Peak Flows – Part 2

It’s the flows stupid!

Peak oil should be renamed to peak flows. Peak oil is seen by the majority of the public, at least those who have at least become conscious of the term, is the date when we run out of oil. Since oil is “everywhere” with new discoveries being announced every week they ridicule the preachers of peak oil as being out of touch or on the lunatic fringe. “Why everybody knows we have enough oil to last the rest of the century.” Nobody, and I repeat nobody expects oil to disappear in this century. They will still be exploring and producing 100 years from now. The problem is peak flows.

When the quantity of oil coming out of the ground begins to decline as expected in 2010 those 2.5 billion emerging citizens will still be trying to grab the brass ring of the cheap energy society. Only it will no longer be cheap. Demand will continue to rise as each decade sees another billion added to the population but oil production will be declining. Growing demand along with declining production. It will be the end of civilization, as we know it. I know that sounds like sensationalism but it is true. Every single barrel of oil will be the object of a bidding war. Cheap oil has produce the civilization we have today. In the history of our planet the biggest boom has been in the last 100 years since oil production and the internal combustion engine revolutionized the way we live. 50% of the oil ever consumed has been consumed in the last 30 years. Take away that life blood of industry and transportation and the world will be a very different place.


Once the decline begins and the bidding war starts, mankind will have to make some very important decisions on how they want to use the remaining oil reserves. Since transportation consumes 90% of the oil produced today that will remain a very big segment. However, we also need to consider the oil used for pharmaceuticals, plastics, fertilizer, pesticides, fabrics, paints, coatings, lubrication, etc. There are said to be more than 100,000 products made from oil and oil byproducts. Which segment is no longer going to get their share? As oil production declines there will be a constant battle by the manufacturing sector to acquire enough oil to continue making their products. Dow Chemical said last week that the cost of oil to make their 2500 product families will reach $40 billion in 2009 compared to $9 billion just five years ago. This is with oil at $130 a barrel. What about $250 a barrel and a price we will see as soon as peak flows is proclaimed. You have heard me warn about the airlines long before the current crisis. How many will remain flying at $250 oil?

People ridicule me when I claim $200 or $250 oil. I get emails all the time calling me the equivalent of Chicken Little. They use to email me back in 2005 when I was calling for $100 oil in 2008. I can’t tell you how many people told me I was crazy and oil would be back in the OPEC basket range at $30 before the year was out. Let me tell you how to calculate the price of oil. Today we have demand at 87 mbpd and “assumed” production capacity of 88.5 mbpd. We have never produced over 87 mbpd so we don’t really know if that assumed production actually exists. If demand is 87 mbpd and production of 87 mbpd then price should remain fairly constant. We have an equal number of buyers and sellers. Obviously this is a little more complicated since there are different grades of oil, light, sweet, heavy and sour. That is what is driving price today but let’s disregard that for this discussion. Once oil flows peak and begin to decline the pricing picture changes. With just a million barrel per day decline the current oil price mechanism will explode. With demand of 87 mbpd and production of only 86 who gets left out? Obviously some segment of the industry will be shorted. Today somebody will not be able to find oil. Tomorrow somebody else will not be able to find oil. Remember a drop of a million barrels per day is 7 mb per week, 30 mb per month, etc. It is not a temporary problem but a permanent problem. Every day that passes thousands of buyers will bid higher than the day before in an effort to buy some oil. If they can’t buy oil their businesses cannot run and products cannot be made. Refiners will try to lockup as much supply as possible to assure their ability to make gasoline, diesel and jet fuel. As each day passes and the accumulated market shortage grows more severe the prices people are willing to pay will rocket higher. What price is too high to prevent your company from going out of business for lack of oil?

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