Peak Oil and Denial

This is a translation of a post from 2009 on my Swedish blog, with some adaptations and updates.

Many confuse peak oil with running out of oil. This is not what it is about - in 2008 I wrote this.

What peak oil is about is instead that for more than 100 years we have lived in a world of increasing oil supply and cheap oil. This has fuelled an economic expansion unmatched in all of human history. When the peak comes and is passed we will instead have to endure a steadily diminishing oil supply and therefore more expensive oil. The biggest worry among "peak oilers" is how our global societies, completely built around cheap oil and constant economic growth, will handle this. Which economic, political and social problems will this lead to? We already see some of them, but more will come the more expensive oil becomes. Will we instead see an economic contraction unmatched in human history?

And there are no other energy sources that can completely replace fossil fuels. I've written about this in my review of the alternatives (only in Swedish).

Now this is a very drastic change that is happening. Many of the economic theories that form the base for our societies' planning will be turned topsy-turvy, since they have only been tested during periods of long term global economic growth. What happens for example to loans with interest when growth slows or turns into contraction? Or pension funds? The change is so big that it will be a severe shock to many people. So how do people react to this?

Elisabeth Kübler-Ross was a Swiss-American psychiatrist who worked with terminally ill and dying people. She created a description of the stages that a terminally ill human goes through, which can also be applied to other shocking information, e.g. when somebody realises the implications of peak oil. Kübler-Ross divided the reaction into five stages - denial, anger, bargaining, depression and acceptance.

1. Denial. This is the first natural reaction to shocking information, which entails a loss and/or change. You refuse to accept reality as it is.
2. Anger. When you gradually have understood that the shocking information really is true and unavoidable the denial is transformed into anger. You become raging and angry at yourself and other people, sometimes including "scapegoats".
3. Bargaining. After the anger is over you instead try to bargain about the unavoidable that is about to happen and try to find something that can postpone the unavoidable.
4. Depression. When you can no longer deny, see that it no longer helps to become angry, and see that you can no longer bargain to avoid the unavoidable you fall into depression. This depression can throw you back to one of the earlier stages.
5. Acceptance. When (and if) you have managed to get through the first four stages you get to the stage where you accept the unavoidable and are ready to deal with it in the best way.

There are many examples of this from real life, for example the debt crisis of Greece, Ireland, Italy, etc., which was first denied, and then met by anger at "evil speculators". At the moment it looks like the EU leaders are in the stage of bargaining, when central banks and politicians try to find ways to "save" countries with far too large public debt.

Another example is Norway's oil production, which started contracting by several percent per year around 2001. This came as a surprise to most people, even those in the business. At first denial was the response, and they believed it was only a temporary production drop. The anger stage is often not seen so much in public in these cases, but I guess that many directors in the Norwegian oil business and oil directorate became very angry that their engineers could not keep the production up. Now it seems that Norway has reached the bargaining stage, where they try just about anything to keep their oil production from falling too fast.

So how do our politicians relate to peak oil? Where are they on the Kübler-Ross scale? Most of them still seem not to have heard of peak oil, or are in the stages of denial or bargaining, since they still mostly talk of how we should create economic growth, although global growth is no longer possible when the global oil production falls. If there are any politicians who have fully understood the implications of peak oil, they still do not want to talk about it in realistic terms, since politicians don't like problems without solutions. Besides it is politically impossible to speak about deteriorating standards for most people. The voters will demand that the politicians "do something about it".

Among other people in power (business directors, central bank directors, etc.) it seems like the situation is similar. It really isn't that strange. All people in most OECD countries who are alive now have lived the most part of their lives in a period of historically unparalleled economic growth and are completely indoctrinated that most things constantly improve.

The "average Joe" has probably never even heard of peak oil and the problems that come with it. When I speak about this with many of my friends and relations they mostly deny that there is even a problem. They start talking about electric cars and solar cells and that "they'll probably invent something new". If you try to counter these arguments you will be classified as a hopeless pessimist.

Journalists then? Well, the peak oil awareness level seems to be low here too. Gunnar Lindstedt is one of the few established Swedish journalists to write about this subject. He has also written the books "Olja" (Oil) and "Svart Jord" (Black Earth), both well worth reading.

In Sweden we happen to have one of the internationally best known researchers in peak oil, Kjell Aleklett, professor of physics at Uppsala University, leader of the Uppsala Hydrocarbon Depletion Study Group and one of the founders of ASPO, the Association for the Study of Peak Oil and Gas. In spite of this Swedish media are rather silent when it comes to peak oil.

On the World Wide Web the situation is better. The first Swedish site about peak oil was energikris.nu, which started in May 2005 but is no longer updated. Nowadays there is the news and discussion site oljepris.se. There are also a number of Swedish bloggers that often write about peak oil (apart from myself), notably Sweden's most read finance blog Cornucopia. ASPO Sweden also has a blog and news.

So it seems to me that most of society does not know about peak oil or is in denial about it.

So where are you on the Kübler-Ross scale when it comes to your view on peak oil? If you've made it to the end of this article at least you are not unaware of it.

Oil and Other Commodity Prices

I haven't had time to write for a while, but now I'm back with this year's first post.

One of my favourite bloggers, Stefan Karlsson, wrote about rising commodity prices today. I feel I have to comment on what he said, but since this comment is much longer than his blog post, I post it here on my own blog instead.

Stefan says "anyone who tells you that the commodity price boom reflects the alleged 'peak oil' doesn't know what they're talking about". I would instead say they are parallel developments.

Now why does Stefan say "alleged" peak oil? Isn't Stefan Karlsson convinced yet about the imminence of peak oil? I'm not saying he has to believe all the doomer stuff you can read on many peak oil sites, but I do hope he has read enough facts to understand that peak oil is here, and will most probably have profound effects on our lives.

In my opinion, the oil price does (partly) reflect "peak oil", because demand has outpaced supply. Take a look at the second chart at http://oljepris.se/statistik and you will see that world production has been essentially flat since April 2005, after rising until then. Many experts who have studied oil production, e.g. Matt Simmons, argue convincingly that the world has passed peak oil and is now on a "plateau" of oil production. Even if the peak is a number of years away, most of the "easy" oil is already taken out of the ground. What is left is (on average) much harder to extract (e.g. in remote regions, have to use more advanced techniques to extract, under deep seas etc). Extracting a barrel of oil on average costs much more now than 10 years ago. There are also other factors involved in oil prices, e.g. military conflicts etc. But price action alone does not refute the fact of "peak oil". Not even when compared to other commodity prices.

But peak oil definitely plays a strong part in oil prices. The inability to increase production in spite of rising demand and sharply rising prices over several years confirms this. If you want more detailed analysis of peak oil, you can get all the information you want (and more) from The Oil Drum and Energy Bulletin.

So why have other commodities shown strong price gains too?

1. Just like for oil, demand has outpaced supply for many commodities (e.g. metals). Starting up new mines is a long process. It takes years of prospecting, government permits etc. The global economic boom of the last few years seems to have caught miners by surprise, with a demand for commodities that by far exceeded most predictions (remember, most "predictors" are notably bad at predicting things like this in advance).
2. Many other commodities are probably also near their global production peaks, e.g. platinum. The production of any finite resource can be Hubbert linearised to get an approximation of the production curve. A notable example of "peaked" commodities is uranium. Just take a look at a graph of global production and you will see that global production seems to have peaked in 1980, and since 1985 the shortfall in production has been made up by using military stockpiles (see for example the chart at the bottom of this article). The price action of uranium over the last few years confirms this situation.
3. Just like for oil, the "best" ores for other commodities have been extracted first. Take the example of copper. When copper was first discovered during the stone age, naturally occuring pure copper was used. Then somebody discovered how to extract copper from certain ores, and the best ores were mined first. Gradually over the years, ores with lower and lower percentage grades of copper have been mined. During the last century we have rapidly mined our way through most of the good ores for most commodities, at a pace never seen before in history.
4. As for food prices, we seem to have reached "peak food" rather close to "peak oil". It seems that the world is simply not capable of producing more food simply for reasons of ecological limits. Global grain stockpiles are now at something like 27-year lows. And population still growing. And demanding more and better food.
5. Increased affluence among large parts of the world's population has created a stronger demand for everything from meat to diesel to microwave ovens. This is actually strongly connected to number 1 above.
6. Food prices have become (loosely) connected to oil prices because of the grain-to-ethanol boom.
   

Now, even if we have passed "peak oil" (which I believe we have), that does not mean that oil prices cannot sink from current levels. Since the margins for world oil supply are so tight today, small differences in production or demand make big differences in price. With the coming recession, I think we will see a lot of "demand destruction", as it is euphemistically called. I therefore guess that oil prices will decline substantially later this year. $65/barrel is not impossible. This is of course blasphemy to many of my fellow "peak oilers", most of whom seem to be convinced that we will see $150 or $200 per barrel oil soon. But I predict that "demand destruction" over 1-2 years will be faster than production declines. Of course a swift economic downturn might also have a similar effect on many other commodities. Though not uranium, I suppose, because nuclear reactors will not be shut down, even if we have an economic crisis.