It's difficult anyway to pay attention to a blog when one has a day job and a family. So the bigger the article, the more time that needs to be spent ironing out its wrinkles so that repetition doesn't become too annoying.
Anyway, installment number one:
Introduction
Like with most topics, there appear to be two major camps in the peak oil debate.
On the one side, there are the peak oilers, who give a lot of meaning to a certain bell-shaped curve while stressing the role of oil in our society and, in many uses, its irreplaceableness. Or, in economic jargon, its lack of substitutability. Quite often, but not always, they come from the camp of resource pessimists who see the limits to all that mankind does, especially when it comes to our growth trajectory. Compound growth. Continued expansion. Reaching the limits of what our environment has to offer. Peak everything.
On the other side are the peak oil denialists. For, as one quickly sees, the debate has been framed from the peak oil side, so that the denialists are forced to take the counterargument: Yes, there will be enough. No problems here. They often stress the seemingly unending amount of reserves around the world (usually a factor of 10 higher than that of the pessimists), the role of economic substitution, the function of the (free) markets, politics and mankind's resourcefulness. Certainly there are limits, but they need not concern us in this instance because humans like to sidestep such things, changing the rules to the game as we go along. Peak oil is just another bit of nonsense and/or non-event like the year 2000 bug and global warming, which, if there's much truth to it, will be dealt with as we go along. For, such issues are just change, and why worry about change? We'll know what to do once we get there.
The two camps even have two different ways or preferences of measuring oil / counting the barrels: the actual stuff coming out of the ground (c + c = crude oil plus condensates) or all oil-like inputs (all liquids) including synthetics and such pseudo-oil products as ethanol.
One side stresses oil's specialness as an energy source and in our economy (our lifestyle is at risk!) while the other the fact that oil's a commodity like every other one in our economy. One side stresses calculable and obvious difficulties while the other stresses that the negative scenarios have "never" come true, so why is it different this time around? One side focused on flow (rates of production) while the other on production capacity (what could we produce if we really had to?).
Well, the peak oil argument is quite simple, if not simplistic. According to Hubbert's curve, a model for ultimate oil production, there's the side of expanding production, there's a point of more or less highest production and then, after about 50% of the resource has been used up, a downside slope. A two-dimensional model for a very dynamic process.
In a way, though, these quite complicated dynamics can be boiled down to basically one question which really matters to most of us and to the way we live: Can we keep up production as we have been doing thus far? (The environmentalist would ask, do we even want to keep up production and continue our present way of life?)
And although I would generally agree that Hubbert's curve gets to the root of the matter concerning the geology of oil, it hardly lets us know how the world and/or our individual countries are experiencing the process: Stress? Opportunity? Business as usual? Defeat? Change brings this and much more to individuals, regions and the world.
Like I said, the curve might be what's going on behind the scenes. But most of us have little relationship to that, relating to more immediate experiences. Four dollar gasoline, for instance, has impressed a number of people, especially in combination with almost daily rising prices. So accepting or denying "the curve", the theoretical argument behind peak oil, makes two wonderfully diverting camps; at the same time, it hardly helps us consider the economics, the politics, the ecological and the societal side of things related it.
To bring this perhaps one step closer to our human experience without throwing away the attempt at modeling, I have chosen to adopt an historic narrative approach. And to keep it simple, I would like to give my model three phases corresponding to common market saturation of many products or phenomena: Upswing, saturation and maturation/waning. Obviously the peak is somewhere in the middle of the second phase (saturation). But where in the middle exactly, is only of secondary importance - unlike in the usual discussion of oil peaking, which is worried about when exactly oil is going to or has already peaked according to the curve. I wouldn't say that the event doesn't means a whole lot in and of itself (yes, that was a double negation), but that we rather need to see the overall system response embedded in the reigning capitalistic/industrial paradigm.
Phase One: Upswing
The first phase began as Colonel Drake drilled the well which set the whole thing off, looking for a viable substitute to replace whale oil for lighting. And although the venture was an obvious success and although whaling peaked in the 1870s (chart), it continued in considerable measure another 70 years or so. By the end of the Whaling Age, Standard Oil had not only helped transform America to a petroleum powerhouse but had already passed its golden age, having been broken apart. Many observers see the somewhat gradual switch from whale oil to mineral oil as a sort of "proof" that oil will be replaced - not because oil will come close to running out but because we will be successful in replacing it with something else. "The stone age didn't end because of the lack of stones.." This corresponds to the future scenario we could call "hopeful".
At any rate, by the end of the 19th century crude oil was moving into a monopoly position for the lamp oil industry as new forms of lighting appeared: Thomas Edison with his electric light bulb and natural gas for street lamps. But before the Age of Oil was over before it even began, people started using it as a lubricant and for the use which we associate it most decisively today: Transportation.
Carl Benz used a derivative of mineral oil, naphtha, to drive his first automobile. Today we would call that paint thinner, quite similar to gasoline.
But here, too, the fuel was getting stiff competition at the turn of the century as electricity began replacing horses as the motor to pull street cars within and around cities. Replacing the horse outside the city in the realm of individual transportation, although ethanol/wood alcohol was also considered an option at the time, nothing could really replace crude oil in the form of gasoline in an internal combustion engine. It was proving to be the cheapest and most available option and, by far its most practical and useful property, it could be carried around as a liquid without much danger. It was simply easy to use. Even ethanol tended to evaporate more quickly and cause dangerous and explosive gas accumulations.
And then, to top things off, the even more powerful (albeit louder) diesel engine was invented, being put to use for ship, locomotive and larger transport vehicles where the noisiness it caused was not considered a problem. By the end of the First World War, most transport was being taken over by engines using crude oil derivatives.
Market penetration continued, so that World War II was an (almost fully) automotive war, fought with tanks, airplanes and diesel boats/submarines. The last niche filled by oil was that of the jet propulsion engine, even though propellers were likewise run by internal combustion.
Looking at market infiltration, the first phase of the Age of Oil was coming to an end - it was everywhere and used for everything. One could say it over-penetrated the market, being also over-used to generate electricity and for heating. Only concerning quantity was there still a good bit of growth possible.
Which presents me as an analyst with a problem: When should we draw the line, saying the market had been saturated, that the first phase was coming to an end? Use (demand), for instance, has increased more or less consistently up to 2005, later consumption increases occurring mostly outside of the U.S. and Western Europe. Is there an other and more fitting type of indication that we could follow?
Well, the 50s and 60s were a great time for the car, not only in America. One could say that this was also the time that a new car culture flourished in the US while suburbia was beginning to be built. There were few that really questioned this development which was soon equated with The American Dream itself. Until, of course, the first serious cracks in the model began to appear: the 1970s.
Phase 2 begins
For peak oilers, picking the beginning of the 1970s as the beginning of the second phase would make sense because the world's premier oil nation "peaked", or at least presented its first of two relative peaks. The second one, a lower peak resulting from the (erschliessung) of Prudhoe Bay in Alaska ten years later, was in a way a result of expanding the physical area under observation - no longer just the lower 48 states. Even so, in 1970-71 the US produced more oil than it ever had and ever will per year. In short, the one country which was most identified with the Age of Oil (as producer, consumer and innovator) and which had originally exported the use of oil on a large scale had reached a quite palatable limit.
For all those who argue on the other side of the fence - that the limits shown forty years ago are hardly definite - the 1970s would make sense as well. For "above ground" factors disrupted both oil markets and the established political relationships of the international community. The Oil Embargo, lines at the pumps, rising oil prices and stagflation were harbingers for the new phase. OPEC began flexing its muscles and decided to cut production in order to gain political influence and to optimize oil prices. The Soviet Union, by then the world's biggest oil producer, was making a very good way by selling its oil to the world market in exchange for hard currency.
At the same time, this economically marginalized many of the USSR's satellite countries like East Germany, Hungary and Romania who didn't have the oil and therefore were faced with poverty, receiving less subsidized fuel. Romania peaked at about the same time that the USA did, only being beaten by the very minor producer Austria (which peaked in 1954). The price of oil the world over skyrocketed for the first time since Spindeltop was tapped in Texas in 1930. The oil conglomerates used the situation to exploit and finance such more expensive to develop finds from the 1960s such as North Sea Oil and Prudhoe Bay. The system was responding in strange and stressful ways.
Prophets of doom were echoed by normal observers for calls of energy independence in the USA in order to minimize international and other above ground factors. The Limits of Growth seemed to be the most timely book ever written, while world production dropped for the first time since Col. Drake's well. The situation played into the hand of the cartel until the rest of the world raised production enough to counteract OPEC's artificial shortage. Only after the concerted efforts of governments and conglomerates in the West could the seemingly cornered market shake off the ghost of immediate and lasting resource bankruptcy.
The general reigning pessimism was reinforced by the failure of nuclear power to provide much substitution for existing energy usage. Fear of accidents and atomic waste put many a project back into the engineer's drawer. Yes, it could have been so easy - if atomic energy had worked well and cheaply the first time around. Even today it is stigmatized with danger and certainly is not inexpensive.
Looking at oil production alone, it should not have been that difficult to transfer from US-centric production to Russian or OPEC production while continuing the gradual search and development for further reservoirs. The system responded differently, "seeing" this as an opportunity to test America's empiric resolve and simply to maximize profit. Such politically overshot markets were bound to suffer once the bubble was over - first the gold-rush mentality then the production bubble and hangover experienced since the mid-1980s.
But the system also responded in areas that seemingly had little to do with oil directly. The catch-phrase here is stagflation, where the economy is trying to expand, where it acts on the one side like a heated-up economy with rising inflation not only in things concerning energy; at the same time it is going through structural difficulties like rising unemployment and stagnating GDP.
This situation broke the back of the industrial complex first in America and then in Western Europe as jobs moved East. Only Japan seemed to be able to profit from the macroeconomic landscape. Apart from increasing drilling activity, little could be done except raise interest rates to try to bring the monetary side of things in order.
After a long decade of such trouble, the focus shifted quickly as prices dropped and the Soviet Union began to crumble. This seemingly accidental connection between the two events was most certainly not. Despite the return to low oil prices and of the big car over the years, at least in the United States, the new oil paradigm was planted in many of our heads, even while the newly revamped private oil industry began to crumble away on the continental U.S. The not-so-short-lived boom gave way to a not-so-short-lived oil-price depression.
Before I sign off til the next post, which will continue in the middle of the second phase, I would like to present a borrowed graph on how this process of price "overshoot" and underperformance works:
Source: Andrew Butter http://www.marketoracle.co.uk/Article35377.html
For the explanation: The middle line is that of oil's GDP-input. The theory is that it should remain somewhat constant - here demonstrated simplistic as 3.8% of GDP. The long swing above the mid-line during the 1970s and '80s bubble was mirrored by a bear market for oil during the 1990s. The short swing above from 2005-8 by a short swing below 2008-2010. Included is the author's guess at where price action could be going.
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