Thursday, October 30, 2008

Oil Production Falls by Nine Percent; Civilization Ends.

In the absence of new investment to increase oil production, oil output is set to decrease by 9.1% per annum. This is the conclusion of a report by the International Energy Agency. Now this is staggering. I have mentioned that figures of a 2 -3% decline following peak oil have been proposed before, but this is a real plummet off the peak. As a rule of thumb, a decline of 2% means painful adaptation, a 5% fall signifies very painful adjustments and 10% portends wholesale societal disintegration. The report suggests that due to steep declines in existing oil fields, mainly in the North Sea (as I noted earlier this week), Russia and Alaska, it will prove difficult to keep up with rising demand for oil. Thus, this is a projection more of the demand-supply gap for oil which relentless demand will inaugurate irrespective of whether oil peaks just yet, but when it does the situation will hardly be helped.

The recent fall in oil prices, in consequence of the credit crunch, has put the brakes on various development projects which does not help the prognosis for a sick oil world. It is noteworthy that the IEA also have a dig at peak oil enthusiasts, claiming that they say the world is running out of oil, and that this is wrong. Of course it is wrong and that is not what believers in peak oil are saying at all or have ever said. However, it is clear that the report's conclusion of a 9% fall in production does mean peak oil in all practical terms whether the Hubbert peak is followed explicitly or not.

The IEA emphasise the position that with sufficient investment in new small fields and exploitation of tar sands "oil", it will be possible to actually increase production. Saliently, it is precisely this kind of investment in new tar sands projects in Athabasca that has been hit by the falling price of oil, i.e. the incentive to produce it just now is far less than in the summer when a barrel of conventional crude bore a price-tag of nearly $150. Such investment will prove expensive, will not be able to keep the end up for overall production v. demand for more than a few years, and inevitably oil will become not just a more expensive but rarer commodity in future, whatever happens.

The blow of a 9% decrease would hit very hard indeed, and leave us all with no time to bring on or even devise much in the way of Plan B's. 9% is something like 7 million barrels a day of oil, and to put that into context the output from the whole of Saudi Arabia is about 10 million barrels daily, so that is what the IEA thinks will be wiped off the world oil balance sheet every year, over a timescale that is not worth considering for more than a couple of years because by then the oil-dependent, civilized world will have collapsed.

Related Reading.
"Nine Percent", By Richard Heinberg:
"World will struggle to meet oil demand," By Carola Hoyos and Javier Bias.,16479,world_will_struggle_to_meet_oil_demand,artykul_ft.html


Yorkshireminer said...

Dear Chris,
now this is nasty, I couldn't agree with you more that the credit crunch has put a brake on investment in energy, and we will pay for it later on. Stupid is as stupid does, but then when you rely on the market what can you expect. All markets are short term or to be correct become short term because we morphed from an investment market too a trading market we don't have investors now we only have traders (gamblers), the result is what we see now, its called greed before need. Unfortunately for Britain the financial tail has been wagging the industrial dog since the last war. Our sorry lot after the last great war was that we came out of the war with our industrial base in tatters over use and lack of investment during the war. The whole lot basically collapsed during the winter of 1947, bit before you time I think, it was then the British empire collapsed It took us until 1956 with the Suez crisis that imperial hubris was finally quashed or at least realized by some of our more astute Politicians. I am a bit of an historical buff and it seems to me that many of our so called economists don't realise is that most of the changes in the financial sector came about because of the need of industry to get its hands on capital, joint stock companies, limited liability etc. etc. Now that is fine if you have a strong powerful industrial sector with plentiful energy, but peak coal hit Britain in 1913 and from that point on our influence has been going slowly down hill. From that point on we began substituting oil and didn't really notice the difference, energy is energy, although there is a difference between owning it and controlling it, most people didn't realize it.
The fascinating thing is that the financial system lorded over by Keynes during the war performed fantastically. In the first world war Inflation increased by 235% during the second world war by about 60% or there abouts put in other words the working and middle class didn't have to pay all the costs of it as they did in the first world war. Inflation does not affect the rich or the poor if you own nothing a 1000% inflation means a 1000% of nothing which is nothing and if you are rich and you own property then an estate is still an estate. I have sifted over the years through the garbage of Marxism Bullionism Socialism and Capitalism and come too the conclusion that any word ending in ism especial when it comes to economics is related to utopianism. Utopianism too me or Utopian theory has always been suspect . It always begins with, once upon a time and ends with they all lived happily ever after. If you are not suffering from an advanced case of juvenile delinquency like most of our so called elite, you tend to grow up and realize this.

The death of Keynes shortly after the war has been for me the greatest blow to Britain that we have ever suffered. Keynes to me has been one of the few economists that could juggle more than three economic variables in his head at the same time. Simplicity is always the mantra of the economically retarded, and for those who think they understand economic theory and don't, such as Bankers they reduce it down too one mantra, the market knows best, it aids there lack of thinking

Anyway to get back too what I was talking about the financial market came out of the war in fairly good shape because of Keynes and we tried with out the wisdom of Keynes to resurrect the economic system we had before the war, the way Winston Churchill when he was Chancellor in the 20s tried to resurrect the financial system as it was before the first world war by putting Britain back onto the gold standard. Like all Utopian schemes it failed and we are the poorer for it. It is not a problem when you have so much wealth to attract money too the city of London to cover any shortfalls but when you have sold off your patrimony and are broke, it is the hight of stupidity try and keep the financial tail wagging at the cost of the Industrial dog which produces real wealth. The policy of of keeping interest rates high to attract short term money too London so that the City could lend it long and therefore make a profit is the main reason our Industry has dissipatedly over the last few decades, and the reason we are in the predicament we are in now. There was no way British industry could compete when they had to pay high interest rates to gain capital when at the same time the Japanese made sure that there industry were cheaply capitalized and kept the price of the Yen low to improve competitiveness. I have always thought that the concept of invisible earning meant just that invisible. I had many delightful argument with my old Senior Lecture over that idea invisible earning meant just that invisible and therefore none existent, but then I would split hairs with a Jesuit just for the pleasure. How many angels can balance on the point of a pin and I am in my element.

The real point of this long verbal purge is to point out something that I have not noticed mentioned by all the articles I have read over this credit crunch debacle, and that is how do you pay for your oil imports if you are bankrupt. Let me try and put it this way, no oil for industry means no goods produced which means no goods sold which means no money which means no oil purchased Which means no goods produced. There seems to be an implied assumption in everything that I have read that we would be always be able to purchase oil. Iceland who have gone Bankrupt to me are not in the same boat as Britain because they are still basically energy independent and are therefore not going to starve. They have screwed themselves by thinking they could play the game with the the financial heavyweights. Common sense should have told them that if you are a flyweight don't fight a heavy weight. Cap in hand they went too the Russians, 4 billion they wanted. They balked, I wonder what the Russians wanted cod or a naval base, life gets interesting don't it.

Anyway Chris this is one of you better essays congratulations.

Deep Regards


Professor Chris Rhodes said...

Dear Dave,

yes, this is potentially very nasty indeed! As I have noted in a couple of recent postings, the economic times are not looking too good for Britain.

There is an analysis that indicates that by 2013 Britain will be £500 billion in the red over its imported energy bill.

I had read that, to the effect that only "rich" people paid tax until after WWII. But as the benefits culture grew more and more of us needed to.

There is a good book - "The Welfare State We're In" by James Bartholomew which gives an interesting perspective about it all.

Deep regards,


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