A Short Summary of Where We’re At

July 4, 2006

This is nothing new to peak oil aficianados, but any new readers might appreciate a quick overview of our current situation. There’s a plethora of issues out there for any diehard doomer to embrace, and many of them intertwine with each other.

Peak Oil

Petroleum is the lifeblood of modern industrial civilization. It accounts for the vast majority of our liquid fuels, and byproducts from it are in everything from fertilizer, to pharmaceuticals, to plastics, and much, much more. Most researchers believe there’s somewhere around two trillion barrels of the stuff scattered around the globe, and that we’ve found most if not all of the major fields and have produced approximately 1 trillion of those barrels already. One trillion barrels sounds like a lot, until you fund out that the world consumes around 84 million barrels daily, and that number is expected to grow dramatically as China and India’s middle class consumers start doing their patriotic duty and buy cars, iPods, and hyper-processed foods.

The largest share of oil comes from a handful of giant, mature fields. The output from these fields is either flatlined, or declining every year. According to Matt Simmons, several of the largest fields in Saudi Arabia are producing around one barrel of sea water for every barrel of oil recovered, and that ratio is getting worse every year, as Saudi Aramco continues to pump millions of gallons of water into these fields to keep the pressure up.

Many ‘experts’ point to one of a handful of options as the ‘next Saudi Arabia’. The usual suspects are oil shale, the Canadian Tar Sands, and ‘heavy oil‘ . You can follow the links to see why each option has issues, but it will suffice to say that each option has a massive cost, either in terms of environmental devastation, or huge energy input costs that make refining the stuff into a losing proposition in terms of net energy gained.

Natural gas is on a similar arc of production decline. We’re currently drilling as many wells as we can in North America just to keep production levels stable. This fact has been hidden by the fact that large areas of the US have been fortunate enough to have relatively mild winters for the last few years, which have kept natural gas price increses at merely obscene levels, versus bankrupting ones.

So, to sum up, there’s only so much oil left in the world. It’s not enough to make everyone happy for too much longer, and as the supply declines, the price will head north, possibly on a logarithmic scale after a while.

Food & Ethanol

The declining supply of oil affects food in two ways. First, modern industrial farming requires a lot of oil. Between the gas needed to fuel the farm machinery, the natural gas required to help make fertilizer, oil feedstocks necessary for pesticides, and gasoline to power the trucks needed for all of the steps in the supply chain that goes from the farm to your pantry, we burn a lot of oil to raise our food.

Ethanol is currently being pimped in Minnesota as being a great alternative to regular gas. While it does burn cleaner than gas, the oil inputs needed to grow and process the corn makes it a net energy loser as well as a sop for midwestern corn growers. If we were going to grow enough ethanol to replace the gas we currently consume every day, we’d have little space to grow food.

The “Green Revolution” has allowed the earth’s population to skyrocket on the back of petroleum-powered agriculture. The decline of the oil supply will mean dire consequences for a planet that jumped from 2 billion people to over 6 billion in a generation.

I won’t even go into how some of the side effects of modern farming will change things… you know, things like erosion, desertification and salinization

The Economy, or Fun With Fiat-Based Currency

Here’s a simple formula for your consideration. I doubt you’d see it in any economic textbook out there:

  • In our modern US capitalistic system, economic growth requires access to ever-growing supplies of cheap energy
  • Fiat-based inflationary currency (like the US Dollar) requires the economy to keep growing, otherwise no-one will buy the debt instruments that we currently pass off as legal tender.
  • Therefore, in order to keep the economy humming along and the US Dollar afloat, we need to be able to use as much energy as we can. When the price of energy rises, the economy will suffer, and the American people along with it.

In the past year, the price of gasoline at the pumps has risen by nearly 50%. How has that affected your bank account? Checking my reciepts, I’m spending more on food, clothing and other goods than I did last year (let’s not even talk about energy costs). My salary rises too, but not nearly as fast, so I’m losing money every year. Welcome to inflationary hell.

Unlike us, the government doesn’t to need to pay it’s bills promptly like the rest of us. My credit card may have a maximum balance, but the US government’s doesn’t. Vice-President Cheney famously remarked that ‘deficits don’t matter‘, and as long as the US Dollar continues to be the only currency that the globe can use to purchase oil (aka the petrodollar), that’s true. Some cracks are showing up in this protection scheme, as places like Russia, Iran and Venezuela start selling oil priced in other currencies.

Once the dollar loses it’s status as the world’s reserve currency, all bets are off. The US national debt has skyrocketed since 2000, and we are only able to keep things rolling along because other nations have been more than willing to purchase huge shares of US debt (packaged as Treasury Bonds). To keep these buyers of our debt happy, we’ve been raising interest rates like clockwork every time the Federal Reserve meets. New Chairman Ben Bernanke has an interesting tightrope to walk, as he tries to raise rates enough to keep China, et. al happy while at the same time not raising the rates so fast that they cripple the US Economy.

Wall Street and the Problem of Short-Term Thinking

The problems presented by peak oil, climate change, population issues and other similar quadries are huge. They’re not the sort of thing that have sound-bite solutions, and that’s a major problem for us. US Politics are dominated by money: really big money in fact. That kind of money doesn’t come from individual contributions that we are all harrassed about making every time an election cycle starts up. That kind of cash comes for corporations and special interest groups. And, since they write the checks, they get an undue say in how the country goes about it’s business. Whether it’s something blatant like rewriting the bankruptcy laws, or something more subtle, corporate interests dominate the politics of both major US parties. And the corporations have a very short time horizon…

Wall street demands growth. If a corporation doesn’t make a significant profit every quarter, both the stock and the leadership gets punished. Therefore, quarterly and yearly profits are what drives most decision-making for the Fortune 500 set. It stands to reason that corporate lobbyists prod, cajole and (occasionally) bribe lawmakers into passing laws that suit their needs, and these needs are usually short-term in nature.

Five years down the road is a long time for big business, and the sorts of problems we’re talking about here are ones that will likely take decades to remedy. So, if you’re thinking the federal government will organize a sort of Appollo project-kind of effort to fix things, expect to be disappointed. A government-commissioned report indicates that we’ll need at least 20 years to solve the liquid fuel crisis that peak oil will bring us without suffering any kind of disruption in liquid fuel supplies, and odds are we haven’t got nearly that long.

So, what do we do? Odds are we won’t have the time needed to make a seamless transition to the next liquid fuel. We continue to spend massive amounts of money on road-building projects that may never be fully utilized, depending on when we reach that magical tipping point where the cost of gas rises far enough that it start’s having a serious effect on the US economy. I don’t have any idea where that point is… is it $5/gallon, or $10, or higher? For many lower-income people, I am guessing that gas north of $5-6 per gallon will do the trick, since it makes no economic sense to drive 30 minutes each way to get to their job at Box-Mart, or some fast-food joint out in the ‘burbs.

The government and big business will do no more than pay lip service to these issues until they reach critical mass. They are so invested in keeping the status-quo going that they will likely keep trying to squeeze one more quarter of profit out, or do what they can to put the problem off to just after the next election cycle.

In the meantime, more and more people get the feeling that something’s coming. They may not be able to identify exactly what it is, but something major is slowly changing in the world. Perhaps it’s just that we’ve enjoyed such a long period of peace and stability that we aren’t used to the normal cycle of history. The way things are going, we are heading for an economic crisis in the US. Whether it’s caused by peak oil, bird flu, terrorism, climate change, or something else doesn’t really matter. When it happens, it will wrack the world economy, and that will open a Pandora’s box worth of chaos. I have a young son at home, and I’m hoping that whatever happens will happen soon, in the hopes that it’s over before he reaches his majority.

Like the Chinese curse says, we are going to be living in interesting times.