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VK2AAB > FUEL 19.06.10 03:50l 283 Lines 16370 Bytes #999 (0) @ WW
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Subj: What Happens When Oil Depletes
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From: VK2AAB@VK2AAB.#SYD.NSW.AUS.OC
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Hello All,
The following article while US based is quite relevant to us all.
Unfortunately I am unable to reproduce the graphs for packet but
I have started to write a program that will hopefully enable me to include
graphs that will show the meaning but will not have the resolution of the
original.
You can find the otiginal article with graphs at;
http://www.theoildrum.com/node/6574
73 Barry VK2AAB
-------------------------------------------------------------
Published Jun 17 2010 by The Oil Drum, Archived Jun 18 2010
What happens when energy resources deplete?
by Gail Tverberg
What happens when energy resources, such as oil, deplete?
One view is that energy prices will rise, substitutes will be found, and
prices will come back down again, perhaps settling at a somewhat higher
equilibrium reflecting the cost of producing the substitute energy source.
The economy will continue to function pretty much as before. The catch is
that we aren't finding reasonably-priced, scalable substitutes, so this
isn't happening. Oil prices are down, but not because of substitutes.
Another view, popular among those concerned about peak-oil, is that oil and
energy prices will just keep rising. If scalable substitutes aren't found,
some expect that oil prices will rise from their current price of $75
barrel, to $100 barrel, to $200 barrel, to $300 barrel, and eventually to
$1,000 barrel or more.
The problem with this view is that it doesn't take into account the amount
of money people actually have available to spend. Just because oil or energy
prices rise doesn't mean that people will get additional income to cover
these higher expenditures. In real life, prices can't keep going up.
I expect that what really will happen is oil prices may bounce up, but they
will soon come back down again, because of recessionary impacts and credit
crunches caused by high oil prices. Most of the time, oil prices will end up
in the uncomfortable middle--too high for the economy to buzz along, but too
low to encourage much new oil production, or much new renewable production.
The result is likely to be continuing recession, getting worse over time,
because of what will be generally viewed as inadequate demand for oil.
What really happens when energy prices go up
Energy expenditures are not a big share of income for high income people,
but they are for the many people getting along on minimum wage, or close to
minimum wage. If oil prices go up, these folks find the price of food and
gasoline going up, and perhaps the price of home heating and electricity
(because the prices of the various types of energy tend to move together).
They find their budgets stretched, and they either
1. Cut back on discretionary spending, or
2. Default on loan repayments.
A similar situation happens to the many people who earn more than minimum
wage, but live paycheck to paycheck, and pretty much spend all the money
they earn. As the prices of energy-related goods rise, these people too find
a need to cutback. Some will cut back on discretionary goods; others will
default on loan repayments; some will do both.
Thus, when oil prices rise (or energy prices in general rise), we end up
with two main effects:
1. Banks find themselves in worse condition because of many loan defaults.
2. The economy starts feeling recessionary impact, because so many people
cut back on buying discretionary goods.
These impacts are likely to lead to others as well:
1. Banks become less willing to make loans, because of the problem with
defaults.
2. Many people are laid off from work, because of reduced demand for
discretionary goods (restaurant meals, vacations, new homes, new cars, new
home furnishings, for example.)
The cutback in the purchase of new homes, new cars, new home furnishings and
the like leads to yet more impacts:
1. The price of homes drops (because fewer are upgrading to more expensive
homes, and because loans are harder to get).
2. There is less demand for oil (because oil is used in making cars, new
homes, and many other things. Also, if fewer people take vacations, and
fewer people drive to work, this reduces oil usage).
3. There is also less demand for natural gas, coal, and electricity, because
all of these are used in manufacturing discretionary goods.
The next round of effects then becomes:
1. Even more people default on their loans, because with the decline in home
values, they owe more on their homes than their homes are worth. This may
also happen if people have lost their jobs, and can no longer afford their
homes.
2. The prices of all energy products drop (oil, natural gas, coal, uranium,
ethanol) because of reduced demand. Many fewer solar panels are sold as
well.
About this time, governments come in with stimulus funds, bails out for
banks, and the problem appears to mostly solved. It isn't really solved
though--it is mostly transferred from private citizens and from corporations
to governments. But governments find revenue vastly exceeds expenditures,
and debt is rapidly rising. Something needs to be done--either raise taxes
and cut services, or default on debt.
Before we talk about these options, let's talk about timing.
When does all this happen?
The popular myth among people concerned about peak oil is that difficulties
do not really start until oil production begins its down-slope. In my view,
the difficulties start much sooner--as soon as oil supply cannot be provided
at close to a constant price.
Figure 1. Average monthly West Texas Intermediate spot prices, based on
Energy Information Administration data
Oil prices were in the $20 a barrel range for many years, but then started
rising about 2004, as Chinese demand began rising. So this was really the
first sign of problems.
A second measure of when this happens is when the growth in oil supplies
starts to falter. The world had been accustomed to a close to 2% a year rise
in world oil production, but slipped onto a production plateau starting in
2005. This production plateau has lasted until the present time (2010).
Figure 2. Diagram by author. Historical data from Energy Information
Administration.
So if we compare what production we might have expected in the absence of
higher price or credit problems (green line), to the actual production (blue
line), a gap started to appear about 2006. This is another measure of when
we would expect symptoms of energy shortages to start affecting economies.
I know many will say, "Oh, but while we had problems with sub-prime
mortgages about then, and housing price drops, it couldn't have had anything
to do with oil prices." I would point out:
1. Recessionary effects happened around the world, not just where there were
subprime mortgages. Japan was affected even before the US, and didn't have
subprime mortgages.
2. The effects that we would expect from higher oil prices had to be
manifested somewhere. It turns out the greatest manifestation was with lower
income people, living in distant suburbs where the commutes were longest.
These are precisely the folks one would expect to be most affected by higher
oil prices.
3. The impacts of recession and credit problems have gradually spread more
broadly than subprime loans, as we would expect, based on the foregoing
discussion of the expected impacts.
I should point out that saying that higher oil prices being instrumental in
causing in recession doesn't mean that there couldn't be underlying
weaknesses, that would allow the manifestations to be in particular parts of
the economy.
Also, we know that higher world oil usage is closely linked with world
economic growth. One would expect relatively lower oil use to therefore lead
to recession--and that is precisely what seems to be happening in the real
world.
What is ahead?
We are now at the point where the recession seems to be better, because
governments have bailed out private citizens and companies (particularly
banks). But this leaves the governments with a huge amount of debt, and with
a big gap between revenues and expenditures.
Figure 3. US government receipts and disbursements as percentages of
disposable personal income, based on data of the US Bureau of Economic
Analysis
Figure 3 shows what a huge shortfall the US government now has in revenues.
There are many other governments around the world with similar issues. In
addition, state and local governments have serious revenue shortfalls.
If recession continues, it is difficult for governments to continue to
borrow more, as expenditures outpace income. Eventually, governments are
left with two options:
1. Raise taxes and reduce services, so as to get revenue and expenses back
in line.
2. Default on debt.
Either one of these things will make the situation worse:
1. If governments raise taxes, the effect on citizens is pretty much like
higher oil (or energy) prices. Citizens react by cutting back on
discretionary spending or defaulting on loans, and we are back to more of
the problems recessionary problems, plus loan defaults we had before. If
governments also layoff workers, this increases the recessionary effect.
2. If only one or two small governments default on debt, the world can
probably accommodate the defaults pretty easily. But if problems spread to a
large number of big countries (UK, United States, and Japan, for example),
then international trade is likely to be disrupted, because many sellers of
goods will find themselves without payment. To prevent this happening again,
the sellers of goods are likely to set stricter terms--I will sell you so
much oil if you will sell me so much wheat in return, for example. The
amount of trade is likely to drop precipitously, because of the cumbersome
nature of such trading.
If governments mainly raise taxes and reduce services, I would expect the
result to be more recession, more debt defaults, and lower prices for all
energy products. Everyone will say, there is plenty of oil (natural gas,
coal, uranium) in the ground. If prices were only higher, we would extract
it.
If there are major international debt defaults, the situation is likely to
be somewhat the same (recessionary impacts and lack of credit), but some
goods may cease to be available for import. If these goods are critical
goods (computers, replacement parts for the electrical grid, replacement
parts for automobiles), the economy could spiral downhill rapidly.
A variation on defaulting on debt is attempting to inflate it away. This
still leaves owners of bonds very unhappy, and can cause many of the same
problems as regular default.
What would it take to ramp up oil production (or a substitute) so production
is again on a trajectory where it is growing at, say, 2% per year?
I can see several ways such a ramp-up theoretically could be accomplished.
(Some of these are more ways of circumventing the problem. Note that these
are all temporary solutions. In a finite world, it is not possible to
continue exponential growth forever.)
1. If conventional oil production is flat to declining, one could ramp up
unconventional oil production (oil sands, oil shale, ultra-deep, and arctic
for example).
2. If conventional oil production is flat to declining, ramp up production
of other liquids--ethanol, biodiesel from algae, and coal to liquids, for
example.
3. If conventional oil production is flat to declining, one can try to
convert a large share of the auto fleet to electric, and ramp up electrical
production.
4. If conventional oil production is declining, one can theoretically
engineer cars to be much more efficient, and ramp up production of these new
cars.
Regardless of which approach one uses, one needs:
1. A lot of time. In 2005, Robert Hirsch was the lead author or a report for
the department of defense called Peaking of World Oil Production: Impacts,
Mitigation, & Risk Management. This report showed that mitigation would take
20 years. If one stops and works through the details of any of the three
solutions proposed above, one can see that each of these require long lead
times. For example, scaling up oil shale would likely require new coal fired
power plants in the area, new coal mines, new train tracks from the coal
mines to the oil shale area, and new water supplies piped into the arid US
West, not to mention building the facilities themselves. Perfecting the
technology for electric cars, and building a whole fleet of these, would be
a similarly slow undertaking, as would replacing the current auto fleet with
more efficient cars.
2. A lot of capital. Unless oil prices are higher--a lot higher--it is hard
to justify large capital expenditures, in ventures such as this. We have
just seen that consumers cannot afford high oil prices, without recession.
3. Long term subsidies. If the prices of the new fuels are too high for
consumers to really afford, one needs long-term subsidies. We have just seen
that high oil prices seem to hurt the economy badly. High prices for
substitutes can be expected to have a similar effect.
It seems like any one of these issues is likely to be a deal-killer. Since
we are already at a point where conventional oil is falling short of demand,
the time requirement will mean that scaling up will be very difficult.
Progress to date on renewables has been very small, as shown on Figure 4.
Figure 4. World primary energy production, based on BP 2010 Statistical
Analysis ? Graph by Euan Mearns
Wind, solar, and geothermal are combined in the tiny red line at the top of
the chart. Since these all produce electricity, not a liquid fuel, they are
not good substitutes for oil. Biofuels are not shown, but are also a very
thin line.
What is "Peak Oil"?
"Peak oil" is sometimes described as the time when conventional oil
production begins to fall. There is still a lot of oil in the ground,
though, but what is left is
1. Very slow to extract. It is necessary to ramp up huge amounts of
production capability to mitigate the downslope of conventional production.
2. Expensive to produce. The easy to produce oil is gone.
So what peak oil really is, is a turning point. One can theoretically
continue to produce the same amount of oil or more, if one makes huge
investment well in advance. The problem is that it is really too late now.
By the time new production finally gets started, conventional oil production
will be down very substantially from its peak level. The fact that no one
ramped up unconventional production (or alternatives production) before it
was too late leaves us with precisely the problem that the peak oil
community has been warning about--oil production capacity that can be
expected to decrease over time, as individual fields deplete.
Peak Oil and Exponential Growth
Oil supplies are expected not just to level off, but to actually decline.
Part of this happens because of the natural decline rate of conventional oil
fields, as the finite amount of oil that is in the field is extracted.
The decline is likely to be more severe than historical decline rates (2% to
8% per year) would suggest, for two reasons mentioned earlier:
1. Declining credit availability, as high default rates continue among
buyers. Lack of credit will tend to keep oil prices low, and discourage
investment.
2. Higher tax rates on fossil fuels. Governments are short of funds and oil
companies are temping targets. If tax rates are raised, this will likely cut
back production, since oil companies base investment decisions on expected
after-tax profit, and this will be lower for many projects.
Meanwhile, we have a huge number of variables growing exponentially:
? Economic growth
? Money supply
? Stock market prices (hopefully)
? Population
These variables are not independent of energy supplies. If nothing else,
people need food to eat, and oil is used very extensively for food
production. It is questionable whether these variables can continue their
exponential growth if oil and other energy supplies are declining in
quantity.
Figure 5. Graph from report Dangerous Exponentials by Tullett Prebon.
?Anyone who believes exponential growth can go on forever in a finite world
is either a madman or an economist?. Kenneth Boulding
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