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Gail Tverberg

Gail Tverberg

Gail Tverberg is a writer and speaker about energy issues. She is especially known for her work with financial issues associated with peak oil. Prior…

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Huge Amount of Oil Available, But…

There is a huge amount of oil which theoretically can be extracted, but the question is whether the cost will be cheap enough for us to be able to afford to extract it. If the oil is too expensive to extract, the shortage of oil seems to cause a recession, similar to what we are having now. I discuss this in purely monetary terms, but it is also an issue with respect to low energy return on investment (EROI), because oil which is of low EROI needs a high price to justify its extraction.

Available Oil

In many ways, the folks who say we a have lots of oil are correct. All one has to do is include the oil which is extremely expensive and slow to extract. Much of the cheap, easy-to-extract oil has already been removed.

Oil Price budget

Economic theory seems to say that if oil prices rise, substitutes are likely to be found, and these will tend to bring prices back down. When oil prices rose, we found substitutes, but they were poor substitutes. They are more generally more expensive, when all of the costs are included. Biofuels interfered with food supply; wind is a substitute for natural gas and coal in electricity production, but it is not as a transportation fuel, which is one of the things that we specifically expect to be short of.

In the above slide, I purposely exaggerated the impact of an oil price rise on food and gasoline. The effect would be greatest on a low income individual. It would also be very great, if the price rise were to something like $400 barrel.

Oil prices

This is pretty obvious, if you think about it. Does it sound like anything we have run into in the last few years.

Oil supply and demand

Many people think of the effects of peak oil as a future event. But we are really experiencing them here and now. Oil production stopped rising in 2005, so by 2006, we were feeling the effects of the squeeze. The effects were being felt as early as 2004, when oil prices began to rise.

Easy oil

I have omitted several slides, showing the rise and fall of oil production in the US 48 states, Alaska, and the North Sea. At this point, most of the fields that are in easy to access locations are in decline, and we are “stuck” with what is left–the slow to extract, expensive oil from difficult locations.

Rising oil prices

So many people have equated high prices with oil shortages, that people have come to believe that if prices are low (or at least relatively low, compared to last years’ prices), everything is OK. But we really need lots of quite inexpensive oil to fuel the economy, or it goes into a recession. Reduced credit reduces demand, and has the effect of bringing oil prices down.

Incomes and oil prices

In the above slide, the cutback in credit is especially important. Without credit, many people cannot buy new cars, new houses, or expensive Christmas presents. All of these use oil in their manufacture and distribution, and keep oil prices up.

 US Consumer Credit

US consumer credit (including things like credit card loans and auto loans) peaked the same month as oil prices. Mortgage loans peaked about the same time, and many types of commercial credit have been affected. The government has tried to pick up the slack with additional borrowing, but this is not the same.

Energy costs

The EIA indicates that on a constant dollar basis, energy expenditures more than doubled between 1990 and 2008. Going forward, the EIA sees more increases in energy expenditures, on an inflation adjusted basis.

I might mention that one of the major uses of new technology is to bring down prices. There are limits to what can be done–if oil is very deep in the ocean, it is likely never going to be cheap to extract. The need for new technology to bring down prices is probably as great or greater with fossil fuels as it is with things like wind, solar, and biofuels. Fossil fuels are at least well adapted to running our current infrastructure. Anything that is very different will require huge expenditures for conversion.

Unchartered territory

In my view, the big question mark is how debt (and financial institutions) will do. The front page story on today’s Atlanta Journal Constitution is “Troubled banks find it hard to stay afloat”. How long will bailing out failing banks with printed money work?

Oil production and unconstrained demand

The growing gap is the concern. Regardless of whether oil production remains flat, or declines fairly steeply, we have a major problem. With many people from around the world interested in using oil products, and many new cars in places like China and India, the gap between production and what we would normally consume (if prices were low and credit were available) is likely to continue to grow, even if somehow oil production could be kept flat.

Lower Oil Production

In the recent past, the advanced economies have been able to “offshore” their energy intensive industries to places like China, giving the illusion that countries can get along with only non-energy intensive services like finance. But for the world as a whole, there seems to be a close relationship between growth in oil consumption and GDP growth. Since finance and some other services don’t need much oil to grow, the relationship is not exactly 1:1. Efficiency growth would also tend to raise make GDP growth higher (but declining EROI would tend to lower it).

GDP and Oil Production

My big concern is international trade. If debt defaults are a problem, this could interfere with the workings of the whole system, especially if it leads to major countries (perhaps Greece) defaulting on their debts.

World population and Fossil Fuels

In the years since fossil fuel use has developed, world population has greatly expanded.

We are already seeing problems with people in some of the poorer nations having adequate food. Even in the US, there are people at the margins who are “food insecure”. Currently, there are government programs to help, but states are finding it increasingly necessary to cut back, because of falling tax revenue.

It would be a lot easier to get politicians to talk about the situation if there were a good solution in sight. There are some partial mitigations, but they likely don’t get us back to “business as usual”. Voters are likely to be very unreceptive to such news.

By. Gail Tverberg

Gail Tverberg is a writer and speaker about energy issues. She is especially known for her work with financial issues associated with peak oil. Prior to getting involved with energy issues, Ms. Tverberg worked as an actuarial consultant. This work involved performing insurance-related analyses and forecasts. Her personal blog is ourfiniteworld.com. She is also an editor of The Oil Drum.

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  • Anonymous on December 26 2010 said:
    Much of the reasoning in the article is quite sound. Certainly one out of the many reasons for current economic stagnation is the high cost of energy and fuel.The role of political forces in the energy dynamic is of supreme importance, yet it is given short shrift by most peak oil devotees. The effect of the ongoing de facto Obama Gulf Oil moratorium, for example, is already important and growing by the day as production deficits from that sector begin to build.Political mismanagment of oil fields by national oil companies from Mexico to Venezuela to Iran to Russia to the Gulf kingdoms has a significant impact on both production and on capacity to raise production on short notice.The 2007 - 2008 price runup came and went much too fast for projects requiring 10 to 20 years to respond fully. The 2009 crash must have scrapped a lot of planned projects.
  • Anonymous on December 27 2010 said:
    Excellent article,and congratulations Alfonso: at last you are getting the message. If you examine every oil price spike since l973, you see that these have stressed the global macroeconomy in one way or another. The wolf arrived though about the turn of the century, when the OPEC countries decided that selling oil at bargain basement prices was not a condition that they wanted to play along with. Now 100 dollar oil is in sight, and it's the same kind of temptation as...
  • Anonymous on December 28 2010 said:
    Pretty much what I have been saying for the last ten years.I have worked in the Oil & Gas industry since 1978 so I am sure I don't know jack.R

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