[ceasley7]

I find the argument between geologists and cornucopian economists on the issue of Peak Oil fascinating. I believe they are both right. Warning, a have a minor in economics. For me, neoliberal free trade dogma(We're all gonna be rich-its not zero sum- its win win-what hogwash-ask the Chinese mercantilists if they believe that nonsense) discredited the profession for me in university not to mention that not one "mainstream" economists warned us about the dotcom or housing bubble. However, they do provide some useful information when it comes to the affects of pricing.

Higher prices definitely brings on more oil supplies either by unconventional resources, tar sands, tight oil, offshore drilling, etc., of course the question is will the new supplies not only offset depletion but will they also increase production, which IMHO, the economists gloss over. For example, China's oil consumption increased 6% last year to 9.5 mbd, at that rate of exponential growth they will be importing 19 mbd in 12 years. It's amazing economists believe that this exponential growth can continue totally ignoring the geologic oil constraints being warned by many geologists. Not to mention pricing and what affects it will have on China's consumers the United States and Europe. Economists=BAU at all cost. It's a religion.

Of course, substitution is also a favorite of economists like natural gas vehicles and electric cars. So the shale gas revolution have them claiming victory in the cornucopian camp. I believe they are a little late to the party. Somebody in a previous post mention a capital crunch being the ultimate problem for mitigation. I couldn't agree more. Capital constraints for the CONSUMER(therefore business) will overwhelm the solutions before they are ready for the party. Anyway the exponential function pretty much nixes ng as the savior for vehicles even with the so called 86 year supply at CURRENT RATES of consumption.

Geologists point out the finite planet, hubbert's past prediction for the U.S., scale of mitigation, and basically reality. Speaking of geography, I believe Iraq's potential is the last great question mark? And that's primarily political I believe. It could move the peak back 5 years if we are lucky. So, I've come up with my own theory.

It has been stated that we will view Peak Oil in the rear view mirror. I defined oil as C+C, tar sands, tight oil, not ethanol, some NGL since they can be substituted for some of the feedstock(?) that represents 15% of a barrel of crude and NGLs can be mixed in with gasoline(?). NGL's are still only 65% BTU though sort of like ethanol. Oil is definitely a just in time industry. Everything that comes up basically gets used up pretty quickly, storage is irrelevant, it would be used up in case of a catastrophic calamity fairly quickly.

Well the nature of the industry is they want to sell everything they bring up and to do it at the price that will maximize profits. Basically, gasoline will stay below $5.00 a gallon until Peak Oil hits, it will fluctuate between $3.25-$4.75 range, as we continue along the plateau to the ultimate hard summit, like it has the following 4 years until we finally cross the Rubicon. Why?

The United States is still the lynch pin of the global economy. If gasoline goes too high here in the United States then it causes demand destruction and less global trade. Say what you want but when it comes to trade the global trade market is highly efficient(notice I didn't say the stock market)We are already seeing this with Europe, with their sky high gasoline and diesel prices being just one factor, trade is decelerating with China .

So gasoline must be priced perfect between production and geographic constraints and consumption by the public. At $5.00 a gallon + you will know we have past peak because at that price economic growth will cease to exist and the economy will enter a steady state economy if that is possible in a debt based capitalism system which I doubt.

5.00 a gallon U.S. is not rational from a global marketplace view therefore the irrationality has to be attributed to something and that will be the Hard Peak of geographic oil. One consequence of this will be the $300 billion trade deficit with China will also hit a peak and reverse due to less and less money in the american consumers pocket to buy their cheap stuff, at least the americans left with jobs. So it makes no sense for the business community to have $5.00 + gallon gasoline.

The average family spends $3300 a year on gas modeled on $3.25 a gallon. I just don't see any slack left in the system. The consumer's capital crunch will be the final problem. To transition to ev's and ng cars and hybrids you need capital. Who would be comfortable right now being age 24 and deciding to get married, have two kids, and then take out a 30 year mortgage unless you have a job in the energy field. Not mentioning food, utilities, health insurance, car insurance, t.v. internet, mobile phones, gas, clothes, unexpected expenses, vacations(?), and the list goes on in a complex society like ours which is primarily credit based.

Of course this perfect pricing mechanism built by the markets means we will use up the available oil left that much faster and once we go over the cliff there is no turning back because there will be no more slack in the system. There won't be any new substantial areas to drill, the real area of growth, and technology will only help to mitigate the decline like the tight oil plays here in the states. So keep your eyes on the prize. $5.00 a gallon in the States equals Peak Oil Rubicon. Things will never be the same then. Only continued demand destruction(code for third world) will keep whats left of the system functioning if that's possible. Everybody else can go to hell and starve. That's basically the TPTB(Davos) message because the only message coming out of their mouths is BAU. It's enough to make you believe in the Devil.

[Corella]

Hi Ceasley, could you explain to a layman (me), why a financial collaps is necessarily TEOTWAWKI? Isn´t it just a different (severer) stage of an allocation problem, worse enough, but theoretically solvable? Debtees will loose their money, the world stops breathing ... ... but why would reboot not be an option? And in case new oeconomics would focus on less consumer crap there would still be some cheap enough energy, buying time to us getting away from fossils. Theoretically just a matter of organization skills.

[Plantagenet]

why would reboot not be an option? And in case new economics would focus on less consumer crap there would still be some cheap enough energy, buying time to us getting away from fossils. Theoretically just a matter of organization skills.

Yes, theoretically just a matter of leadership and organisation skills.

But leaders with organization skills, understanding and vision are severely lacking right now in DC and in the EU and other countries. So far Governments in the US and Europe are more concerned with which bankers, deadbeat countries, bankrupt corporations, real estate speculators etc. get bailed out then with any kind of transformative plan for the future.

[ceasley7]

Corella, I'm a layman too. My degree is pretty much worthless. I don't know what's gonna happen, just pure speculation. Does a financial collapse necessarily equal TEOTWAWKI? In 1929, it did for the vast majority of the world, only they wouldn't really feel the effects for several more years. The 1930's was a soul crushing time for a a large swath of America. Led to Hitler coming to power, the rest is history. And that was a simple stock market crash and we were a trade surplus nation. We were still living on a sea of practically free energy. Makes you wonder why it took so long to come out of it? Probably, the BAU religion prevented a faster resolution and really only full production from WWII pulled America out of it. Some things are better now, we have Social Security and Medicare for the old and foodstamps for the eligible americans. Of course our debt is going to the moon which is a scam anyway. We could always issue Greenbacks like Lincoln did to win the the Civil War. That is currency without debt attached to it. Won't happen though. Too many powers(banks) would be opposed to it. They would scream inflation. If you only help out those most unfortunate, you don't have to worry about inflation. I seriously doubt that Food Stamps($200) a month for an individual is driving up Food Cost. You could I guess let them die and that would definitely depressed demand but even the BAU crowd should surely see this would hurt the profits of the food companies.

Back to your question. In a perfect world this would be easy to mitigate, however, we know the score. Ego, vanity, Pride, Ideology, hubris and on and on. The least admirable characteristics of mankind IMHO makes this a most difficult task to address. Not that I'm any better. Therefore, I agree with your assertion that theoretically its just a matter of organizational skills if we were communist(to each according to his needs), However, we are capitalist and fascist on top of it. The state and industry are one and I'm not bashing it. It is just the truth. Our way of life based all on oil has led to an astounding degree of advancement and complexity, therefore, being our Achilles hill also.

I also agree we have enough cheap enough energy to mitigate. When I say mitigate that is not BAU. Who is going to be the first industry to sacrifice themselves and their families for the greater good. Who should choose? Isn't the market the most efficient figuring this stuff out? How about the cornucopians? They really believe in substitutes. Maybe they are right. I don't think so. The cornucopians and BAU crowd are going to gamble on the lives of billions to turn the titanic before it hits the iceberg. Better to hit the iceberg head on therefore saving the ship from sinking and calling for another ship to come rescue them. You will still lose the titanic(BAU) but save the people.

At a minimum we should have leaders say you know what let's limit kids to one per couple until we figure this thing out are at the most two per couple(replacement) Oil is the blood of the body. Debt is meaningless without the availability of semi-cheap energy for vehicles 20-30 years from now. But there is no leadership therefore no Hope as far as I'm concerned. The poor will be sacrificed first like always unless mankind has their Road to Damascus moment.

[ian807]

Hi Ceasely, I have a slightly different take on peak oil, economically speaking. I think the critical factors are production price and energy return on energy invested (EROEI). Put simply, as oil production prices increase and energy return decreases, oil becomes less useful to the world as an energy source, UNTIL, (and here comes the punch line), it results in cascading failure of supply chains, initially as a result of increased transportation costs.

Why? Any given product or service is dependent on capital, energy for transport and manufacture, and other supply chains, including the supply chains directly involved with energy production and distribution. This kind of system feedback guarantees that when these fail, the remaining supply chains all fail suddenly, and from the viewpoint of our lifetimes, permanently.

This doesn't need to happen, of course. Transportation is our Achilles heel. If most of our transportation system was electric or gas powered, this would be an inconvenience, but we might have a century or more of transition time.

[ceasley7]

Interesting ian807, feedbacks is what it's all about and yes the negative feedbacks of increasing oil prices will lead to decrease manufacturing worldwide due to everybody being poorer due to increase spending on transportation fuels. For example, the average american family spends $3300 a year on gasoline if that goes to $5000 then there is $1700 less to spend. All things being equal something has to go. Car Insurance? Nope Health Insurance? Probably not? Probably still increasing. Food? Some substitution to lower value goods. Taxes? I wish. Housing? Nope, rents are going up, basically the worst of two worlds. We have inflation for services and energy/food and deflation for housing(asset). So less products and services in the aggregate will be bought due to increase cost of transportation fuels.

And you then state that less will be spent on the supply chains directly involved with energy production and distribution because there will be less demand for products and services. Never really thought about it. Makes sense. If momentum is really broken then yes I could see some of the remaining energy reserves left in the ground. This would imply a faster unraveling than I envision maybe for the best. Of course, population growth might negate this break in momentum unless we plan on not feeding the baby.

I agree for our lifetime only transportation is our Achilles heel. I'm forty and not worried about the lights going out in my lifetime. I am worry about job prospects in the future that will enable me to pay the light bill. As for ev's and ng vehicles. I definitely believe they are part of a solution. I desperately want to believe in the shale gas revolution and do somewhat. The market price being one confirmation for me. I'm just somewhat hesitate to jump fully on board since the U.S.G.S. and I believe E.I.A. reduced the technically recoverable reserves in the shale areas dramatically.

On the other hand we have 250 million vehicles in the U.S. and less than 0.1% ng vehicles. Same with ev vehicles. We need to start and by the time we are scaled up will there be enough of us citizens left to make a difference(having enough capital) to purchase these vehicles.

[rangerone314]

According to the Hirsch report, we need to start peak oil mitigation 20 years before peak for a decent transition. For a crash program, ie moon landing or Manhattan project, we need 10 years.

According to the Australians peak of conventional crude + tar sands + deep water = 2016, which is 4 years from now, not 10 or 20. If the Saudi's, Iranians and others have lied about their reserves etc, then there will be an even steeper decline from what the Australian government energy report indicated. (which I think was a 25% decline from 2016 to 2035, during which the world's population will have swelled to perhaps 9 billion.

I believe that represents a 42% decline in petroleum production per capital for the world (during the rise of China, etc)

Translation, we're out of time.

[ceasley7]

pstarr, yes I had read that the economy goes into recession when oil exceeds 5% of GDP, probably read it here. That's why I believe we are still basically at stall speed. The GDP number of 2.8% rings hollow to me. Until I see Federal Tax Receipts improve much just call me skeptical. The unemployment number is basically a cruel act of manipulating statistics. Plus the Baltic Dry Index dropping to Hades along with the depression in southern Europe confirms for me we are in a Global Recession right now. Of course, feel good economic statistics is to be expected in an election year.

Not really read up on EROEI, but the way I understand it basically is that non-conventional oil costs more because it is much more capital intensive to get out of the ground.

[The Practician]

Not really read up on EROEI, but the way I understand it basically is that non-conventional oil costs more because it is much more capital intensive to get out of the ground.

That's pretty much all you need to know. Big picture, the price/affordability of pretty much any good is a reflection of the embodied energy of the product.

I've said this before and I will say it again here: The OEI, or what has been called "economic peak oil," is really just EROEI peak oil for people who have an easier time thinking in Dollars than Joules.

[Pops]

I'm still up in the air about whether it is absolute price or the rate at which the price rises that does the most damage. Heres gasoline in the us in nominal dolars:



In '03-'04 people were still living high and filling up from the 3 bedroom ATM. There were occasional stories in the MSM about gas prices but I think folks believed as soon as we "drilled-baby' that prices would come down. By '05-'07 we were getting spikes over $3 every summer - twice what we'd been paying in '03.

The thing is we've not seen less much less than $3 unleaded in over two years now and doesn't look like we will anytime soon. Based on the oil price I predicted the start of the recession would be pegged at May of last year. Things slowed some and almost went backwards (and probably did after all the revisions and stimulus and SPR releases, etc are tallied up) but not as much as I thought - good evidence that predictions aren't my strong suit, LOL.

The thing is the economy has adjusted to gas at $3. We've become more "efficient". The efficiency was acomplished by sloughing off extraneous jobs, unserviceable mortgages and unprofitable businesses...




I've been saying $100 oil is the limit for the economy. That the price of oil just can't rise higher for long and in fact, each run at $100 would make the economy less able to stand high prices, so instead of the price stair-stepping up it would be forced to stair-step down. I think of the green lines on this chart as demand growth pressure from non-OECD economies and the top red line as demand destruction from the OECD countries:



My current prediction (LOL) is that the price will stay within a $100-120 band this year, that since everyone is a doomer now, everyone will be treading softly so no big booms or busts. But as the wedge narrows through '12 & '13 we'll get an idea of which way things may go, a more "efficient" economy that allows fewer to use and pay more or a more "efficient" economy that forces everyone to use less and so pay less.

Either way we'll be more "efficient".


A good article

[SeaGypsy]

Funny I won the last 2 WTI forecasts based on gut feeling based on some vague semblance of an understanding of this Pops. Your graphs will help me explain how I 'knew'...

[dsula]

I've been saying $100 oil is the limit for the economy. That the price of oil just can't rise higher for long and in fact, each run at $100 would make the economy less able to stand high prices,

What's the logic behind that? I'd assume that after each rise in price the low level users will be cut, leaving the oil left for uses that truely are beneficial.
E.g I'll be easily willing to pay $50/gallon for gas for my chainsaw.

[Pops]

I don't think fast and slow effects are mutually exclusive. I think $100-125 is where the absolute ceiling is right now and a buck a gallon or more is the "shock" threshold.

The quick run-up last year slowed the economy to a near stop. But the price of gas doubled between 2002 and 2004 without a recession. OTOH, the slow crawl to $100 just about killed the US car industry, put the hurts on drive-to-qualify commuters, et.

The correlation between oil shocks and economic recessions appears to be too
strong to be just a coincidence (Hamilton, 1983a, 1985)

http://dss.ucsd.edu/~jhamilto/oil_history.pdf

From my link in the previous post (2005)

A 2010 study by economists at the St. Louis Federal Reserve Bank agrees: “For most countries, oil shocks do affect the likelihood of entering a recession. In particular, an average-sized shock to WTI [West Texas Intermediate crude] oil prices increases the probability of recession in the U.S. by nearly 50 percentage points after one year and nearly 90 percentage points after two years.” On the other hand, a 2005 study by the Stanford Energy Modeling Forum found that “when oil prices move gradually higher (perhaps somewhat erratically), as they have done over the last several years, they do not directly result in economic recessions, even though the economy may grow modestly slower.” Gradual price increases do not derail economic growth because consumers and entrepreneurs are able to adjust smoothly to them.

http://reason.com/archives/2011/03/08/o ... -the-reces


Regardless of whether prices climb fast or slow they obviously divert money from other spending but probably the effect is different.

If they climb over a long enough period, adjustments can be made - and will be made if the signal is strong and steady enouogh and the MSM blah of the moment isn't diverting attention by talking about short term supply problems or ignoring them altogether like the first part of the oughties. Buy a smaller car, move closer, etc all lower exposure and even provide a little economic activity in the process. Still, some areas of the economy are starved and die.

If they rise faster than people can, or believe they should, try to accommodate, then the chilling effect on other areas of the economy is quick and widespread because the ways to mitigate are limited - except to quit spending elsewhere. Again like Libya last year.

You've seen this from Huntington I'm sure
http://emf.stanford.edu/files/pubs/22457/EMFSR9.pdf

[Cog]

I think Pops has nailed the price range at which OECD economies start to slow down or even stop growing in an economic sense. That being $100-$120 range. We are there now and we see it in the US and Europe.

[rangerone314]

I think Pops has nailed the price range at which OECD economies start to slow down or even stop growing in an economic sense. That being $100-$120 range. We are there now and we see it in the US and Europe.

Yup.

Deffeyes on his Princeton site a while back estimated about 5% of GDP, and that range is right in the ballpark of that.

[Cog]

The other problem associated with even a gradual $10/bbb/year is this. Middle class wages are basically stagnant and have been for years. That great mass of people are being pinched by all this rise in price. Now it certainly valid that people need to make choices to cut their consumption of fuel in whatever ways that they can. Some of those choices will send ripples of doom to certain parts of the economy that can scarce afford it.

I'm having difficulty seeing how this ends well.

*Edit

Not to hijack this thread but I wanted to add that the USA and EU need to proceed with a lot of caution regarding Iran. A miscalculation here could be rather devastating.

[ralfy]

Probably related:

"Our Oil-Constrained Future"

http://motherjones.com/kevin-drum/2011/ ... ned-future