Monday, May 25, 2009

Jeff Rubin on the Effects of Peak Oil

"We shouldn’t be looking at oil prices as the effect of the recession. They are the cause." - The Globe and Mail:

One often hears disparaging comments about those that suggest that there will ever be any substantive "peak oil" effect on how we live. They are portrayed as radical doomsayers. Those expressing concern about the impact of climate change are often discounted in a similar fashion.

The question I put to those who toss aside such concerns is this: Can we afford to be wrong about this?

Consider the following numbers:
  • There are 6.7 billion people on this planet
  • The world population has more than doubled since 1950, predicted to reach at least 9 billion by 2050
  • Since 1980 the world daily consumption of oil has increased by more than a third
  • Even with oil reaching more than $140/bbl in July 2008, the oil industry was unable to increase production to match demand
As everyone will tell you, whether one accepts the concept of peak oil or not, there is plenty of oil still in the ground. The fundamental question is not how much supply is ultimately available but what will be the cost of extracting that oil at a flow rate that our economy, as currently construed, demands? Are you willing to bet the farm on the prospect that the oil industry can continue to supply an expanding population with sufficient quantities of fossil fuel energy at a price it is able to pay?

It will cost ever increasing amounts of money, time and energy to extract the remaining oil and bring it to market. It is an accepted fact that the oil we have extracted to date has been the easy stuff to get out of the ground. Although there is a lot more to exploit, it will become increasingly more costly to do so. If we want the oil, we will find ourselves paying a lot more for it over time.

Of course, as the price does inevitably rise, there will be those who will start to change behaviour and demand less. As the cost of commuting inexorably rises, people will attempt to find ways to reduce their costs through a variety of means. Some people will switch to transit or look at carpooling or other alternatives. Others will move closer to work. Such changes take time, but they will happen.

This reduction in demand will have a negative impact on the price of oil. If it has a big enough effect, some people will continue to maintain their energy consumption at previous levels. That is why I expect we will continue to have a roller coaster ride of undulating pricing in oil. When the price drops, there will be many proclaiming yet again that the "peakists" are simply doomsayers who are wrong yet again. When it starts swinging back up, while the "peakists" will be saying "I told you so", their opponents will simply blame the oil companies for profiteering. Over the long term though, year after year, decade after decade, the price will be going up and up and up. The only thing that will keep prices down is if the entire world collectively consumes less.

As Jeff Rubin points out, we are currently mired in one of the deepest world wide recessions in more than sixty years, yet oil prices are more than $60/bbl. If the economy ever does start to rev up, he predicts it will be beaten down again by rapidly increasing oil prices as supply constraints kick in. It is not a matter of if, but when.

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