We Peaked

It has only been a few weeks since I first learned about Peak Oil, and in a short time I’ve read nearly a hundred articles, watched a couple movies and spoken to dozens of people about what this means for the future of mankind.

I’ve found reactions range from “that’ll never happen” to “hydrogen is the new oil” to “this will mean the end of suburbia” to “WE’RE ALL GOING TO DIE!!” and every shade of optimism and pessimism in-between. I’m not sure which is worse, those cripplingly in denial, or the obsessed doomsayers who insist the worst-case scenario is the most likely.

The fact is, nobody really knows how this is going to play out. There are so many factors involved, including the behaviour and reactions of the entire human population, and the biggest of world market forces involving food and energy in which nearly all humans are involved.

Here’s a quick breakdown of what I understand will definitely happen, what might happen, and what probably won’t:

What will definitely happen sooner or later

• The cost of food and energy will go up
• The cost of all things which use energy (transportation, manufactured goods, etc.) will go up
• Businesses (and people) relying on cheap energy will suffer if they don’t adapt
• These higher prices will cause everyone to choose cheaper solutions when available
• There will be shortages of food and fuel in some parts of the world for some amount of time
• Millions or billions of the poorest people on earth will not be able to afford food and will starve to death

What might happen

• The economies of the world may fall into a crippling depression
• Countries may start wars over dwindling oil resources
• Air travel may no longer be affordable to the middle class
• The “civilized” world might stop being built around the car

What probably won’t happen

• Democracies fall to be replaced by totalitarian dictatorships
• All technology is abandoned and we return to life as it was in the middle ages
• Economic “theory” will be proven to be one big fallacy
• The sky falls, destroying all life on earth
• Jesus makes an appearance with a handful of horsemen

We know things will change drastically on earth, we just don’t know when. We also don’t know what pains will emerge as people are forced to adapt faster than possible.

And we must not forget that this will be a worldwide event. Not being able to afford to drive is one thing, watching your entire community or country starve to death is another. Most of the real victims will be in third-world countries like Bangladesh. Those in the first-world will probably complain the loudest about the cost of filling up their SUVs, but the varying levels of suffering will be incomparable.

The doomsayers, having realised that the world needs to change and adapt, believe that it is their sole responsibility to run around scaring everyone into changing immediately. At the same time, they dismiss economists suggesting that economics could never understand or explain the market forces at work. Of course this is completely ironic, because economic forces are the only explanation for what is happening and how and why the world will change.

Long before the message of the doomsayers reach the consciousness of the entire world, people will start making big changes in their lives in order to save money and/or earn more money. Money is the reason people change, not bestselling books or youtube videos.

The rules of supply and demand are deceptively simple but more powerful than we can imagine. Take a simple scenario that we’ll be facing on a regular basis: on some random day in 2008, the world produces 85 million barrels of oil, and the world wants to use 86 million barrels. What happens? The price will go up until enough people feel oil is too expensive and decide not to buy a million of those barrels. They may use a different energy source instead, or might decide they didn’t need to use the oil so badly after all. Ideally, these million barrels will be the oil that is used most wastefully. Unfortunately, it will also include those that were depending on it to live, but still can’t afford it.

So how easy will it be to reduce demand by (ie. change peoples’ minds about) 1 million barrels per day? or 2? or 10? or 86? Nobody knows, and the future reality will depend on the answer to this question.

Here are just a few more examples of how higher prices will encourage people to change their minds and decrease their demand for oil:

• People will stop wasting energy and food when it becomes too expensive to do so
• People will buy more things made locally by hand when transportation becomes expensive and manual labour becomes cheaper than machines and robotics
• People will buy (and grow) locally grown, organic food when it is cheaper than mass-produced
• People will choose public transportation when it is much cheaper than driving
• People will choose to work at home when possible, or else choose to move closer to work, or else choose to find a job closer to home
• People will buy renewable energy when it is cheaper than non-renewable energy
• People will pay extra for energy-efficient appliances if they save enough in energy costs

It’s very important to remember the element of choice in all of this. People will choose to adapt because the alternative will be unattractive, expensive, or just plain stupid. It’s not like you won’t be able to choose to drive a car, you just won’t make that choice as often. Ask someone in middle class USA in a few years if they feel they were forced into changing their lives by the power of the world market forces and they will simply say “no, I chose to do _____ because I could save $_____.”

In fact, world market forces have “forced” people into choosing all sorts of things. If you were to go back to 1900 and tell someone that over the next century the entire world would be reshaped, people would leave the farm to enter the cities, buy cars, live in the yet-to-be-built suburbs, and develop massive technology which would shift work away from manual labour and towards information technology, they would freak out and start running through town insisting everyone start bracing for change and probably that they should leave the farm immediately, buy a car, and brace for the impacts of globalization. But of course, that wouldn’t have made a difference.

So what is one to do, armed with the knowledge that the world will be facing some big changes? First, don’t panic. Realise these changes will come at a gradual enough pace that you will be able to survive. You may want to prepare yourself for the possibility of blackouts and shortages of food and gas, but don’t go crazy. A well-stocked pantry and a supply of candles may help you to relax. You can also start making bigger changes like installing a wood stove or moving somewhere that doesn’t require a car. It takes time to make changes, so the sooner you start the more comfortable the transition will be.

And if you’re really clever, you’ll realise that there are infinite new business opportunities being created by this change. Start a company to help start and maintain backyard gardens, or sell and install wood stoves and solar panels, or help companies transition to telecommuting, or develop or sell electric cars.

We do need to change, but there’s no need for pessimism. There are lots of ways to help people change that don’t involve shocking them with doomsday scenarios. Warn them of the coming apocalypse and you’ll be dismissed as a chicken little. Offer to help them save money instead, and you’ll be welcomed with open arms.

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I just read this, but Google said last November that they have created a team to find cheap sustainable energy cheaper than coal:

The newly created initiative, known as RE<C, will focus initially on advanced solar thermal power, wind power technologies, enhanced geothermal systems and other potential breakthrough technologies.  RE<C is hiring engineers and energy experts to lead its research and development work, which will begin with a significant effort on solar thermal technology, and will also investigate enhanced geothermal systems and other areas. In 2008, Google expects to spend tens of millions on research and development and related investments in renewable energy. As part of its capital planning process, the company also anticipates investing hundreds of millions of dollars in breakthrough renewable energy projects which generate positive returns.

“We have gained expertise in designing and building large-scale, energy-intensive facilities by building efficient data centers,” said Larry Page, Google Co-founder and President of Products. ”We want to apply the same creativity and innovation to the challenge of generating renewable electricity at globally significant scale, and produce it cheaper than from coal.”

Could they develop the technology that so many have been hoping for and, well, assuming would happen? If not Google, maybe another company?

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A few years ago, I went to the University of Waterloo in Ontario, Canada, and had a few economics classes with an excellent professor and economist, Larry Smith. I recently asked Larry the following: “Is it possible that economic growth could be over? forever?”

This was his answer:

There are several aspects to your question.  First, economic growth is not over, and certainly not forever.

While conventional oil [that is cheap] reserves many be nearing their limit, there are many untapped unconventional sources [that is expensive] that await their full exploitation.  For example, oil sands, shale and coal itself.  And nuclear power sources can, in due time, supply ALL our needs if necessary. And it will be safe if we tolerate the expense of safety features.

What we are seeing is the end of cheap energy. And this will [is] disruptive of our life styles and industries and economies. But we will adapt, as we always have, with pain and much complaining. But why would this slow or stop growth? Expensive energy production afer all adds to GDP.

Growth is about the generation of value, NOT physical goods. And already most of our production [about 70%] is services.

As well, high oil prices will spur the reduction of greenhouse gases and the increase of conservation measures. We have ALREADY reduced BTUs per dollar of GDP.  This will continue.

The personal challenge to you is to adapt yourself as a producer and consumer to the new realities.  And prosper as a result.

I wish you success.

It’s worth noting that Larry is mainly talking about the Canadian economy. Certainly some countries will be much worse off, but the lesson here is the same. High prices have the magic effect of making people finally change, as non-oil products and energy sources become comparatively cheaper, on a scale that government intervention or environmental campaigning could never achieve.

These high prices will be the kick in the ass we need to make major changes, changes which will improve our environment, require huge effort (ie. create many jobs), and potentially make our countries and our world a much better place to live.

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The International Energy Agency says they expect production will boost in 2009/2010, giving some temporary relief, but said prices will then continue to rise until 2013 (from India Reuters):

FRANKFURT, July 5 (Reuters) - The situation on the oil market is likely to ease in 2009/2010 as more production comes onstream, then tighten again through 2013 as output falls and demand rises, the head of the International Energy Agency said.

“The market situation will certainly remain tight until 2013,” Nobuo Tanaka told German business daily Handelsblatt in an interview released ahead of publication on Monday.

In a summary of the interview distributed on Saturday, Tanaka urged oil producers to increase investment and consumers to save energy.

Developing countries must end the practice of keeping petrol prices artificially low and industrial countries must not reduce taxes on petrol at the pump, which would send the wrong signal to consumers, the paper quoted Tanaka as saying.

Earlier this week, Tanaka told Reuters in an interview that the world oil market was very tight, leaving it vulnerable to several factors that could boost crude prices further.

This is good news. It sounds like the world will get a very noticeable warning over the next year or so, encouraging people to make drastic changes while making the cost of changing a bit more affordable.

I also think “until 2013″ should be read “until at least 2013″. I’m assuming they can predict until 2013 because if new sources were discovered today it could take 5+ years to reach production.

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Following the summit in Madrid this past week, OPEC president Chakib Khelil announced that prices will go higher soon. He also emphasised that the cause of higher prices is the US dollar and bioethanol. My understanding is that bioethanol would relieve some demand thus lowering oil prices, but the president of OPEC claims otherwise (from Xinhua):

ALGIERS, July 6 (Xinhua) — Oil prices are likely to rise further largely due to a weak dollar and geopolitics, Chakib Khelil, president of the Organization of the Petroleum Exporting Countries (OPEC), said Sunday.

The minister denied accusations by some western countries that insufficient supply by the oil producing countries are causing the soaring prices.

“The price of oil will rise again in the coming weeks. We have to follow the evolution of the dollar, because a 1 percent fall in the dollar means four dollars more on the price of oil,” Khelil said in an interview with the local daily Algeria-News.

“I believe that 60 percent of the rise is due to the fall in the exchange rate of the dollar and to geopolitical problems, and 40 percent to the intrusion of bioethanol on the market,” he said.

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It seems the Marshall Islands may already be the first country to be plunged into disaster following rising oil prices. Essentially the island can’t afford to buy the diesel fuel it needs to provide electricity on the island (from Google News):

Marshall Islands declares ‘economic emergency’ over energy crisis

MAJURO (AFP) — The tiny western Pacific island nation of the Marshall Islands has declared a state of economic emergency as soaring fuel prices threaten to shut down electricity supplies.

Failure to resolve the fuel crisis could lead to a “disaster of unimaginable magnitude,” President Litokwa Tomeing said in a statement late Thursday.

…

“Without electricity everything will come to a standstill,” Finance Minister Jack Ading told visiting Asian Development Bank officials this week.

“The adverse effects of this global fuel crisis, its intensity and severity, are even more acute and destabilizing on small island states like the Marshall Islands with practically no means to protect itself from external pressures and shocks,” he said.

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I found this article which puts together statistics from the 2006 CIA World Factbook to speculate on the potential of a few dozen countries:

Which countries are best equipped to survive peak oil?

It concludes that Russia will be at the top and Bangladesh at the bottom. And until a few days ago, Bangladesh had gas prices fixed from when oil was $60 a barrel (from Google News):

Poverty-hit Bangladesh forced into huge fuel price hike

The government last increased fuel prices in April 2007. World crude oil prices have since more than doubled, costing the impoverished country more than one billion dollars in subsidies in the fiscal year that ends on Monday.

Economist Apiur Rahman, the head of Development Coordination — a Bangladeshi think-thank — said the global surge and the resulting domestic hike could be catastrophic for millions in the country.

“It’s very bad news for the country’s farmers, for rural poor, and even middle income people,” he said.

“It will drive millions of people into poverty. Inflation will jump immediately. But the government had no choice, its hands were tied. It had to raise prices.”

And most foreboding:

Economist Apiur Rahman, the head of Development Coordination — a Bangladeshi think-thank — said the global surge and the resulting domestic hike could be catastrophic for millions in the country.

“It’s very bad news for the country’s farmers, for rural poor, and even middle income people,” he said.

“It will drive millions of people into poverty. Inflation will jump immediately. But the government had no choice, its hands were tied. It had to raise prices.”

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Matt Simmons, author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, has done some great, articulate interviews about Peak Oil. Here are two from The Bloomberg Report, one from January 31st, 2007, the second from March 5th, 2008:

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I found this story in the New York Times archive, published on June 20th, 1920!:

[A] consumption curve that rises faster than a production curve is the graphic signal of danger ahead: the heavy draft now being made upon our accumulated stores of oil - more than 10 per cent. gone in nine months - tells the story that we are living beyond our means; and it all leads up to ask ourselves, in this day of apparent plenty, where will our children get the oil they need?

So we had about 88 years of warning but nobody has bothered to do anything about it yet.

It’s also interesting to wonder: if we were living beyond our means in 1920, how much will we have to undo to return to a sustainable lifestyle?

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The Globe and Mail reported yesterday that Ontario’s economy (which is almost 40% of Canada’s economy) is shrinking and may be heading in to a recession. The cause?

Just three months ago, economists were projecting that Ontario’s economy would grow 1.2 per cent this year - a consensus forecast that has since been slashed in half in the wake of an unexpected rise in oil prices and plummeting motor vehicles exports to the United States.

“We are in some challenging times,” Finance Minister Dwight Duncan told reporters yesterday. “I think those challenges continue.”

Unexpected rise in oil prices? This is just the beginning.

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