The Three Phases of the Age of Oil: Phase 2 Continued

In the previous post I began dissecting the Age of Oil, well over a century old now, into three basic phases. My hope is that this will help change the way we discuss peak oil.

Focus on oil - properties of the general crisis

The wild secular market swings shown in the previous post wreaked havoc in all directions. Even the bubble and collapse of the Japanese markets and economy during the 1980s and early '90s, not usually connected with oil markets, were fueled by them. For this reason, I would claim that the events of the 1970s and early '80s were not just a one-time, meaningless episode inaugurated by OPEC's greed. Instead, it was a new relationship between mankind and initially black gold on the one side and our energy resources in general on the other. A new paradigm was certainly taking hold, which can be seen by the following traits of the shifted mentality:

 - securing national access to oil was not necessarily only a concern in times of war but rather a constant task for politics

 - in the long run, alternative energies will undoubtedly be needed to be developed to replace oil / fossil fuels;

 - and because of the addition of concerns about all varieties of pollution and later particularly with global warming, this need was reinforced

 - raising taxes on oil products (especially in non-U.S. developed nations) was used to wean people and whole economies off excessive oil use

 - an answer to how to deal with both oil supply and demand was integral to almost every party platform the world over

 - oil was promoted to a national concern: most of the world's oil supplies (ca. 80%) came under control of national oil companies and have remained there

ON the other hand: Just like the scarcity of oil as seen on a global scale during the 1970s and early '80s was artificial (a consequence of market manipulation), the resulting abundance up to the year 2000 was likewise an anomaly, even more amplified by the collapse of the Soviet Union, taking a good deal of oil off the market with it. The respite was just long enough to rock especially the U.S. into a sense of false security, while efforts to replace oil's role in society were quickly squelched. Slowly (but mistakenly!) we got the feeling that high prices and oil scarcity were the exception instead of being the rule.

The past decade has now taught us otherwise.

But this time around it is quite, quite different. What's interesting about the last decade is that despite seemingly ridiculously high oil prices,* there has not been an oil crisis. Perhaps a price crisis, but there was never a time in the "first" world when one couldn't fill up at the pump if one had the money to do so. Despite the recent Iran crises and Arab Spring, for instance. At the same time, use of oil (demand) has fallen considerably - especially in the developed world. Unlike the 1970s, this time around it's the market that's doing the job it's supposed to be doing instead of politics: Placing a premium on a scarce good. And, like Europe's high taxes on oil products, the price regime is doing the job of "slowly" weaning us off oil.

Just imagine how much it would have helped us over the years if oil had slowly risen from $3 a barrel in 1970 to $50-oil today? - I'm assuming, of course, that there would have been less inflation around 1980 so that oil prices would have generally stayed lower. I could imagine that we would likewise depend today much more on possible replacements, which needed to have constantly progressing oil prices to promote their economic advantage.

There are other differences to 40 years ago. Chinese demand and global presence, for instance. The Internet. Russia (whose production has a similar role to back then) is surely a strong regional power - but hardly a global one. Most oil production depends on enormous projects and capital expenditures. Just think of the tar sands in Canada or deep water in the Gulf of Mexico. Independents in Texas or North Dakota have become the exception to the rule.

And maybe a much finer point: There isn't a great deal of willingness to unilaterally place restraints on (one's own) oil production, because this would help focus the world community against the perpetrator. Besides, the prices are already high enough so that great profits can be made!

Back then, one could at least count on the US/USSR dichotomy, being able to side with one or the other, perhaps starving one side while benefitting the other. Nowadays the effort of all players is needed to keep production - at least concerning crude oil - just steady.

Now, what would happen to supply if a real crisis were to disrupt delivery? This possibility is constantly in the back of our heads, as is evident with media coverage and price swings surrounding the Iranian sabre rattling (on both sides).

Back in the 1970s, Saudi Arabia could have quit producing and other producers would eventually fill the gap - at least by speeding up planned projects. Back then, it took half a decade to get Alaska drilled and a pipeline built. But today, the world is already producing mostly all-out. Spare capacity exists for sure on paper, while Saudi Arabia and a few other countries (Iraq, Iran and Libya) could certainly produce more for a while; but what should we expect? That the whole world could be producing all out all the time? That there never be any political or logistical interruptions to the precious flow?

And finally, oil producing nations, from Venezuela to Russia to Saudi Arabia, are horridly dependent on oil revenues to prop up their social programs and other governmental activities, keeping their populations tranquil. If only for this reason they won't be throttling oil production - at least not too much.

In short, the running theme of the past four decades, and more than likely the next couple as well, is that of oil's limits. Whether geologic or artificial ("above ground") factors, whether too little supply or too much demand or, when the price drops too low for any amount of time, too little investment: We're faced with the reality that oil is spread thin across the earth's surface while depending on politics, geology and technology for supply to be maintained.

Infinite amounts of oil

There are reports out there that "prove" that oil production is doomed to rise - s. Harvard. There are reports and a considerable movement out there that "prove" that oil production is doomed to fall. While, if you think about it, there's nothing very special about oil. Just like many things on and around the Earth's surface, oil is made of hydrogen and carbon, while the oxygen which otherwise holds them both together in plant matter has been released to the atmosphere. The sources for oil are carbon dioxide (having passed through plant matter) and water - again, nothing special. So we could make oil out of thin air, if we wanted to. Only, we would have to add at least twice as much energy to create it than we ever plan on getting out of it. This, on top of the fact that only about a 20% efficiency is been reached when burnt in an internal combustion engine, only makes the thought of creating it artificially (except in "upgrades" like coal to oil) seem ridiculous.

With this thought in the back of our heads, however, we see that oil production is directly a result of the investment we make into it. So:

- all those who predict that oil production will rise are predicting that we will make the effort - meaning the investment - to make it work

- all those who predict that oil production will fall are predicting that we will not make the effort to make it work

Both usually add on a "have to" or "be able to" with a will or won't to their conviction.

All I'm going to do at this point is add an "if". If we are able to put enough effort into it and our capitalistic system allows us to make the necessary investment in it, we will continue to "make" greater amounts of oil. If, on the other hand, we can't or don't, then we won't.

And this is the job of the middle phase: To figure out, IF we can keep up with our present needs or not. And IF NOT, what are we going to do instead of it? Which alternative energy or system will win out? And what sort of lifestyle will win out?

At the same time, again trying to define what we're even talking about in regards to the Age of Oil, it has proven to be quite difficult even to decide what peak oil means. What is the real problem behind peaking: how should we define it? As:

1.       the highest point of global crude production (input flow) absolute

2.       the point at which price rises and investments stop bringing higher value to the next unit of production

3.       the highest point of global liquid hydrocarbon energy extraction absolute (think tar sands, ethanol or bio-diesel)

4.       point 1 and 3 not absolute but per capita

5.       preceding points in respect to exports

6.       preceding points in respect to GDP

7.       etc..

Many of these peak points are past. Some are in the future. But none of them really matter in and of themselves because they are not directly involved with when the peaking process has direct effects on each of our selves and our surroundings. They only refer to a theoretical peak oil out there.

Production may rise, Production may (and more than likely will) fall, but more and more and more and more of our efforts will be going into replacing, substituting, continuing and discontinuing the oil paradigm. And this has shown itself to be and will continue being an enormous strain on our economy.

The End

When will this second phase, the energy and economic struggle as we know it, end?

Well, if we can agree on its beginning as when the first major producer peaked in crude production, then it would fulfill my symmetric sensibilities to define it as when the last major producer peaks. This could be perhaps around 2030 as the late comers like Brazil, Angola and Canada begin struggling, squeezing oil out of the rocks that have advanced them into the status of exporting countries nowadays, using even more advanced methods to get it out of the ground and into our vehicles or into new carbon-fiber and plastics factories. Yes, even if we don't use oil for the usuals like transportation, it will still have its specialty uses.

Until then, the importance of the one or the other producer and consumer will continue shifting. Prices will generally remain high, skyrocketing whenever a crisis emerges and making a nose-dive whenever recession rears its head, stifling investment. Great price swings might be the norm if the market instabilities since the late 1990s and especially since 2008 continue. This is not a necessary - although in my opinion the most probable - condition.

One other possibility, that of permanent economic crisis in the developed countries and China, would have a strong calming although depressing effect on price swings. The worse the world economy is doing, the (much) lower prices will stay. The rebound in prices since 2009, for instance, was to a significant part resulting from governmental and central-banker attempts to sufficiently supply the market with liquidity. Of course this course has helped save the world economy for a short while; but excess liquidity tends to flow to many of the places that make the "bleeding" of the original wound get worse. High oil prices flood producers with "petrodollars" that need to be re-invested in markets (stocks, bonds, real estate, etc..) and/or in new/excess equipment or in often unrealistic infrastructure and monumental building projects which lose most of their value once the petrodollar spigot is turned off.

At the same time, high oil prices insure that producers continue investing in extraction and in laying the groundwork for more oil production.

The final major property of the second phase in the Age of Oil is a conscious consideration of how to get out of the Age of Oil. Here I'm not talking about general or parallel progress in the form of the internet or mobile communication which accidentally may reduce our need for oil products. Rather, it's the search for alternatives. What are we going to replace oil with? How are we going to change operations in order to replace or conserve oil? What near-oil substances (gas to liquids, coal to liquids, bio to liquids) can we use as a shortcut to creating oil from scratch? Who is going to be a winner or loser in the replacement game?

This is a process that started long before the oil crises of the 1970s as atomic energy was hailed as the replacement to fossil fuels by the godfather of peak oil himself, Marion King Hubbert. It should have been a gradual and unnoticed transition, first replacing dirty coal for our electric stations and then powering batteries and overhead lines for transportation. Until, of course, it became obvious that atomic energy is not very cheap, has serious waste issues and gives everyone a big scare whenever an accident is on the news. Disregarding the tangible consequences, the dangers involved are quite bad for publicity. Besides, uranium has depletion issues as well.

So what we would call the modern conversation about and search for alternatives began in the 1970s. Solar was, of course, the only real answer at the time. At the same time, regulations for scrubbing hazardous emissions out of the smokestacks in the coal power plants were mandated, so that they didn't need to be replaced so fast by alternatives. (This looks like it will be repeated by filtering carbon dioxide out of the power plants' smoke stacks.) As oil prices fell in the mid-1980s, the search for alternatives almost came to a halt, transforming more into an ivory tower discussion. We shouldn't forget that despite this, there were great theoretical strides achieved in such areas as wind, so that wind has become an option in certain regions of the globe on the same ranks as solar in the desert.

What amazed me and made it clear that hardly anything had changed in the background discussion since the first oil crisis was in the press. The articles from 1975 looked exactly like the ones from 2005. A few of the details may have changed, but the solutions-discussion remained fairly constant. The technological advances since then have made it possible to go large scale on wind and solar, as countries like Denmark, Germany and Spain have shown. Battery technology has made great strides, not least because of the laptop and cell phone boom throughout the world. At the same time, production prices for alternatives have not nearly dropped enough for these technologies to come anywhere close to being competitive to fossil fuels.

So until this happens - either by oil prices rising too high or the prices of alternatives falling low enough or, completely independent of price, supply becomes too unreliable to depend on - we'll remain in Phase II of the Oil Age. Which brings us to the question of when the 3rd (and final) stage will begin. Well, let me start with the negatives.

It will not begin once global oil production peaks, like it actually has been doing at least since 2005. (As it already had artificially done btw between 1979 and 1984.) And it won't begin as a result of some economic or political crisis or even from a minor war in the Middle East, for instance. Unless, of course, the timing just happens to coincide with the true indication that the third phase has begun. Economically speaking, the indication could be that more transportation is powered by electricity than by internal combustion or simply that more cars are battery powered than run on oil derivatives. Geologically, I have already named the indication: That the last major oil producer peaks, although we can certainly debate on what connotes a "major" producer. Another sign would be that production drops around a rate of 2% or more.

Just consider: The U.S. itself has been living in a "post peak" world now for four decades. Much of this time, however, there was not even a regime of high prices, a major difference to global peak. As a result of the world peaking, prices will probably stay high and (until the second phase is truly over) continue rising, no doubt. At the same time, not every region the world over will be living in a post peak world, meaning they could even be making the profit of their lives.

Whether the world quits using great amounts of oil because the new technologies and systems make it simply obsolete and undesirable or because there is not enough of it and/or oil is too expensive to use is for this reflection non-essential. It will most certainly be a combination of the two but will only occur once oil has been scarce enough in a long enough timeframe that we have to be weaned off it. If prices were to go back to what they were during the 90s for even a few years, enough people would once again stop worrying about alternatives while most producers would hardly be able to make profits, halting investment. But since it is extremely unlikely that lower prices can be maintained for any extended period of time, we will continue looking for the way out of the predicament.

And continue to hope to find a workable solution.