2010 January 03 Sunday
1 Year Past Oil Production Plateau?

The world spent the last 5 years on a bumpy oil production plateau. Was that the peak in world oil production? Nate Hagens thinks so and he thinks most still (incorrectly) imagine this recession is just another normal recession where normality will soon resume.

Everything did in fact start to change in the 1970s, as US energy per capita consumption peaked, real wages peaked, US oil production peaked, and we started to use debt (spatial and temporal reallocation of real wealth) to increasingly supplement energy's role in current growth. Urged on by socially acceptable excess consumption via advertising, borrowing from the future also became socially acceptable, and the linkages between real capital (natural, built, human and social) and financial markers for this real wealth became blurred. I should clarify: I think we have plenty of energy, resources, technology and materials for this many or more humans for a generation or so to come, just not at current levels of consumption, aspiration, and the perceived extant (digital) wealth.



Source: GDP -Bureau Labor Statistics, Debt - Aggregate household, financial, corporate and government. Source: Fed Reserve Standards Board 2009

If we lived in a society of 100% reserve requirements, then peak oil would have been later, and implied higher oil prices pretty much right after the peak. As it stands, though, debt pulled forward allocations of energy and other resources and the 'peak affordability' engendered by credit collapse will run its course first. It is important to understand we are not close to running out of available energy or resources, even for this many billions. But it is very clear (to me at least) that the amount of energy flow rates (and accompanying non-energy inputs like water) are not enough to service/maintain the accumulated financial claims in this system, especially given that a large % of energy inputs have been spent long ago. It is likely if not inevitable that the claims extant in current system will cause currency reform which in turn has implications for all sorts of interdependent systems based on just-in-time inventories and global trade.

We are roughly where I thought we’d be 5 years past peak (technically just 1 year off the plateau) – still trying to maintain the façade that everything is normal, shorter attention spans, shorter interest in things academic and more interest in things practical. And a concerted effort among the icons of society to borrow and legislate our way back to just before the social precipice. I, like many people, misjudged government and central bank efforts to keep things afloat in the near term, and this could well continue for a while. Ignorance is bliss and all that.

The big debt run-up alone is reason enough to believe we can't easily get back to business as usual (BAU). But if we are past world oil peak production then consider this graph:

U.S. Energy Consumption by Fuel (1980-2030)
(quadrillion Btu)
Figure on U. S. Energy Consumption by Fuel (1980-2030).  Need help, contact the National Energy Information Center at 202-586-8800.

The liquids line up top might be about to go into a 5+% per year decline that'll play out for a couple of decades. The bulk of those liquids comes from oil. Natural gas liquids and biomass contribute smaller portions.

How do we get whacked when oil production starts going down, down, down? In a word: transportation.

U.S. Primary Energy Consumption by Source and Sector diagram image

1Does not include the fuel ethanol portion of motor gasoline—fuel ethanol is included in "Renewable Energy."
2Excludes supplemental gaseous fuels.
3Includes less than 0.1 quadrillion Btu of coal coke net imports.
4Conventional hydroelectric power, geothermal, solar/PV, wind, and biomass.
5Includes industrial combined-heat-and-power (CHP) and industrial electricity-only plants.
6 Includes commercial combined-heat-and-power (CHP) and commercial electricity-only plants.
7Electricity-only and combined-heat-and-power (CHP) plants whose primary business is to sell electricity, or electricity and heat, to the public.

All that oil flowing into transportation is our Achilles' Heel. It is not cheap or easy to shift that demand into other sources of energy. My advice: make your next car a conventional hybrid or pluggable hybrid. Do anything else you can practically do to lessen your reliance on oil. The biggest challenge: finding a job that'll survive the multi-decade decline in world oil production.

As I've pointed out in FuturePundit post just looking at oil consumption trends it is easy to see American economic stagnation as India and China outcompete Americans in oil buying power.

Rembrandt Koppelaar, President of ASPO Netherlands, captures this shift of oil consumption from the developed to the developing countries in his Oil Watch Monthly reports (PDF). See pages 8-12 for OECD (developed countries of Europe, US, Japan, Canada, etc) and then compare their oil consumption usage trends (all down including the US) with the trends for India and China on page 13. US oil consumption has already peaked. China and India can afford to drive up oil prices to levels that cause Americans and Europeans to drive less and to switch to more fuel efficient vehicles. This trend will continue.

Our economy will contract as our oil consumption contracts. If we are collectively wise we will make decisions that in the aggregate will cause the rate of economic decline to be slower than the rate of oil consumption decline.

Update: To clarify: I do not agree with Nate Hagens about investment strategy during a period of declining oil production. One can still find investments worth making during an economic contraction. Some assets will become worth more while others become worth less.

One of the biggest issues (unresolved in my own mind) is whether an economic contraction caused by Peak Oil will be deflationary or inflationary. The question hinges on politics. Which central banks will pursue an aggressively expansionary monetary policy? Some will. Faced with a sovereign debt crisis some central banks will buy up sovereign debt and cause inflation in order to inflate away some of the unpayable debt. I would like to read a good argument for which countries will go inflationary and which will allow deflation to occur.

Share |      By Randall Parker at 2010 January 03 05:01 PM  Economics Energy


Comments
Wolf-Dog said at January 3, 2010 5:31 PM:

IF only Bush had spent half the money lost in Iraq and Afghanistan, on electric vehicle and battery research, we would have been free from imported oil now. It is calculated that it would cost only one year of imported oil money to put charging pods in every street in the United States. Another half a trillion dollars would have been more than enough to develop better batteries with 250 mile range per car. Had we started in 2001 just after the 9/11 attack, this would have been the best answer to Al Qaeda. It can be correctly argued that Al Qaeda strategists brilliantly bankrupted the US government by intentionally drawing the US into a distant guerrilla war, for the purpose of preventing us from investing in battery and alternative energy research, and they won.

Red Charlie said at January 3, 2010 7:13 PM:

There is absolutely nothing in this article to be taken seriously. No substance.

You know a person has gone off the deep end when he becomes strident on a topic that he fails to define adequately. Getting emotionally tied to a topic you do not understand signals a lack of engagement with the relevant features of reality. That is exactly what is happening with the ever-changing definitions of "peak oil."

Randall, you are recommending resource allocations to your readers when you clearly do not understand the underlying issues. God help your readers who take your recommendations seriously. Have some humility and attach a few paragraphs of caveats and qualifications to such offerings.

Wolf-Dog said at January 3, 2010 7:49 PM:

Red Charlie,

Here is the historical trade deficit data of the United States. During the last few years the annual US trade deficit has been in average $650 billion, and most recently close to $700 billion:

http://www.census.gov/foreign-trade/statistics/historical/gands.txt

Now if you examine the following historical data about the oil imports of the United States, you will see that just the oil component of the US trade deficit would be approximately $300 billion per year (assuming 400 billion barrels per year at $75 per barrel, since the average number of barrels imported per month is approximately 350,000,000):

http://tonto.eia.doe.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MTTIMUS1&f=M

Thus it is not just the shortage of oil, but the fact that we are currently not exporting enough to pay for these imports. This is the more immediate reason we must attain independence from oil. Otherwise, at this rate of foreign trade deficit, the US dollar will continue losing its value anyway, and once the US currency is devalued another 50 %, this would balance the trade deficit since the labor costs at home will be lower than in Japan and Europe. But then the oil price will be double for the United States, nearly $150 per barrel, and then this would dramatically increase the cost of oil imports to well over $500 billion per year, and this cannot be sustained even if we balance the trade for manufactured goods. This is the end of the United States unless we attain independence from oil.

Mercer said at January 3, 2010 8:00 PM:

" use debt (spatial and temporal reallocation of real wealth) to increasingly supplement energy's role in current growth."

I think consumers used more debt spend for things like bigger houses, eating out more, overseas travel, gambling, college tuition, plastic surgery and electronic gadgets. I don't see how spending more on these items "supplement energy's role in current growth". I do not see what energy prices had to do with it. Credit cards and home equity loans provided the means. He assumes that expensive energy and easier credit are directly related. Credit has been getting more widespread since the 1920s; first with with buying on installment, then to thirty year mortgages, to credit cards and home equity loans.

I think energy prices will rise in the future but that does not mean economic disaster. It means consumers should lower their consumption of oil and items like those I mentioned above and save more.

Randall Parker said at January 3, 2010 8:57 PM:

Red Charlie,

I've linked to lots of info about Peak Oil in the past, mostly on my FuturePundit blog. I do not try to prove how soon it is going to happen every time I write about it. I don't think to the basic Peak Oil arguments every time.

I recommended resource allocations in this post?

As for understanding the underlying issues: I've read a lot of petroleum engineers, physicists, and geologists on Peak Oil. I know discovery peaked in the early 1960s. I know rate of consumption bypassed rate of discovery in 1980. I know the current rate of discovery is a third the current rate of production. I also know the list of countries that are past peak oil production keeps getting longer. Look at Mexico's oil production for example. I also know the OPEC oil reserve figures aren't credible and were artificially hiked in the late 1980s so that OPEC members could justify to each other bigger production quotas.

I could go on. Again, I've read a lot about it - enough to be very troubled. Did we peak in 2008 as Kjell Aleklett believes? Or will we peak in 2015 as Charley Maxwell expects? Or was Fatih Birol's statement that peak comes in 2020 the correct forecast? Any of these dates puts us in deep trouble. How fast we come down off peak is also critically important.

What do you think I'm missing?

Rob said at January 4, 2010 6:16 AM:

Oil can be made from coal for relatively low cost, and we have hundreds of years of coal left, RIGHT HERE IN THE U.S.

A.Prole said at January 4, 2010 7:22 AM:

Randall,
As I've kept banging on to you in this blog, for the umpteenth time, (everytime you post an 'oil-shock' post infact), the western world has already the means at its disposal to deal with your Cassandra-like catastrophe (ie nuclear energy), all all that is lacking is political will and foresight.
Take the case of China, for instance.They are moving into nuclear in a big way (HTGR reactors etc), and the 'green energy' initiatives look very promising (their wind-eneregy program grows by leaps and bound and the installed capacity is already enormous).
Consider also prposals to 'farm' the vast empty deserts of thw world with photo-cells.
Also, the Chinese have developed an efficient Li-On battery for vehicular use.
To repeat myself - the solutions are at hand, no technological breakthrough is needed.Just the knocking of common-sense into western politicians' heads which is, admittedly, an enormously more difficult task than 'splitting the atom'.

Eric Johnson said at January 4, 2010 11:35 AM:

Prole, I dont think Randall sees it as the end of the world. But as it stands we stand to spend a mountain of cash to covert to $4x,000 all-electric cars. The Chevy Volt would cost less to buy & operate if it didnt have the gasoline engine in it of course. I wish they would make that. But no matter the price, that possibility would still not protect the economy completely, because a limited range will reduce efficiency.

I dont see it as the end -- just a long recession that will occur while nearly everyone is compelled to save for a rather expensive new car. And what about trucking, both retail and wholesale (logs etc)? How can you run trucking efficiently on batteries, when every trucker wants to drive 400 mi a day? Your prices on everyday items will go up even if god built us a train system of some sort gratis, because its more expensive to run. But it wont be free, so you will also have to pay the construction costs via almost everything you buy.

At least, it wont wreck the world via transportation alone. But what about "industrial" uses of oil as noted above? I'm not familiar with what those are.

A.Prole said at January 4, 2010 2:32 PM:

Eric Johnson,
It's not inconceivable that the next generation of Li-On batteries will store as much energy pound per pound as gasoline or diesel.
Also, 'battery exchage centers' or rapid recharge stations can be set up.

Randall Parker said at January 4, 2010 6:10 PM:

Prole,

As Eric points out, I'm not forecasting a reversion to primitive savagery as a result of Peak Oil. We aren't all going to start living like John Boy Walton either.

Regards substitutes, I've got one word for you: costs.

I spend a lot of time reading on energy. I know that John Rowe, CEO of Exelon who put together the third biggest nuclear fleet in the world (after the French national utility and some Russian one), thinks that new nuclear can't complete with natural gas and coal for electric generation. Even with a $15 per metric ton carbon tax he doesn't think new nuclear competes on costs. I know two different utilities in Europe recently revealed they won't build new nukes without a 40 Euro emissions tax per metric ton of carbon. Coal and natural gas are too cheap.

That's nuclear for electric power generation. That's not nuclear for (much more expensive) synthetic liquid hydrocarbons generation.

Cheap Li batteries: In your dreams. This is dreamy too:

It's not inconceivable that the next generation of Li-On batteries will store as much energy pound per pound as gasoline or diesel.

Before you start posing like you have answers research it and explain relative costs. Provide links to credible sources.

Wolf-Dog said at January 4, 2010 6:59 PM:

Parker and Prole:

Actually in the future there might be nanotechnology based batteries that come close to the density of gasoline or diesel, but even without such a great improvement, only a marginal improvement will suffice: Here is the latest Tesla Model S, which is a fairly large family car, and its larger battery has a range of 300 miles. The only problem is that this battery is very expensive, as it is assembled by hand, from off the shelf laptop batteries. But the fact that such a battery exists, is an indication that its price can be dramatically lowered within less than a decade.

http://www.teslamotors.com/models/index.php

But here is another improvement for plugin hybrid cars. The MICROTURBINE generators instead of piston engines in plugin hybrid cars, are a major improvement. This prototype has a pure electric range of 80 miles, and once the battery is depleted below a certain level, the microturbine electric generator starts charging the battery, yielding an additional 500 mile range.

http://reviews.cnet.com/8301-31166_7-10406217-271.html

http://jalopnik.com/255528/super-efficiency-200-mpg-velozzi-micro+turbine-electric-hybrid

http://www.energyvortex.com/pages/headlinedetails.cfm?id=4326


The advantage of these microturbine generators instead of ordinary piston engines is that they require far less maintenance, they are cheaper, and a variety of low grade fuels like biodiesel, alcohol, or a mixture of other fuels can be used. Thus in the future all American plugin hybrid cars can use microturbines to make these even more economical. Incidentally, the microturbine is more fuel efficient than piston engines, so that the gasoline mileage of such hybrid cars (after the battery is depleted) is at least 100 miles per gallon even if the pluging battery is never charged. Thus once we have affordable plugin hybrid cars and trucks, this will make it possible to avoid oil imports, and additionally, since a lot less liquid fuel will be needed, biofuels can also become more feasible since a much smaller quantity will be needed. According to Capstone, if mass-produced, these microturbines can be sold for $3,000.

Eric Johnson said at January 4, 2010 7:35 PM:

Sure, maybe it will get a lot cheaper, maybe not. If it doesnt, you might need to find a way to get about $49,000.

The microturbine thing sounds pretty cool though. Beats the heck out of lugging around an internal combustion engine.

500 mile range for a one-ton car is what for a truck carrying 80 tons of logs? Not much. Sure the truck can bear the weight of lots of extra batteries, but they will cost a huge amount. We would probably have to go back to trains for the most part. $$$ to build them.

Engineer-Poet said at January 4, 2010 8:10 PM:

Microturbine efficiency is very disappointing; if you look at Capstone's figures you'll see they peak out at about 26%.  Diesels can easily beat 40%.  A microturbine can make a very lightweight range extender, but not an efficient one.  In a world of declining petroleum production, efficiency is king.  Inefficiency killed the steam engines and other cleaner continuous-combustion schemes in the 70's when the price of oil shot up, and this time will be no different.

I suspect that we can put heavy trucks on rails and electrify the rails for less than it costs to rebuild deteriorating freeways and find fuel for the trucks.  No figures yet.

Wolf-Dog said at January 4, 2010 11:05 PM:

You are correct about the newer diesel engines that have more than 40 % efficiency, and these can be made small and cheap. I hope that within 5 more years the cost of a pluging car with 50 mile pure electric range can be lowered to $25,000. Once it is legislated by the US government that only plugin hybrid cars and trucks can be sold in America, then the oil consumption would probably decline more than 75 % or more, and this would bring an end to imported oil. In particular, with only 25 % of the current oil consumption, then suddenly biodiesels and other plant based fuels become economical because the plugin vehicles will be more economical even in the non-electric mode after the battery is depleted.

Here is an example of a diesel-electric Caterpillar tractor:

http://gas2.org/2009/12/23/caterpillars-d7e-diesel-electic-hybrid-tractor-is-an-earth-friendlier-earth-mover/

This tractor is not a plugin because from the very beginning it is not using a charged battery, but the diesel engine is generating the electricity to run the electric motors that propel the tractor. The net benefit is that the tractor is 25 % more fuel efficient, and it has 60 % less moving parts, making it more durable.

But in retrospect, had Bush responded to the 9/11 terrorist attack in the year 2001 by allocating $100 billion per year to accelerate the development of the plugin cars such as Chevrolet Volt, by now there would have been a solution. Even Obama is falling way behind in launching a major project to accelerate freedom from imported oil.

A.Prole said at January 5, 2010 1:55 AM:

Anyway,if battery improvement proves to be technologically impossible and unfeasible, I cannot see why the ultra high temperatures gebnerated by HTGR reactors cannot be used to synthesis organic fuel from elementary precursors.
I know this is roundabout and inefficient, but if your big diesel swilling trucks are so important to you.

Wolf-Dog said at January 5, 2010 6:48 AM:

There is no question that the battery technology will improve substantially within a few years. Maybe the 300 mile range batteries will remain expensive, but the 80 mile range batteries will almost certainly become much cheaper, and since small diesel engines without transmissions and gear boxes are very cheap, it is guaranteed that in the future a decent plugin hybrid car can be sold for $20,000. In fact, because the transmission and complicated gear boxes will no longer be needed, it is possible that plugin cars will in fact be even simpler than the ordinary internal combustion cars! Even the cooling mechanism of the small engines feeding the plugin hybrid cars would be simpler.

But don't dismiss the microturbines. This DOE website says that they are hoping to increase the efficiency of microturbines to over 40 %:

http://www.eere.energy.gov/de/microturbines/

Microturbine based plugin cars would be even simpler to manufacture.

Also the turbines can be made quieter than piston engines. Remember the M1 tanks are much more quiet than diesel tanks.

But my main point was that if Obama legislates that within 5 years all new cars sold in America will be plugin vehicles, this would save the US, provided that the government will immediately start providing $150 billion per year for research in this area. This would bring an end to foreign oil imports, and it would also make it possible to support all the plugin hybrid cars with biofuels since plugin hybrids would need 75 % less oil.

Engineer-Poet said at January 5, 2010 6:58 AM:

Had Bush just responded to 9/11 by re-instating the PNGV program he'd cancelled just months earlier, we would be far better off and PHEV-ready.

He didn't; he preferred to support OPED in general and Saudi Arabia in particular over his own country.  That makes him a traitor, with all that implies.

RC said at January 5, 2010 8:32 AM:

Yes, and Obama is a traitor also based upon his many treasonous actions. Electing traitors to the presidency appears to be an American trait recently.

Peak Oil 2005? No, more like Peak Oil 2030.

MPG said at January 5, 2010 8:04 PM:

-But my main point was that if Obama legislates that within 5 years all new cars sold in America will be plugin vehicles, this would save the US, provided that the government will immediately start providing $150 billion per year for research in this area. This would bring an end to foreign oil imports, and it would also make it possible to support all the plugin hybrid cars with biofuels since plugin hybrids would need 75 % less oil.-

And what will produce the electricity for the plug-ins? Nuclear plants? Wind power? Solar? What? That's right, nothing. And what will the biofeuls be? Just to let you know, there is plenty of oil in the US, plenty. And plenty more off both coasts. Can't drill for it.

Randall Parker said at January 5, 2010 11:27 PM:

MPG,

With late night charging we could power over half the vehicles in the United States without building new electric power plants. We have lots of unused generation capacity during off-peak hours.

Plenty of oil off coasts? Depends on your definition of plenty. If all areas were open for drilling we'd still never regain the production level of 1970. We'd still import oil.

Engineer-Poet said at January 6, 2010 6:30 AM:

Even if we burned oil in CCGT powerplants to charge EVs, we would need a fraction of the oil for the 60%-efficient CCGTs than we burn in 14.9%-efficient ICE vehicles.

Wolf-Dog said at January 6, 2010 6:42 PM:

It is calculated that to make all the cars in the US are electric vehicles, the necessary expansion in the power grid has to increase about 10 % to 15 %. In comparison, the industries and cities would consume a lot more electricity even if all cars are electric vehicles. It is only because petroleum based fuels are a more efficient way of storing energy in cars that gasoline and diesel cars are still in favor, it is not because of a shortage of energy that liquid fuels are used in cars. So expanding the power grid by and extra just 1 % per year during this decade is not a terribly difficult thing to do, given that this would generate wealth in the long run since it would reduce the US trade deficit by $350 billion per year if we stop importing oil, (assuming that oil will not be more expensive than the current $75 per barrel and the amount of oil we import will stay the same.)

But even the current Obama administration is investing too little in battery research and hybrid or pure electric car development.

Bob Badour said at January 6, 2010 7:12 PM:
even the current Obama administration

You didn't honestly think he was going to do anything useful, worthwhile or different did you?

Sage said at January 6, 2010 8:19 PM:

Craig Venter talks about creating life: http://www.youtube.com/watch?v=nKZ-GjSaqgo

The real argument about energy can be reduced to "portable energy" and "low cost". The amount of energy that man consumes is a tiny fraction of the Sun's incident flux energy. We need to convert some of that incoming energy into a portable form at low cost. Is it too great a leap that a bio-engineered organism can be made to do that? Is it too great of a mental leap to assume that man won't be able to harness photosynthesis eventually?

Computer advancement and biological sciences are advancing hand in glove. The next 100 years will bring about changes that cannot be predicted here. Among those advances it is likely we will create a bio reactor microbe that produces portable energy at an efficient cost. Or, perhaps we will engineer a plant that grows oil efficiently.

Even if those advances don't come, which is unlikely given our current trajectory, the current amount of energy in the U.S. in terms of coal, and natural gas is enough to last 100's of years. Also, we are finding oil in deep water, such as in Mexico and in Brazil. If we guarantee the cost of oil at say $60 per barrel, then oil companies can take long term risks, and banks can take long term bets. We would soon be awash in known reserves.

Our natural gas reserves are increasing, due to innovations in extracting natural gas from shale formations. We have enough nuclear fuel for many hundreds of years.

People always discount the ingenuity of man to engineer and create his way around limits. But, that doesn't mean we should be stupid, and use our energy unwisely. We currently design our houses, our cities, our food production, our entire way of life to inefficiently consume energy. We could easily live with high living standards on much lower energy consumption provided we took a smarter approach.

But, perhaps biology has an answer there too, where IQ's are increased every generation. Smart people can better lead the politicians, smart people can better suppress their base instincts, smart people tend to do less crime, and smart people can make rational long term choices with regards to population control.

no i don't said at January 7, 2010 5:19 PM:

"When a country runs a trade deficit,with oil or other goods, it's currency should decline so it will export more and import less. That is why the dollar is falling against the other major currencies."

What the hell does "trade defici" mean? If there's trade there cannot be deficit.

Trade implies exchange: Japan sends me cars and I send them Florida oranges, IN EQUAL VALUE. "Trade deficit" is an absurd concept that leads people to imagine all sorts of things. If we instead say, "Budget Deficit", now that would be a real concept that would simply mean "we have imported more than we have exported" or "we have spent more on something than we should've"

"Trade Deficit"... I'm surprised people still use that to try to mean something.

Wolf-Dog said at January 7, 2010 6:32 PM:

In addition to Florida oranges, we send to Japan freshly printed counterfeit money, which is delicious, since this money is shipped before even the ink is dry. This is why at the sushi restaurants in Tokyo they should start wrapping the sushi with green 100 dollar bills instead of seaweed (which is also green). But seriously, the meaning of foreign trade deficit is that what we are exporting IN EQUAL VALUE is not just goods and services, but also IOUs (dollar) as debt. With the accumulated dollars, they can buy what they want even in the US, but they would do a lot of harm since in the end the US dollar based money supply in the hand of foreigners will be greater than in the United States. Also ultimately this will cause the value of the US currency to decline a lot more.

no i don't said at January 8, 2010 3:05 PM:

I agree, Wolf. Let's see what 2010 has to bring...


Post a comment
Comments:
Name (not anon or anonymous):
Email Address:
URL:
Remember info?

      
 
Web parapundit.com
Go Read More Posts On ParaPundit
Site Traffic Info
The contents of this site are copyright ©