The End of Industrial Expansion
World oil production has reached peak capacity. We are now facing the downside of the peak oil curve and the consequences on world energy markets will be more than uncomfortable. The decrease in production capacity means we no longer have the ability to compensate for minor fluctuations in oil markets. The major crude oil suppliers are all reaching the breaking point, which will spell the inevitable end of industrial expansion. Alternative energy technologies will not help industrial markets to expand, only slow the decline. The problem lies in our ability to comprehend this looming catastrophe and act quickly enough to avoid a complete economic collapse.
ยป Source: Daily Reckoning
Against the background of everything else happening in the financial markets is the apparent circumstance of peak oil. Even The New York Times joined the chorus in a Sunday editorial, saying:
“Our demand for petroleum products strains the limits of the global capacity to supply them. In past decades, if a pipeline broke in Nigeria, Saudi Arabia might compensate by setting workers to pumping more oil. Now, with little additional capacity, rising prices are necessary to balance out supply and demand.”
No more increasing capacity = peak oil.
Peak oil and tradable paper currencies: “Rearview mirror” action
It’s as simple as that. We now have nine and a half months of “rearview mirror” action to look back and see that world oil production has retreated from its all-time high of just over 85 million barrels a day (m/b/d) achieved in December 2005 (just as geologist Kenneth Deffeyes of Princeton had predicted). For 2006, production has remained in the 84 m/b/d range every month reported so far, while demand has exceeded that.
Texas oil man Jeffrey Brown, a commentator at TheOilDrum.com, the outstanding oil discussion group on the Internet, makes the point that Saudi Arabia is at the same point statistically (in terms of ultimate recoverable reserves) that Texas was at in 1972 when production there peaked. The world’s four greatest oil fields are in depletion (Burgan [Kuwait], Daqing [China], Cantarell [Mexico], and Ghawar [Saudi Arabia]) and these have accounted for over 14 percent of the world’s oil production. (Ghawar alone accounts for over 60 percent of Saudi Arabia’s production.) The North Sea has peaked and production there is “crashing.”
Venezuela has peaked and its oil is low-quality heavy crude. Indonesia (an OPEC member) has peaked and is now a net oil importer. Nigeria’s political chaos is making production increasingly difficult-to-impossible. Production in the Canadian tar sands is not making up for losses elsewhere. The United States alone is down to about a four-year supply of conventional crude and condensates while importing 70 percent of the oil consumed. Discovery of new oil (including Chevron’s largely hypothetical deepwater “Jack” finds) is barely covering a fraction of the world’s consumption. So it goes….
Peak oil and tradable paper currencies: An end to industrial expansion
Where finance is concerned, the basic implication of peak oil is pretty stark: an end to industrial expansion (i.e. “growth”). All the alternatives to oil will not keep the industrial economies expanding - they can only slow down a contraction, and only marginally so. The trouble with this picture is that finance is a system that uses paper markers to represent the hope and expectation for the expansion of wealth. These markers are currencies, stocks, bonds, option contracts, derivatives plays, and other certificates that are traded in open markets. If there is no longer any hope of increased wealth in the world, then all those tradable paper markers become losers. Their value unwinds and imagined piles of wealth evaporate into thin air.
The unwinding process depends on the psychology of the people who own these certificates. If they do not understand the global oil situation and its implications, then they will continue to hope for and expect expanded wealth, and thus continue to regard their paper certificates as credible markers of value. And that is largely the case at the moment, since most of the playas in the financial markets are not paying attention to the peak oil story, or don’t believe it is for real.
Two special and transient circumstances are now propping up the financial markets. One is that for practical purposes the world is virtually at peak, meaning this is an extra-special time of strange behaviour (like the point in the apogee of a steep sub orbital flight in which passengers become momentarily weightless). Supply and demand for oil are only beginning to go out of whack (that is, demand just barely exceeding supply). Even at this early stage, the oil markets themselves are showing stress, as hoarding behaviour sets in and induces wider swings of price volatility. But these swings in oil prices - such as the one we’re in right now, where prices have crashed 20 percent since the panic buying (hoarding) of June and July - send false signals to the financial players.
The main false signal is that all is well on the global oil scene… there’s no real supply problem… and hence no threat to the continuing expansion of industrial production and its associated wealth-generating activities. This signal just tells the playas to buy more paper markers. Thus, the stock market goes up.
The second special and transient circumstance is that so much wealth has already accumulated along the way to peak, that financial markets take on a life of their own - as existing wealth “invests” itself in more paper markers hoping and expecting to “grow” into even more wealth. The problem here is that existing wealth is actually being squandered, since the paper markers will only lose value as the hopes and expectations vested in them dissolve in disappointment. But we haven’t quite reached that point yet.
