Peak Oil

This is a topic that has come up tangentially in a few comment boards and blogs I’ve looked at over the past week. It also came up in a discussion I had a couple weeks ago. The amazing thing about “Peak Oil” is that it so easy to see and understand in every day conversation, if someone bothers to think about it. Unlike economics and politics, which seem so complex and subjective, obscure, and prone to, literally, violent positions. But oil is just oil. It comes out of the ground, and we use some every day, and way off into the future sometime, everyone understands there won’t be anymore. But few people think about it beyond that.

Try this, though: The next time you’re having a political discussion with someone, throw “Peak Oil” into the conversation. Just throw it in there and see what happens. You’ll know when to do it. It will be at that moment when you just want to say, “Yeah, but it doesn’t really matter because…” There, that is your spot. Throw it in there: “Peak Oil.” It stops everything. Which is interesting, because the topic is really about imagining stopping everything.

It is one thing to imagine something like that, and quite another to experience it. The disconnect comes because people don’t want to imagine it. It is uncomfortable. In fact, that is one of the things that disappointed me about the article that motivated this post  (; I wanted more juicy imaginings about particular difficulties that could be foreseen. There is little of that there, but hints of it. So, let’s imagine it now.

Let’s start with setting up our premises.

1. Supply: Oil reserves are declining, and the extraction of oil is becoming more difficult and more costly. There is a wealth of data that supports this premise, and I can dig that up if you want me to.

2. Demand: Oil demand is generally seen as increasing, although this is not necessarily so. As was stated in the Al Jazeera article, “Meanwhile, world demand for crude oil grew at nearly two per cent each year between 1994 and 2006. In 2007, global demand peaked at 85.6 million bpd, but decreased in 2008 and 2009 by a total of 1.8 per cent, reportedly due to rising fuel costs.” Demand, at some level, will be determined by the costs to supply the oil, and the ability of consumers to afford it. I actually see demand continuing to fall, even as prices rise, or rather, because the prices are rising.

3. Scarcity & Price: It is axiomatic that as these supply and demand factors continue along their inevitable trajectories, the price of oil will rise. The question people often ask is, “How much?” In fact, there is no ceiling. Because they’re not making anymore, and because we will continue to use oil so long as the return exceeds the cost, it is conceivable that one gallon of gasoline in the future could be virtually priceless. You might scoff at that, but let me ask you this: How much would you pay for one gallon of gasoline if you knew it was necessary to save your life and the lives of your children and partner? Would you trade all of your material possessions for a chance at life? If that point seems a little extreme, it is only because we haven’t finished imagining.

4. Applications: So what do we use our oil for? Well, it turns out, nearly everything, in some measure.

Consumer Products: The computer you are reading this on is constructed in large part using synthetic materials produced as various long-chain polymers, which are of course developed most easily from oil. Anything plastic has a high likelihood of having originated as oil. Nylon, polyethylene, polyester. So, to lay out a sketchy, wholly incomplete list of things made with oil: ropes, fertilizers, plastic baggies, cars, computers, dishes, Vaseline, clothes, upholstery, carpet, signs, windows, remote control devices, vinyl fencing, telephones, certain perfumes and cosmetics, and maybe just one or two toys.

Power & Communications: What about the electronic signals that result in a readable media? Both the electricity, and the communications that permit you to read something I wrote from anywhere in the world, are highly dependent on oil. So your cell phone and even landline communications are implicated here, as well. Even beyond the ungodly cost of putting communications satellites into orbit, all of those cell towers, switching stations and equipment runs on … electricity. The United States produces 71.4% of its electricity from fossil fuels, which of course includes coal and natural gas, two commodities that are similarly finite. Electricity production depends not only on the fuels used to wind the magnetos, but also the infrastructure itself, the equipment needed to extract the energy from the oil and to transform it into alternating current. And so even if we miraculously develop an abundant alternative energy source, we cannot use it without an enormous investment in infrastructure.

Transportation: Cars. For that matter, consider a Dodge Ram 2500, with a 6.7L Cummins diesel, 4×4 of course. Lots of us have those up in this country, and they’re damned useful. But it runs on oil. Even the cars that are being developed to run on electricity, still depend upon oil, as discussed above. And what happens when gas hits … what? $10 per gallon? Never happen? Before the international releases of strategic oil reserves last month drove down prices, Germans were paying over $8.50 per gallon. In April, some gas stations in the U.S. were charging over $5/gal. But gasoline will become even more dear than that. Try $50 per gallon. When? It may be a few years, perhaps not until 2020, unless we have another Black Swan event crop up. (Those damn Black Swans seem to be multiplying lately.) But other experts are not so sure, and some project that acceleration to occur by 2014 or 2015. And once that price accelerates, it will not be coming back down.

By the end of this decade, be prepared to pay $100 per gallon of gas, if you can get it all. So, what are you doing with that Dodge Ram now? Well, you’re not selling it. No one else wants it either, or they have their own already. A bicycle will be worth more than that truck, not just in real terms, but in monetary terms, as well.

But the question of how you are going to get around is a personal one. Transportation is a huge issue beyond our personal movements. It’s not like we didn’t get around the world before we started using oil to power motors. But we did it with sails, and hooves, and feet. But beyond moving people, we are moving food, tools, materials, energy itself, anything of a tangible nature that needs to be moved from one place to another. And as we know, the cost to transport is always marked into the cost of the product at its destination. So if you want to move grain from Ukraine (which isn’t happening right now due to drought) to Australia, you haul it from the granaries by train to the port, where you load it onto a tanker, which then transports it to its destination. But what is the cost of that transportation if oil is priced at $500/barrel, as opposed to $100/barrel. The cost is prohibitive, and there are no local markets that cannot beat any price the Ukrainians want to offer … even free. But what if there is no local market?

Production:  Transportation doesn’t even scratch the surface.  Well, yes it does.  But there’s more.  That grain produced in Ukraine was grown using petroleum-based fertilizers.  It was planted, tended and harvested using mechanized equipment that runs on oil.  The tractors, trains, trucks and ships themselves were produced by industrial processes that depend on oil.  The mining, transportation and refining of the metals used to produce vehicles and equipment depends on oil.  The fish you see in the supermarkets were either caught by vessels powered by oil, or were farmed using processes that depend on oil.  The beef, pork and chicken you buy at the supermarket and grill in your backyard wouldn’t be there without feeding that livestock with grains and other materials that had to be also grown and transported.  Even water for drinking is cleaned and transported using oil.  Our human waste is cleaned using electricity, meaning that by extrapolation, in the United States, 71.4% of that too relies upon fossil fuels.  Timber is harvested using oil.  Nails and screws and saws and drills and drywall and shingles and siding and stoves and refrigerators and nearly everything involved in constructing a home, commercial building or factory is subsidized by the profligate use of this compact, stable, transportable, and heretofore cheap source of energy.  And get this:  Even the development of alternative energy sources depends on oil.  As an example, ethanol from corn is subject to the same energy constraints as that grain out of Ukraine.  Energy development requires the investment of energy, and right now, the only real game in town is oil.  Your job depends on oil.

5.  Wages:  It is no secret that for the past 40+ years, real wages have declined as measured against inflation (the cost of goods and services).  You have to be careful about what data you review.  For instance, the United States Department of Labor will tell you that real wages have actually increased slightly, but they factor in the cost of benefits such as healthcare, and attribute that as an increase in income for the worker.  In doing so, they throw out the fact that those healthcare costs have themselves increased exponentially.  The bottom line is that while oil climbs in price, our ability to pay for it does not increase.  Moreover, as oil prices increase, the ability of employers to continue to employ people in a productive capacity is reduced.  In other words, as external costs of production (materials, shipping, taxes, regulation, etc.) increase, employers are forced to reduce capital costs in other areas if they wish to continue selling their product.  The easiest place to do that is wages.  They either lay people off and increase the productivity of each individual worker, or they reduce, or at least do not increase, wages.  Also, because governments are subject to the same market forces, and they find their own ability to maintain their operations at current levels reduced, the reaction is rarely to cut back on their own operations.  Instead, they either shift costs to the citizens, reduce services provided, or tax.  (This is a whole other conversation.)  No matter how they go about it, the direct impact is felt by the individual citizens or their employers, further depressing real wages and job creation.

6.  Costs & Returns:  Everything we purchase, make, sell, trade or gift involves a cost-benefit analysis at some level.  Take, for an example, a fishing trip.  If I want to go salmon fishing for the weekend, I need to pay up front for a number of things:  fuel to drive to the river; food (which I would need to have anyway, but which inevitably involves unusual luxury items); state costs (licenses, tags, etc.); and equipment and materials devoted to that endeavor (poles, fishing line, hooks, roe, weights, etc.).  If I am fantastically successful, I will bring home six Chinooks, at a cost of perhaps $5/lb.  More likely, I’ll bring home one or two, with my cost per pound at $15-$20.  Maybe I’ll bring home nothing, which is usually the case for me, which means I risked $300 and realized no tangible return whatsoever.  Now, if I want to eat salmon, that is a different calculation entirely.  I would never run into Fred Meyers and plunk down $300 on a wheel for a chance of getting 0-6 whole salmon.  What’s the difference?  In the former situation, I was buying not the fish, but the time, the experience, the connections with my buddies.  In the latter, I am buying a product.  In fact, I would rarely pay $15/lb. for fish when I can eat just fine on farm-raised tilapia at $2.59/lb., but if I really want to eat salmon, I have lowered my risks, stabilized my costs and defined my returns by heading to the grocery store.  But what if gas prices rise to $10/gallon?  The salmon at the store now costs $40/lb., and a trip to the river becomes prohibitively expensive.  And so I’m definitely staying home and eating tilapia … or burgers.

The point of this example is to demonstrate that people are willing to risk capital so long as the potential returns can be justified.  But as prices rise, the investment rises, even while the potential realized benefit remains the same or declines.  At a certain point, the investment is not sufficiently incentivized to justify it, and the consumer turns away.  It becomes a losing proposition to eat salmon, and so I just don’t.  This is not welcome news to the commercial fishermen, the grocery store, the shipping industry, or the local bait shop.

7.  Location:  Where you are factors substantially into how you will be affected by a critical shortage of what Charles Hughes Smith ( calls the FEW resources — Food, Energy and Water.  As shipping costs increase, the transport of products cannot be sustained.  First, the products become expensive, then prohibitively expensive, and finally there is no rationale for shipping product from point A to point B at all.  If the product cannot be produced locally and shipped economically, it won’t be available at any price.

What this means to me will be different for you.  Here, where I live, we have hydroelectric power and geothermal springs, energy sources that do not depend on petroleum at all.  We also have water, stored in our mountains throughout the winter, and poured into our aquifers, lakes and rivers during the Spring melt.  Sometimes we have more, and sometimes less.  There is substantial forage for livestock and cropland than can be irrigated by gravity-flow diversions.  We are truly blessed here.  Now contrast that with Phoenix, a city of 1.5 million souls.  There is no imaginable way to sustain that population in terms of water alone if its transport is not economically accomplished through cheap oil.  And the same things can be said of nearly every major urban area in the world.  Some places, such as Mexico City or New York, numbering in the several of millions, are wholly dependent on lengthy supply lines for their FEW resources, the very resources necessary to survive.

In simple terms, the longer you have to transport something, the scarcer and more expensive it will be, and with the collapse of affordable oil, that means that many places will no longer have access to sufficient resources at all.

8.  Ramifications:  If supplies are dwindling and becoming more expensive to produce, and demand remains at or near the current levels, then the scarcity and price equation cannot be avoided.  And if everything we make, and most things we do, depend on that particular energy source, then it follows that those products and services will also increase in cost.

As the cost-benefit factor plays into the scarcity-price equation, it becomes increasingly clear that I can afford less and less, and I therefore must make prioritized choices as to where I will apply the capital available to me.  It is up to me to ensure that I maximize my own personal returns on the sparse capital available to me.  I have to do that to survive.  I am not alone, and because of that, my own decisions are echoed and amplified by the millions other people engaging in their own analyses and decision-making.  My personal choice, because it is rational, is repeated, magnified, and applied globallyby millions of others.  And the results are stark.

Eventually, it makes no sense to fish commercially for salmon.  No one is buying it, and it costs a hell of a lot to produce.  So that goes away.  Meanwhile, receipts from fishing licenses and tags fall precipitously, until the Department of Fish and Game is wondering why the hell they are maintaining and operating these expensive fish hatcheries.  Plus, the hydroelectric power that made the hatcheries necessary in the first place have become critical to the supply of non-petroleum based energy.  Fish mitigation efforts are costly, and increase the costs of the hydroelectric energy, as well.  By now, people are more concerned about getting food into their homes, and less about maintaining a fishery they no longer have the ability to enjoy.  And ocean-run Chinook go extinct.  The commercial fishery collapses.  Shipping is reduced as product is no longer shipped in from Seattle.  The stores’ shelves no longer feature salmon.

We can apply this calculus to everything.

When you actually do take the time to consider the implications of peak oil on our present civilization, you can see that the civilization, globally, has been grounded, built and expanded upon this cheap energy source.  Our world cannot be sustained otherwise.  If oil had never entered the equation, or if we had exercised the wisdom to recognize its finiteness, we would not have the population that we do, nor the cities, the infrastructure, nor widely available food, energy and water.  We have built our civilization on this energy source that is going away soon, and when it does, our civilization cannot be sustained as it is.

People will die.  A lot of them.  Billions.  There is no way to cast that fact other than as the greatest tragedy in human history, caused by our instinctual need to exploit any resource until it no longer sustains, and then moving on to the next one.  But there is no “next one” in the wings right now.

My children, and likely I, will live to see the end of personal oil-driven vehicles, of golf courses and subdivisions, of abundant food and energy and water.  We will live to witness the extermination of billions of people through starvation, thirst, disease and war.  We will have the opportunity to start over, and to ensure that our people going forward act in sustainable ways.  As a civilization, it is likely, albeit not guaranteed, that we will retain much of the knowledge we carry into this calamity.  And learn a lot more.  The Earth will appreciate a break from our relentless exploitation.  And we can all learn to live more simply, closer together, and more harmoniously.  We’ll see, I guess.


Posted on July 25, 2011, in Economics and tagged . Bookmark the permalink. 1 Comment.

  1. My car just rolled over 100,000 miles this month. It is a 2004 Subaru Forester. I felt pretty good to go seven years before I hit the big mark. It did make me smile because when it rolled over I remembered my dad telling me, as a kid, that if a car got close to 100,000 miles it had to be thrown away, it was all wore out. He also pointed out that some families hit that mark in as little as 10 years. Well, we only had one family car at a time and they never made it to 100,000 miles, dad always sold them at about 80,000 miles and 10 years old.

    I remember the long summer days of my childhood. The parents sat out on the front porch talking with the neighbors while we, the children, played kick ball in the street or played kiss tag while running around the yards. There were no fences in our yards because all of the neighbors decided together that they did not want them. Instead, they wanted their children to play together and the families to have picnics together, which we often did.

    I’m not one of those old biddies that believes everything from the past was good and everything from today is bad…quite the contrary. I like my computer, the microwave can be handy, I prefer MP3 players to eight tracks, I enjoy music from all eras, and I am grateful for the many birthdays I have celebrated. As each one passes I have accumulated more knowledge, experience, and hopefully wisdom.

    What I do miss is community. I have always believed that “it takes a whole village to raise a child”. There was a calm back then that seems to be missing today. People trusted each other, they weren’t afraid, (maybe spiders, hippies, and the new rock and roll music, caused some trepidation in folks…Oh, most people didn’t like snakes much either.) Neighborhoods were like family and children were safe in any home on the block because everyone knew each other and everyone helped each other.

    Do I believe we are addicted to oil? Hell yes!!! Do I believe it has served us well? Not so much. What I see is that oil has allowed us to have almost anything our little heart’s desire. We basically are spoiled rotten and we are starting to stink! Our gluttony and greed have destroyed the very core of family and community, and without family and community there is no joy in life.

    I think we are way overdue for a good spanking and I think we are about to get it. I hope we learn something.


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