The 3 Phases of the Age of Oil: Transition continued

Even though we are somewhere in the middle of the second phase of the Age of Oil, somewhere around global peak, we have only recently begun the transition away from it. This is mostly to be seen in developed nations, where absolute oil (and, of course, relative) usage has fallen and large subsidies have been awarded to promote renewable energies.

In the same respect, the transition will hardly be complete as the second phase of the Age of Oil comes to an end. It will most certainly be well under way, and perhaps the winners - both the regional political winners and the respective technologies - will likely have become evident. Oil as a commodity, on the other hand, will not lose its general importance (e.g. as one of the main ingredients for the chemical industry) but will have begun to lose its universal usage that it has in certain sectors such as transportation today.

Likewise, oil's global peak of production is turning out not to be very sharp (meaning it hasn't moved up and then back down again within a short couple of years) but is coming more in the shape of a plateau which will eventually start dropping, probably at about the same time that Saudi Arabia's production begins to falter. This is, of course, a personal guess - maybe it will coincide with Russia's fall instead.

Global production will most likely begin falling gradually while individual countries / regions continue adjusting consumption patterns, just like they started to within the last decade. It is even possible that some countries further ramp up on oil use, mostly because of their present momentum - and here I'm not only thinking of China. Parallel to this, there will just as well be producing countries that increase production - and most likely their consumption as well.

But once production goes from its nearly 75 mbd of crude which has been the hard top since 2005, to under 60 mbd - the levels before the mid-1990s: even for such countries, rationing (usually in the form of "exotic" pricing) will most likely begin. Goal for them being to export more, drawing in more hard cash for the local economy.

That's when the second phase will have come to an end.

Phase 3

The world that peak oil buffs see coming after the peak is probably the one that begins in what I would like to call the third phase. By that time, either we will have found viable alternatives and systems to replace and/or transform our present economy, or we won't have.

Now, this might sound like an obvious statement until we look at it more deeply. At the present, society tends to think that we only need to replace the energy source and continue on as before. And if the new source has a different form than liquid combustibles, then we have to change our usage. This is being done at the moment with transportation, for instance: Instead of oil, electricity is being offered as a fuel.

Just consider: I can't put electricity in the car in my driveway, so it doesn't work just to replace the fuel. I also need a new car packed full of batteries. Of course, I'm not alone in needing a car, meaning that electric cars need to be introduced in a big way. And the whole infrastructure that goes along with it. And the supporting energy has to be ramped up and manufacturing switched over to produce it. At least a billion cars will need to be built with lithium-ion batteries to make the new system work.

Is this even possible? Will we even be able to supply enough lithium for them all? Or will human ingenuity come up with a new battery composed of even more abundant materials than Lithium, for instance?

This assumes, of course, that enough electricity will be produced to power the cars day by day. And because it is a replacement of a more efficient (direct) power source, the back of my envelope says that it amounts to about 100% new production above today's.

With this simple analysis we see that nearly 40% of our primary energy usage needs to be replaced, meaning that even without considering our present infrastructure of coal and nuclear power plants, we would have to ramp up production of renewables and/or coal and/or nuclear enormous amounts. Or do you really think that our democratically chosen politicians and profit-driven markets will choose the environmentally friendly approach to this, only using renewables?

Again, I'll put this into the category of "hope", hoping that we can successfully make the switch to electric without civilization mostly crashing along the way.

Of course, this is a very simplistic way of looking at things in which we "only" need to find new energy sources and build new infrastructure. Whether the medium is electricity or hydrogen or a number of different possible carriers, the scenario remains the same, with electric production supporting the whole structure.

On a more differentiated approach, we will more than likely be able to (rather: be forced to) find alternative ways of running our economies and our lives that don't use the same sort and/or amounts of energy. For instance, we might telecommute to work. Or we might not even "work" the same way that we do today. We might become a civilization of free-lancers and day-wagers, for instance, reducing the amount of energy we use immensely by staying home a lot more. On the energy side of the equation, this scenario means we will stop using oil products to get to work while using electricity to run our cyber-offices, our automatic transportation trains, etc.. Primary energy use would then generally drop significantly, perhaps compensating for the lack of access to oil. The hope is, that the quality of our lives will not suffer. However, this still requires an increase in electric use while we mothball our SUVs.

This sounds like the easier, more doable path: Less energy use combined with a quantum leap in virtual activity - with an aging population anyway; less general consumption while paying back government and private debt - and, of course, cleaning up the banking system.

But isn't this a perfect cocktail for a shrinking economy?

A shrinking economy leads to less income for governments, which leads to more relative debt and the need for stronger budget cuts, which puts less money back into the economy. A very vicious cycle that can be presently testified to by the Piigs - of course with their quite individual themes and characteristics, they can somehow be put in the same category anyway. Right now, while the world economy is still generally expanding, there remains a reasonable hope that such countries/regions could hook back into the obviously still expanding world. Once the global economy leaves the course of expansion, however, what hope will we have for all but the fewest "lucky" economies around the world, which either just happen to have the right goods and resources need by all or with an ingenious long-term leadership?

Which leads us to the conclusion that two things need to happen to not fall into the peak oil trap of a shrinking economy as described above –

1) replacement of energy sources and infrastructure while

2) revamping our economic paradigm based on expansion to one that can just as easily contract without leaving carnage in its path.

And hence peak oil's despair: If we accept these premises, it would be more than likely that we fail to establish a new working macro-system, waking up one day in an economically obviously dysfunctional world. In that case, oil restraints will then translate directly into poverty, not only in the usual culprit countries like sub-Saharan Africa, but also in countries that are considered much more advanced. Region for region, country for country, class for class will lose its connection to prosperity.

Of course, between hope and despair is a third route. And many variations of it. For, as John Michael Greer never tires of pointing out: Once peak oil has set in, we have no notion of what the world could actually look like. We have never been there before. It will be like landing on an alien planet we've seen from afar through a telescope, not knowing what to look for - but finding out what reality looks like once we're there, all the same.

Now, I am not convinced that industrial society will disappear or follow the way of the Roman Empire, disintegrating into a dark ages. For the most part, we will make do. But what does that mean? Most of us will experience this as being worse than today - more difficult to get by, benefits being cut, relative poverty in old age. Some of our energy slaves, things we take for granted day for day, will be taken away - but not all of them. We will learn to conserve a lot - but not go back to depending on our own canning, for instance, to survive. The world will not turn back to becoming something "made by hand", as James Kunstler presents it. The suburban intermezzo, on the other hand, will quickly fade away, just like the ex-urban has been doing since 2008. It will pay to shorten our supply lines and to develop "smart" logistics.

After presenting all the "nots", it simply remains the question of the "wills". What will it be like?

We will work harder. And more of us will work/ need to work to make ends meet. At the same time, unemployment statistics will skyrocket, if only because established institutions will be laying off, going bankrupt, rationalizing anything and everything that isn't completely necessary. This may seem like a contradiction, except when we realize that this can only work if we give up a great deal of our income and well-paying jobs. And it's not like we'll be giving them up (as if we had a choice) but rather, they will simply disappear.

Black markets and mafia organizations will thrive, while the state will be busy fighting off Soviet-style collapse, never really re-experiencing the Russian re-birth as the new millennium began. Shadow states, in whatever form they might take, will become common as the funds in the public sector needed to counter such power struggles dry up.

But we will have our i-phones. Even if we have nothing else, these electronics will disappear as likely as the radio disappeared during the Great Depression. There may not be enough to eat on the table, but we'll give anything to be connected and online. Granted, there is a possibility that we lose contact to our communications satellites or that communication towers be demolished and used as building materials etc.. like the coliseum in Rom was used as a stone quarry after it was no longer functional nor needed. Well, how about setting up a neighborhood watch with sharpshooters against those trying to steal something from "our" communications towers?

Nevertheless, however connected we are, the trend in our physical surroundings will certainly be shrinking. Instead of the increasing amounts of living space that each of us has had the past century or more, we will learn once again how to be "stacked" on top of each other better. The closer we are, the less energy will be used in such undertakings as climatizing our living space and supply logistics. Now, although we'll be closer together physically, using all the tools that we have developed the last years will allow us to experience a much greater virtual space which is at our disposal - another way of changing our immediate experiences to and with our surroundings.

This middle scenario between hope and despair includes for this reason both expansion and contraction. One clear megatrend will be a more or less speedy transition away from the transportation paradigm of the 20th century based on a car for everyone. This doesn't necessarily mean that we'll give up the car - just the idea that a car or two belongs in each of our driveways. Many non-poor city dwellers throughout the world have gotten along very well in life without one, while knowing the time-tables of the public transportation system better than the multiplications table. Besides, who would say that a "smart" transport system isn't in the cards?

Likewise we need a different support of and activity for our economy which replaces the purchase, financing, upkeep and fueling of the automobile. Smart phones and laptops, despite their great improvement within the Information Age, hardly replace the sums of money, (meaning economic activity) which flow through the car industry. Housing and perhaps smart homes will continue to be a great part of the economy - but the gap left by the automobile will not quickly be replaced. And if not, then contraction is already programmed into the cards.

What could the next big thing be? Well, here is not the place to try to come up with new ideas but to discuss the general scenarios: hope, despair and making due. For, yes, we need a solution. And when I discuss "finding" a solution, I don't mean scratching it onto a piece of paper or model it on a computer. This is not a "all we have to do is.." type of thing, not a one-problem puzzle. Change our energy source. Change our infrastructure. Change the way capitalism works. Change the way the markets and our monetary system work. Change our lifestyles, our settlement patterns and our logistics. And the question of whether our world is about to get so much smaller, as some peak oil economists would suggest, depends our how we "transform" our society in these points and many others.

Again, it's not necessarily a question of single solutions. Instead, complete systems need to be exchanged which function in the real world with real politicians, businessmen, workers and families that have to care for an aging population - and which require a functioning economic and monetary regime. For it has been our present economic regime that has been causing serious problems in a big way at least since the Japanese troubles began after 1990. Our ready supply of energy has most certainly compensated for our monetary constraints over the last century - a role that it will not necessarily be able to fill in the future with a shrinking resource base.

Therefore, I don't think it will come down to whether there are enough energy solutions and corresponding human ingenuity in the physical sense. Instead, it might just come down to a monetary system that fits the physically "shrinking" world of the Information Age instead of the expansion of the industrial era.

For let's not forget that it took until the 20th century to come up with a system that replaced hard currency, for instance - the bane of capitalism: Long periods of depression, despite technological expansion, visited the West basically everywhere for the most of (and especially in the second half of) the 19th century. Occasional gold rushes with the corresponding expansion of money supply relieved the general depressive atmosphere. Fiat currencies, which allowed money supply to grow along with the general economic growth, finally relieved the situation. Of course, not without growing pains such as the German hyperinflation of the early 1920s, the British return to hard currency in the mid-1920s and the ensuing world depression of the 1930s.

Will it take just as long for us to come up with a replacement or improvement of the "fiat" system that will fit the coming era? Let's hope not.

These are some of the fears which are running through the peak oil community: That on the one side we will have less power input from fossil fuels (especially oil), causing economic development to stagnate. On the other side, there will continue to be an economic/monetary system which depends on the collection of interest, which itself depends on an expanding economy and yearly increasing tax income. On the investment side, this is translated into the fact that the stock market demands a return on the capital tied up there. Profit. Now, most stocks are owned by institutional investors, meaning insurances and pension/endowment funds are the ones collecting these gains. If there is no gain in the value of stocks and/or no dividend, these funds can only pay out of their base capital, quickly having nothing left from which to earn an interest. Such generational contracts such as the Social Security system in the U.S. and similar government retirement programs likewise depend on next year's income being higher than the last - simply because an increasing number of people are receiving benefits year for year while fewer are paying into it.

Re-investing

The final challenge on the monetary side goes another step deeper into the mechanics of economics, especially those of the capitalistic type: Corporately investing.

This activity is that which gives capitalism its name. For through the workings of the larger economy and flows of money, capital has the habit of accumulating in one or more areas, in one or a number of hands. At the same time, certain actors tap into such "depots" in order to accomplish larger projects like building a ship for trade, opening a mine or developing a piece of land into e.g. a plantation. Opening a factory and building a railroad were typical activities in the early capitalistic/industrial era.

In order to accomplish such feats, great amounts of capital need to be invested, but also need to be "freed up" i.e. extracted from other activities, restricting investments in some of the rest of the economy. Generally speaking, investment in one area pulls capital and investment away from the next. There is, of course, strong competition for investment capital. On the other hand, the dramatic expansion of credit associated with a fiat currency, while governments spend freely on the calculated income from future taxes, has relaxed the immediate correlation of investment in one area resulting in capital starvation in an other. One could even think that competition for capital would be regulated by interest rates.

Despite such expansion of credit, we have witnessed this phenomenon in recent years in what is known as the "Dutch disease". Investment and expansion in the natural gas industry in Holland meant stagnation in the rest of the national economy - at least until expansion eased and the windfalls could be exploited. After the new infrastructure and investment had been installed, on the other hand, the Dutch did quite well among the European economies. Once, that is, the fresh capital was producing profits and being freed up to wander elsewhere.

Because of this phenomenon, the real problem with transitioning from one energy source and energy infrastructure to another is not that oil products themselves become more expensive. Rather: Because of expensive oil, more capital will be needed to invest in replacing capacity either in oil production or in the production of other energies, be it solar, wind or atomic. These projects require enormous amounts of capital, which is taken away from other needy areas in the economy. And because the capital return may not be as high as in other projects (trade, real estate, internet), a lot of hype is needed to get this capital committed.

These thoughts are an introduction to the probable path much of the world will experience (have already begun to experience) during transition to the third phase of the Age of Oil. Between the scenarios of hope and despair is "making due" or malaise, the vision of a capital-starved world. In it, a lack of growth and expansion combined with the enormous primary investment needs of the energy sector and its related infrastructure and industries combine to create an anemic economic environment in more or less permanent crisis. At the same time, once the new basic infrastructure/paradigm is in place, capital could begin wandering back into competing sectors.

Once that happens, maybe we'll then start worrying about getting into space again!

At any rate, it's extremely difficult to describe the third phase, simply because this all depends on which of the three (or which of the many of the other possibilities) we will go down. With the information that we now have in front of us, the most probable is a semi-functioning form of malaise. The transition into it is the tricky part, one that could end up going any which way. This is quite different from the past 200 years, where the path that development followed would have not been so different, regardless of how history itself would have gone. Granted, it could have been faster or slower, depending on who had won the world wars and the fight for ideological primacy. In the end, though, the technologies would not have been generally different.

This is, however, a claim that I cannot prove - just like I cannot prove how the world is going to react to a depraved energy situation. And anyone who claims they know how the world will, in the mid-term, react is either an blasted genius, a true visionary or downright a miscalculating fool. And although I think that there are people who understand quite well how the world and its people function (J.M. Greer or on the psychological side Nate Hagens), I doubt that they can fathom how this future will be.