we can live like chimpanzees.
My analysis has as its premise that the economy behaves like other physical systems. It needs energy–and, in fact, growing energy–to operate. If the system does not get the energy it needs, it “rebalances” in a way that may not be to our liking. See my article, “The Physics of Energy and the Economy.”
An outline of my talk is shown as Slide 2, below. I will omit the EROI and Hubbert model portions of the presentation. Continue reading