Peak Oil is You
Donate Bitcoins ;-) or Paypal :-)
Page added on March 24, 2014
Why peak oil signals the world’s end, or at least the one we know
While global financial markets are still levitating somewhere between the stratosphere and the Kingdom of Asgard, by 60°24′31″ North and 172°43′12″ West, in the middle of nowhere, an isolated island of 137.857 sq-mi holds the key of three major economic developments and risks:
- November 2013, Lawrence Summers raised the question whether the “secular stagnation” and the impossibility for the US and other major economies to grow without the help of recurring bubbles was not doomed to become the “new normal”.
- March 2014, the Conference Board released a study (figure 1) showing the falling trend in global total factor productivity, i.e. in the share of output not explained by the “accumulation of factors” (more on this economic jargon below).
- March 2014 again, the NASA published a research paper answering to “widespread concerns that current trends in resource-used are unsustainable, but possibilities of overshoot/collapse remain controversial”. This study tells us that, based on a well-known prey-predator model to which they add “wealth and economic inequality”, a total collapse is “very difficult to avoid” (figure 2).
Source: The Conference Board, January 2014
Source: NASA, 2014
1. – The tragic fate of the fat caribou, or why we have to fear the reindeer of St Matthew more than the wolves of Wall-Street
During World War II, the US Coast Guard decided to install long range aids to navigation in St Matthew Island, a remote rock in the Bering Sea in Alaska, and to stock emergency food source there. In August the same year, they released 29 reindeer (known as caribou in North America) on the island as a backup food source for the 19 men stationed there. As World War II drew to an end, the Coast Guard left the island and, by the same token, the population of reindeer growing unchecked as their only predators, the 19 men on duty there, were sent back home. It followed a dramatic boom & burst of population dynamics (figure 1). From 1944 to 1966 the number of these herbivores, which did not have to worry anymore about any predator and ate all the available lichen, increased from 29 to 6,000. In 1957, their body weight was found to exceed that of reindeer in domestic herds by 24.5 percent among females and 46.6 percent among males. Then, the following winter, as they faced a limited food supply to sustain their number and their massive body weight, they underwent a crash die-off, the population falling from 6,000 to 42 (figure 3).
There is a lot of food for thought in this story. First, as the NASA study suggests, when one species (for example the top 1 oercent living in the Galapogos, another rock ,as I put it in a paper issued last year “Why Kings of Galapagos are long equity under (mild) Mugabenomics?”) thrive to the abject detriment of another one (the lichen, or the “bottom” 99%), bad things eventually happen.
Source: The Conference Board, TED, January 2014
Source: Manicore
Second, and more generally, the point of this story boils down to the mundane fact that resources are everything, and when they vanish, the transition from a given state to another one, namely from unchecked growth and exuberance to complete obliteration, is dramatic most often than not. This holds all the more true for the key resource, i.e. oil, which brings us to the second chapter of our tale.
2. – The peak-oil: a conspiracy theory or a mandatory mathematical truism?
Most of the discussions on oil hover around the question of “reserves”. I am going here to state the obvious but the key argument to keep in mind is that these reserves are meant for one and only purpose: oil production. ….woooh!, that’s new, next please! Okay, but bear with me. Till someone proves me I am wrong, I assume that the volume of Earth is finite, so that oil reserves are finite. Now, for a given stock of non-renewable resource, all production functions obey to the same law: they start from zero, grow to a maximum and decline to zero in a “bell-shape” way (figure 4). Now, the area under this curve is called the integral of the production function and it is strictly equal to the oil reserves. Because oil reserves are finite, the integral is necessarily convergent and because they are non-renewable the production function (the derivative function of the oil reserve) cannot have another form than a bell shape. You can stretch it, you can squeeze it, but the general form is this one and not any other. This is mathematical certainty like 2+2=4. The peak-oil is a mandatory mathematical truism, not a “conspiracy theory”.
Obviously, the key question is: the “peak-oil”, is it for now?
Well, running the risk of stating one obvious thing after another, I assume that we all agree that a compulsory task to perform before extracting oil from the ground is to find it. This has profound implications as this makes us certain that a peak is mandatory given the resource potential of the oil field. It also tells us that the higher the proven reserves and the bigger they are with respect to production, the closer the peak of oil production (remember: the integral is the area under the production curve). If I take the example of the United-States, as evidenced by King Hubbert, there is a 35-year lag between discovery and production (figure 5). If evidence proves Hubert peak was a bit bad on timing, possible production curves, based on the world ultimate reserves. i.e. total extractable petroleum, suggest that the peak is now.
Source: Laherrere, 2003
Source: Manicore
This is old story and, as the world still goes around, one could dismiss all this analysis. However, what is new is that business conditions are becoming more challenging for the oil majors as figure 7 suggests. Indeed since 2009, the capital expenditures of ExxonMobil, Royal Dutch Shell and Chevron have increased by 39-89 percent while their production has stalled. This is the balance-sheet-based proof that the peak-oil is happening now.
Source: Wall Street Journal
Now, the last point on the peak-oil, and this is key to understand the third and last chapter of our tale. We have to keep in mind that when we hear that we still have for 20 or 30 years of oil ahead of us it does not mean that we live the “good life” for the next 2 to 3 decades with constant consumption and then, the year after, we fall straight to zero consumption in a crash die-off as our reindeer herd experienced. Actually, consumption will be following the bell-shaped production function, it will be a slow death, and in the meanwhile, as the oil majors experience, the massive rise of capital expenditure will be weighting on the marginal energy return of energy. Indeed, according to Kopits, total upstream industry spendind since 2005 has been USD 4 trillion (about USD 2.5 trillion spent on legacy crude oil production), and legacy oil production has declined by 1 mmb/d since 2005. By comparison, between 1998 and 2005 the industry spent USD 1.5 trillion on upstream development and added 8.6 mmb/d to total crude production. This declining energy return in energy production, which is nothing but the by-product of declining/exhausting oil reserves and the very fact we are experiencing the peak-oil, drives the whole economy down.
Indeed, though we live in the age of the “information technology” it is worthwhile to remember that the information society is an energy ogre (not mentioning the globalisation mantra which gives a central role to the transport industry which consumes two-third of total oil). For example, according to ASU engineer Eric Williams 227 to 270 kilograms (or 500 to 594 pounds) of carbon dioxide are emitted in manufacturing a laptop computer. Mark Mills , the CEO of the Digital Power Group, teaches us that a medium-size refrigerator will use about 322 kW-h a year whereas the average iPhone uses about 361 kW-h a year once the wireless connections, data usage and battery charging are tallied up.
3. – There is something deeply wrong about macro-economic theory
So how all this relates to the “secular stagnation” scenario and all the fall in total factor productivity. Well, this is where things get a little bit technical and where our tale comes (finally!) to an end.
Most economists are big fan of more or less complex equations designed to explain everything in a highly stylised fashion. In this quest, in order to explain the origin of economic growth, they use the so-called Cobb-Douglas production function which states that GDP (Y) is a function of technology (A), capital (K) and labour (L). More precisely, the Holy Grail equation takes this form: Y = A * Ka * Lb, with “a” and “b” the elasticity of production to capital and labour. Total factor productivity is for instance derived from this equation.
Now, as the purpose of this equation is to explain the origin of economic growth, let’s put ourselves in the shoes of the Neanderthals. While we are planning to go in the wild to bring back some proteins to the tribe, we look around us. We do find sturdy arms, sturdy legs and few well-functioning brains. In a word, we find “labour”. Do we find “capital”? A broad and outstanding No! However, as the time goes by, our species is evolving. We will find primal energy in the form of fire, and then, at a very latter stage fossil energy and we will understand how to use it. “Capital” will appear at a much latter stage based on accumulated labour (whatever it is “inspiration”, aka knowledge, or “transpiration”, aka sweat and hard work) and the use of energy around us.
The point is very simple: the central equation explaining economic growth is plain wrong and we need to transform it in order to make capital an inner feedback loop to the system as it is mentioned in the Report to the Club of Rome (2003) or suggested by Jean-Marc Jancovici . How to do this?
Well in order to make things simple, let’s assume that returns to scale are constant (if I multiply resources by 2, output will be increased by 2, which fares as a reasonable assumption) so that we get b = 1-a, and therefore Y = A * Ka * L1-a. Now, let’s make the capital K dependent on energy (E) and labor (L) (or accumulated labor, (integral of L), so that K = c * E * L (with “c” a constant and simply labour which does not change the qualitative properties of the model). Our equation becomes: Y = A * ba * Ea * L.
Add to this new equation a reasonable assumption about the dynamics of labour (I assume a logistic function for the dynamics of the population with a sharp increase followed by an asymptotic rise) and the knowledge we have gained over the shape of the oil production function and thus of the dynamics of how available reserves evolve, we can build a toy-model and easily simulate the path of the economy (figure 8) on an oil(energy)-dependent computer. This toy-model clearly shows how sensitive an economy can be to the downward shift in oil-production during and after the peak-oil.
Do not get me wrong here. I do not believe that the Stone Age ended because we were short of stones. My point comes down to say that we are smack in the middle of an energetic transition, that this transition has a much more profound current negative effect that many can believe and that the world as we know is coming to an end, evolving towards “something else”. The hope here is that, flawed economic models, lack of political will to manage this energetic transition or ideological foolishness from the Talibans of the “all-green” regarding the nuclear energy as “evil”, will not drive us toward the tragic fate of the reindeer herd of St Matthew Island and other unfortunate raging bulls (figure 9). Indeed, the NASA research suggests that high wealth inequality is sufficient to create a total collapse. Add inequality regarding access to energy, water and food (agriculture is oil-dependent too) on the top of that, and we have a Mad-Max-Moment ahead of us. In this state of urgency, do we attend a rise in global capex in renewable energy that could make us more optimistic? Well, unfortunately not. Global investment in renewable energy fell 11 percent in 2013 to USD 254 billion according to Bloomberg New energy Finance. This is the second decline in renewable investments since 2001. So, yes the crash die-off of our fat caribous is unfortunately still a scenario.
15 Comments on "Why peak oil signals the world’s end, or at least the one we know"
Pops on Mon, 24th Mar 2014 10:11 pm
“this transition has a much more profound current negative effect that many can believe”
I’ve been posting here for 10 years and reading about PO for a few more than that and sometimes the possible effects seem more profound than I can believe emotionally, logically yes but on the gut level . . .
Northwest Resident on Mon, 24th Mar 2014 10:20 pm
“Indeed, the NASA research suggests that high wealth inequality is sufficient to create a total collapse.”
I think that the NASA study cited high wealth inequality as just one of the symptoms of a collapsing economy, not the cause of the collapse.
Otherwise, I don’t find much to disagree with in this article. But it is just one of a wide variety of “collapse is coming” flavors. I personally prefer my “collapse is coming” daily dose without the goofy economist math, but that’s just me.
Davy, Hermann, MO on Mon, 24th Mar 2014 11:19 pm
Author – Joel Guglietta is Managing Director of OCTIS Asset Management in Singapore
OK, I agree the Cobb-Douglas production function needs updating. In the past energy was something that could be assumed to be substitutable. The cost of energy was low in relation to the other costs. It could be reasonably left out. This is no longer the case today.
I felt this guy just didn’t have the best handle on the holistic nature of our predicament. He has a feel of a guy that just discovered a phenomenon and is diving into the details. He is a financial market guy so economics and finance are driving his ideology. He is a little rusty on the PO topic. He needs a few more years of daily study before he will have a well rounded handle on this complex topic.
After 13 years of study of these issues, they start to flow into a central narrative of a predicament of diminishing returns in the limits of growth with a population in overshoot to its carrying capacity suffering vital resource production stagnation. This includes an unhealthy financial system with financial repression, excessive debt, unfunded liabilities, excessive leverage, stock market bubble, market manipulation, corruption, legal disregard and wealth transfer. Politically the global world is unhealthy with a revolving door of patronage, corruption, and little concern for long term problems. Society is unhealthy with obesity, environmental toxins, crime, and community decay. The environment is being altered by industrial man in ways that will render it sterile for future generations and much of the planet’s species. The world’s oceans are nearing a tipping point biologically with acidification and warming. If all that was not bad enough our stable climate which was “Most” responsible for modern man’s accent, has been destabilized and is showing signs of AGW from the forcing of CO2. With all these problems we have the systematic risks associated with a complex interconnect global system that is brittle and ready to break to a lower level of complexity due to the above problems. The most troubling aspect of this global system stress is the fact that most local support systems have become dependent on the global system for their primary support. Korowics calls this a “delocalized local”. The complexity present most notably in our vital resource food has created the most at risk. Food is the most dangerous element of the above dangers facing society. All of the above dangers have an impact on food. Society will quickly unravel with food insecurity. I feel the financial system contraction is the most clear and present danger with Peak Oil dynamics presenting a brick wall further down the road if financial repression holds the financial system together. In my mind we have 9 years or less before our status quo BAU is in tatters. Once this occurs it is anyone’s guess if the Nuk waste and fuel can be managed properly to avoid a world irradiation event. Likewise will the NUK wmd’s be kept safe from use which will surely initiate a nuclear winter. Wow, that is some doomer shit. I can see no reason to be optimistic longer term. Shorter term my optimism is we still have a decent standard of living going, that is some of us. Enjoy life to the fullest now in the moment.
rollin on Tue, 25th Mar 2014 1:02 am
I am really glad that it took huge amounts of technology and science to figure out things we already know.
1) It takes a long to grow and a short time to die.
2) If you have one bucket of something, it will not last forever if you keep using it.
3) We either grow up, start caring and take responsibility, or crash and burn.
4) Change is coming whether we like it or not.
And I will add my own.
It is impossible to predict the future.
Stilgar Wilcox on Tue, 25th Mar 2014 1:02 am
It’s a good article, but I couldn’t help notice that we somehow transition from the Caribou on St. Matthews Island population crash story, to the final graph which shows human population still steadily rising in spite of diving GDP, past peak oil. Maybe somebody didn’t want to be the Greek messenger of bad news by extending the graph to the right just a tad more.
Makati1 on Tue, 25th Mar 2014 2:19 am
@Davy, we agree on most points here, even the 9 years, but maybe less. Maybe I need another cup of coffee. ^_^
Economists can seldom see the real world because their career/income gets in the way. Typical of all of us, I suppose. Especially those techies who think their tech supported world is forever.
Northwest Resident on Tue, 25th Mar 2014 2:40 am
“I’ve been posting here for 10 years and reading about PO for a few more than that and sometimes the possible effects seem more profound than I can believe emotionally, logically yes but on the gut level…”
Pops, I know exactly what you’re talking about. It isn’t difficult to intellectualize and get a mental grip on the world we’re heading into, but not so easy to feel it on an emotional level, most of the time. Maybe that’s because we don’t really know what is coming — there are a lot of possibilities, from very worst case scenarios to not-so-bad scenarios. I imagine the boys preparing for the invasion of Normandy on D-Day didn’t spend much time feeling fear either, until the moment was upon them. Don’t worry, one of these days in the not too distant future there will be a big event and we’ll feel the worm turning, and that’s when we’ll feel the gut-level fear, probably lots of it. I’m pretty sure that time is coming up over the horizon, so we might as well enjoy the emotional calm while we can.
PapaSmurf on Tue, 25th Mar 2014 2:53 am
There is a massive amount of Global Warming research being done right now estimating the amount of CO2 that we will be burning for the next few decades and how it will affect our climate.
How is it that all of those thousands of scientists have missed the concept of Peak Oil and how our CO2 emissions are going to crash starting any minute now?
All of those smart science guys just totally missed it? So are all of their predictions worthless? If we are going to crash into a Mad Max level of existence with a massive die-off in the next few years, surely that will have an impact on all of those Global Warming models……. I wonder why they are not even calculating based on Peak Oil CO2 emissions crashing in the next few years.
GregT on Tue, 25th Mar 2014 3:34 am
How is it that some people continue to spew utter nonsense, before spending any time what-so-ever to read what our scientists have been telling us?
Papasmurf on Tue, 25th Mar 2014 4:04 am
You kids have been wrong on your predictions for years. I see that trend continuing.
Attempting to predict Peak Oil has proven to be quite a waste of time for the past few decades.
adamc18 on Tue, 25th Mar 2014 6:59 am
Papa – The latest figures show that 63% of the CO2 and other man-made greenhouse gases in the whole of human history have been spewed into the atmosphere in the last 25 years.
Bearing in mind the estimated 30 – 40 year time-lag in CO2 causing its damage and all of the catastrophic side-effects such as methane release in the Arctic, it seems pretty unlikely that Peak Oil is going to save us from a climate catastrophe.
perfector on Tue, 25th Mar 2014 7:07 am
I think it was a “Black Swan” event that finished off the Caribou population – an exceptionally bad winter. Its possible they were in a very fragile equilibrium, but they had no margin for error.
Isn’t this often what happens? That a population which grows so rapidly usually collapses due an unforseen event which it could have easily survived if it wasn’t so overpopulated.
And I wonder if their growth rate had started to dip in reaction to overpopulation and stress? This is common among many animals, but its normally too little too late. That’s why I’m leery about those who think humanity’s slowly declining fertility rate will save us. Probably too little, too late.
(and I laugh at those cornucopians who seem obsessed that slowly declining fertility rates are going to see the human race significantly decrease, entirely voluntarily. Ha! We should be so lucky.)
J-Gav on Tue, 25th Mar 2014 9:49 am
Yeah guys. Some reach a point in their study/analysis of the world where that wrenching gut-level mixture of fear, horror and a couple of other emotions kicks in. But you can’t go around in that state constantly and lead a ‘normal’ life. And you can’t go around shouting at others: “Hey, guess what I just saw in my crystal ball.” Well, you can but people will take you for a nut-job.
Each has to get there on their own. Then, with a little luck, link up with some others who’ve seen the handwriting on the wall to try and do what’s doable.
Davy, Hermann, MO on Tue, 25th Mar 2014 10:32 am
Yea, Gav, being a mild doomer coming to the conclusion that all the nasty tends I have research for many years continue to trend with a trend to a convergence of all these trends in a dangerous mixture bringing on all kinds of unintended consequences, feedbacks, and nasty side effects. Like NR and prefector mentioned with black swans and unknown knowns in combinations making gauging the time, place, and how of decent beyond our feeble minds and further beyond the meanest supper computers money can buy. Our attitude is 90% of navigating this lull before the storm. One can appreciate the moment or die now spiritually. In the end none of us will get out alive as we all know as a firm reality of life and death. I don’t think you can fully prepare for this. NR mention a soldier at “the dawn of the day of a beach invasion”. I feel that in my heart sometimes. Knowing many of those around you will not see the night. Society may get lucky at least in the beginning but eventually the decent will reset the human population to pre-industrial carrying capacity less a significant amount for environmental sterilization. Extinction is a very real possibility. We as humans can unleash wmd’s which is further disheartening because there is a dark side to humans and the corruption of the spirit when life and death is in ones hands is always present. Personally we have to continue on dancing next to the cliff enjoying the party but with the ever present dread of what is next. We can chose to be heroic in the higher aspects of the human spirit and like Tainter said you can’t quit the effort at battling entropic decay. The game is over for society when we give up.
Makati1 on Tue, 25th Mar 2014 1:11 pm
Roughly 60 million of us die annually around the world. Death is nothing to fear as it comes to all of us in one form or another. We try to avoid it by taking care of ourselves and to avoid stupid, dangerous activities and places, but we can never know the time or place unless we take our own lives.
I lost an uncle to cancer at age 50 and his brother is still alive and 90 years old. My best friend died of cancer at age 58, yet I am only two weeks younger and I am 70 and in good health. I hope to see my 100th birthday, but I may not wake up tomorrow. That is life/death. You do your best to prepare for eventualities and then you enjoy it as much as possible.
We appear doomed as a species but I will likely not live to see the last person die. I watch events unfold and try to second-guess them. Better than any mystery book or TV show. Most always wrong on the timing as unexpected measures delay the inevitable, but I see the steps between now and collapse getting smaller and smaller.