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Peak Oil and the Recessionary Cycle

In the minds of many of those concerned about an imminent rendezvous with peak oil, the day the world slides past the all-time peak in oil production will be a fateful and irreversible crossing. After it all the calamitous predicted consequences of the ensuing decline will become obvious--financial collapse, unaffordable energy prices, shortages of food and other goods dependent on cheap oil, and mounting unemployment to name a few. And, the cause of these effects will be plain for everyone to see.

But even as some of these symptoms begin to manifest themselves, the public remains ignorant that stringency in oil supplies lies at the heart of them (though peak oil is admittedly part of a complex web of problems related to our broader energy and resource use). Why is this so?

From the long view the level of oil production on a graph in this decade may well look like a peak. But from closer in, as we experience it day to day, month to month, and year to year, production may seem to be on a long, bumpy plateau. Even though one of the world's major sources of energy information, the International Energy Agency, admits that conventional crude oil probably peaked in 2006, the public and most policymakers remain ignorant of this sign that liquid fuels will have a hard time keeping up with demand.

It is true that other liquids--natural gas liquids, biofuels and unconventional oil derivatives--have allowed total liquid fuels production to eek out at new all-time high this year. But robust demand once again drove the price for Brent crude above $100 where it remains as of this writing. This seems to have had the effect of dampening economic activity and so prices and production have actually fallen from their highest levels as demand has waned. We know that oil price spikes have been associated with 10 of the last 11 economic recessions (PDF); there is reason to believe that we are headed into number 12.

It is this pattern which prevents a clear signal to people, policymakers and markets about our predicament. We seemed to be crossing the Rubicon of peak oil in 2008 as prices rose to $147 a barrel only to cross back during the subsequent two and a half years leading to a new nominal peak in production in January this year. In between the price of oil plummeted to around $35 a barrel before rebounding above $100.

This phenomenon has now been described for us by the former editor of Petroleum Review, Chris Skrebowski, in his piece "A Brief Economic Explanation of Peak Oil." Skrebowski believes there is a sort of speed limit that oil prices are imposing on the economy, and it begins roughly when oil trades above $90 a barrel though the number may be higher for high-growth countries such as China, perhaps up to $110. If prices stay in this area for long, it appears to signal that a recession is not far away.

From the public's point of view, oil prices this high have become a "normal" part of life. And, if Skrebowski's analysis proves correct, there will be no dramatic price spikes above, say, $200 a barrel that stick, something that might definitively signal the beginning of a long-term oil crisis in the public's mind. Instead, there will be repeated attempts to revive economic activity through fiscal and monetary stimulus which will ultimately fail to gain traction as oil prices shoot up once again, dampen economic activity and lead to recession after recession. During each recession oil prices will drop making the peak oil problem seem to disappear.

It's certainly true that significant increases in world production of liquid fuels would end this cycle. But as Skrebowski points out, "If adaptive responses were fast enough and large enough, oil prices might be broadly stable. They clearly are not." By "adaptive responses" he means in part those increases in oil production and the production of substitutes. But, the unstable economic climate we are now facing is making long-term planning and investment in both the oil industry and the alternative energy industries difficult.

What Skrebowski offers is a sound rejoinder to those economists who say that peak oil theorists don't take into account economic factors--factors which those economists say will solve the problem of peak oil whenever it arrives by destroying demand and making substitutes profitable. For now, however, we can see that the economic factors are not really solving the problem of peak oil, but possibly feeding it. That's not something most economists will be able to hear. And, it describes a pattern that will likely only confuse the public and policymakers even though Skrebowski has explained it in terms that any thoughtful person can understand--if only they want to.

By. Kurt Cobb

Source: Resource Insights




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  • Anonymous on October 06 2011 said:
    Thanks Kurt."peak oil theorists don't take into account economic factors--factors which those economists say will solve the problem of peak oil"Wasn't it just last year those who deny any limits were hooting that "peak oil" was wrong because we were experiencing "peak demand"? In other words, economic contraction and pain caused by expensive energy somehow proved concerns about peak oil wrong?And now the mantra is 'See, high prices enable expensive energy!' What did they think the peak oil worriers worried about if not high prices leading to demand destruction (read: perpetual economic contraction)?
  • Anonymous on October 07 2011 said:
    Excellent article, which deserves a wide readership. WTI oil now costs about $80 and Brent $100, so the average price is somewhere around 90 dollars. That might be too much even if the global macroeconomy was in good shape, but as things stand that price is definitely too high. In my humble opinion, before the high and mighty begin thinking about advanced energy economics, they should read and memorize this short article,and hopefully any useful comments it may engender.
  • Anonymous on October 07 2011 said:
    The real problem is money worship and ignorance. People think that money has "power" when in fact money is merely an accounting system.As the exponential fiat monetary draws to an end, many people will still not understand. We have been in the effects of "Peak Oil" since about 1965. It's the old boiling a frog to death by turning up the heat slowly problem. Soon we will have a large economic collapse that will put the peak firmly in the rear view mirror, and people will blame it on something other than energy and resources.It's just a sign of the times that people are so out of touch with reality.

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