The Peak Oil Crisis: Preparing for Depletion

Falls Church News-Press

By Tom Whipple
May 31, 2007

News on the gasoline stockpile situation was delayed this week due to the Memorial Day holiday. As gasoline consumption figures over the long weekend won’t be available until the middle of next week, we may get a better insight into prospects for this summer then. While waiting, however, it seems like a good time to start thinking a bit about the years ahead and what we should be doing to get ready for them.

There are two areas of energy consumption we, as individuals, can do something about: transportation and buildings. The cost and availability of our food is something that few of us have much control over. If food becomes too expensive, then we simply reduce or forego eating out; reduce our use of prepared, packaged, and expensive foods; or even reduce the quantity we consume until the costs of food meet our budget.

Commercial use of energy to make and distribute things will be sorted out by the market – here again, there is little most of us can do to effect change other than generally reducing consumption either because we are trying to save the world’s resources, or, more likely, we simply can’t afford to pay what stuff is going to cost.

Unaffordable gasoline will affect each of us differently depending on how dependent we are on our automobile and what our alternatives are. In the U.S. we have something on the order of 210 million cars and light trucks in service and, even if the resources are available to replace a fleet of this size, it will be many decades before they can be replaced with vehicles that use little or no gasoline. Worldwide, the situation is even worse.

It probably won’t be too long before we figure out whatever supplies of motor fuel are available will be better spent on growing and distributing food and maintaining vital-to-civilization systems such as water, sewers, electricity, and communications rather than being burned in private cars. For the immediate future though, unaffordable gasoline will be coped with through a combination of increased public transit and a lot more ride sharing.

Soon, there will be lots of room for changes in public policy as we tackle the job of reworking our transportation systems. For now, we are not ready to think seriously about changes, for the reality of imminent oil depletion is not widely recognized. Another three or four dollar increase in gasoline prices should do the trick.

Buildings, however, are another matter -- be they offices, factories, commercial space, or homes. In the developed world, most use prodigious amounts of energy. Although our electricity and natural gas bills currently are not increasing as fast as gasoline prices, price increases for other forms of energy won’t be many years behind. Unlike a gas guzzler which can be parked, used infrequently, or scrapped for a more efficient vehicle, few of us will have the opportunity to replace our buildings for more efficient ones.

A couple of hundred years ago most homes were heated and lit by wood plus a little candle wax. That’s obviously not going to work anymore. My guess is that most people’s access to firewood, if any, would be sufficient for a couple of days or, at best, a couple of weeks. For awhile, there will be a rush to huddling around electric heaters, but just as natural gas, oil, propane will soon be too expensive to for many to afford, large amounts of electricity will not be far behind. We are going to have to transition to solar and maybe a little wind energy to control our personal climates.

One of the redeeming features of our current living and work place arrangements is that we waste prodigious amounts of energy in heating, cooling and lighting them, so that there is a lot to be saved. We all know by now that eliminating incandescent bulbs and moving first to compact fluorescents and then, as they become more affordable, to LED’s most of the lighting costs in homes and offices can be eliminated.

Equally big jumps in household efficiency can be achieved by disconnecting clothes dryers and going back to clothes lines. Pulling the plug on the central air would be the third big energy saver.

Given the trends in fossil fuel availability, it is clear that our goal will have to be zero net energy for all our inhabited buildings. This means that the preponderance of the energy used in buildings will soon have to come from the sun, wind, water power, and perhaps a little biomass and will not be delivered in by pipe and power lines or in trucks.

The course from our current building stock to highly efficient ones will be long and difficult. Starting on this course is not difficult or particularly expensive. Plugging air leaks, adding some more insulation, and perhaps improving the window and doors is a good place to start provided one knows what to do, where to start and is physically and financially capable of taking action in the face of rapidly rising energy costs.

Later steps on the way to zero net energy buildings, such as major insulation and window upgrades, solar heating and electric panels, new heating and air conditioning equipment will be very expensive and perhaps unaffordable for many in an inflation-wracked world of depleting oil.

It is at this point that governments at all levels will need to get involved. First they must recognize that the bulk of our inhabited buildings will need to be overhauled to be useful in a world of very high priced energy. Cost/benefit ratios for steps to improve the efficiency for nearly every existing building need to be worked out.

Building codes will need massive overhaul to prevent further construction of buildings that are premised on cheap energy and that will have a very short useful lifetime. Construction of sub-divisions that do not take into account optimum sun angles should come to an immediate halt. Obsolete laws and covenants that frown on efficiencies from clothes lines to solar panels must be abolished as soon as possible.

There is much to be done and the time is growing short.

http://www.fcnp.com/index.php?option=com_content&task=view&id=1340&Itemid=35

The Peak Oil Crisis: Alarms Are Sounding

Falls Church News-Press

By Tom Whipple
May 17, 2007

Across the world alarm bells are starting to clang. Above every gas station, a large sign is proclaiming that prices are on an unstoppable climb towards un-affordability. In Paris, the International Energy Agency has announced that the demand for oil is likely to exceed the supply later this year, unless, of course, OPEC steps up production. In the Middle East OPEC spokesmen reiterate time after time that all is well, there is plenty of oil, and there is no need to increase production.

In Ottawa, a parliamentary hearing on energy security broke up in turmoil last week when a distinguished professor pointed out that, unless Canada stopped selling 60 percent of its oil to the US, Canadians would soon be “freezing in the dark.” In Nigeria, Chevron is evacuating hundreds of employees to forestall the possibility that they too will be hauled off to the swamps as hostages in an increasingly bitter insurgency. The Chinese just announced that their April oil imports were 23 percent higher than last April’s. Iraq, Saudi Arabia, Venezuela -- everywhere you look – there are unmistakable warnings of troubles to come.

These, however, are issues for later. Right now, on the top of every American’s agenda should be the question of whether we are going to get through the summer without shortages and gas lines— opinions are mixed.

First, all seem to agree that gasoline prices, which set new highs last week, will continue to rise. Even the Director of the Energy Information Agency, whose job it is to put a rosy spin on adverse developments, told a Senate Committee earlier this week that retail prices will go higher heading into the vacation season because not all of the recent rise in wholesale costs has been reflected in what consumers pay at the pump. So far high prices, which are approaching $4 a gallon in some places on the West Coast, seem to have done little to dampen demand although they may be cutting into WalMart sales.

Since significant cuts in US gasoline consumption don’t seem to be in the cards, at current price levels, then we are back to refinery output, gasoline imports, and our stockpiles to see us through.

Two years ago, before the hurricanes put so much stress on US refineries, they were being operated at 95 percent of capacity. We got through last summer by importing 1.5 million barrels of gasoline a day during May from foreign refineries. According to a senior EIA oil analyst, 800,000 barrels a day of US refining capacity is still shutdown. This translates into about 400,000 barrels of lost gasoline production each day or nearly 3 million barrels a week.

Last week the situation eased a bit. Although US refineries are still operating below 90 percent of capacity and processed only a trivial 30,000 barrels a day more of crude than in the previous week, our refiners managed to squeeze our more gasoline, so that production increased by 200,000 barrels a day to 9.1 million. The “good” news, however, is that gasoline imports jumped to 1.5 million which resulted in the first significant (1.7 million barrel) increase in our stockpiles in many weeks. However, 1.2 million of the 1.7 million barrel increase was on the isolated West Coast. The increase in gasoline stocks east of the Rockies was only 500,000 barrels last week – way lower than necessary to forestall problems later this summer.

The questions now become: Will this increased supply, which is based on imports of foreign gasoline be sustained over the summer; and are the stockpiles already so low that they will not be sufficient to meet the increased demands of the summer driving season which starts in about two weeks? Last year the demand for gasoline jumped from 9.1 million barrels a day in the spring to 9.6 million during the summer months. Unless very high prices start reducing demand for gasoline we will be looking at new highs this summer.

Earlier this week Matthew Simmons, of Twilight in the Desert fame, suggested that prospects for an uninterrupted summer of driving may be worse than government spokesmen have been letting on. Simmons notes that gasoline stockpiles at refineries are “works in progress” and that millions of barrels of gasoline moving across the country in pipelines and barges are not available for delivery to your gas station. Therefore, the drop in inventory that has taken place this spring is from local bulk terminals that supply your gas stations. In this case, the drop in “useful” stockpiles may be on the order of 30 percent and we could be very close to the point where shortages will develop.

Where does all this leave us? The short answer is, in an increasingly grim situation. When respected analysts say our gasoline situation is beyond the tipping point and that at least some of us are likely to be sitting in gas lines before Labor Day, we should heed the warning. Looking at the broader, worldwide picture, the situation is equally grim. When the normally staid International Energy Agency starts issuing a stream of dire warnings about shortages or much higher prices before the year is out, we should start thinking about a markedly different future.

http://www.fcnp.com/index.php?option=com_content&task=view&id=1284&Itemid=35

The Peak Oil Crisis: The Summer Ahead

Falls Church News-Press

By Tom Whipple
May 9, 2007

Last week they began kidnapping foreign workers at an alarming pace —22 foreigners kidnapped in 36 hours— and overran offshore platforms and production ships. On Monday, the strongest militant group issued a chilling ultimatum. “All foreign and local nationals working with multinational oil companies and their contractor should vacate Ijaw territory (the oil producing region) immediately.” “All foreign embassies should withdraw their nationals from our homelands.” “Nothing can protect them --- No more hostages taking -- Any national caught shall be summarily dealt with.” By the way, these guys have a good track record for doing what they say they are going to do. The next morning, three major oil pipelines were bombed, shutting down another 150,000 barrels per day of oil production. Total production shutdown by the insurgency is now on the order of 900,000 barrels per day. The insurgents have demonstrated that they have the capability of shutting down most, if not all, of Nigeria’s oil production.

Should this happen, we might find our imports running a million barrels a day short this summer, unless we can outbid the Chinese. Replacing this much lost Nigerian oil production will be very expensive at the gas pump.

If we get through the stockpile and Nigerian situations, then it will be time to consider the situation in Venezuela. In case you missed it, President Chavez managed to expropriate about $30 billion worth of oil company processing facilities last week and is currently negotiating the terms under which the oil companies will remain in Venezuela. The negotiations do not seem to be going well and there seems to be a good chance one or more of the foreign oil companies will pull out and head for the courts. We have been importing about 1.4 million barrels of oil a day from Venezuela, which the government would gladly sell to China or nearly anybody but the US. The speed with which a breakdown of relations between Chavez and the oil companies will affect US oil imports is difficult to predict.

As the interaction between oil production and a hurricane is unknowable until a few days before it strikes, there is not much useful to be said other than that the oil companies are working hard to mitigate damage from future hurricane strikes in the Gulf and forecasters are predicting a banner year.

The future of Iraqi oil exports depends on the course of the insurgency. The US is currently getting about 400,000 - 500,000 barrels per day from Iraq, and so long as each of the insurgent groups gets to steal a share of the oil or revenue, nobody seems inclined to kill the golden goose. As there seems to be very little in Iraq not susceptible to being blown up, the current situation must be satisfactory to all concerned. Sooner or later, however, somebody will become discontented and precipitate a drop in production.

Finally, we will have to watch the slow-movers – declining Mexican production (we get 1.5 million barrels a day from there), lower Saudi production, and even the continuation of frenzied growth in China. All these seem destined to add a few, or a lot of, cents at the pump before the year is out.

So there you have it, from unusually low gasoline stocks in the spring to frenzied Chinese economic growth later in the year -- all seem destined to play a role in how much money you will be leaving at your favorite gas pump later this year.

http://www.fcnp.com/index.php?option=com_content&task=view&id=1241&Itemid=35

Post Peak Oil: Effects on the Stock Market and World Economy

The Daily Reckoning (Australia)

James Howard Kunstler
May 10, 2006

Whenever somebody complains about “the lies that George Bush & Co. told to get us into the Iraq war” (as Frank Rich did in The New York Times recently), I wonder how those lies compare to the lies that the American public tells itself every day - for example, that America could get along without oil from the Middle East, or that hybrid cars will save Happy Motoring, or that the United States can have an economy without producing anything of value.

Meanwhile, the Dow Jones index went up over a hundred points the same day that 32 people were massacred on a university campus. And bear in mind that the massacre did not occur late in the day but literally around the same time that the New York Stock Exchange rang its opening bell - so that as the body counts mounted through mid-day, the stock markets only went higher! Then, the rest of the week, while the cable news Mommy-Daddies went through the familiar rituals of bewildered hand-wringing, and NBC released the trove of farewell videos sent in by shooter Seung-Hui Cho between killings, the Dow piled on another 250 points to close at an all-time record high just under 13,000.

Could the financial markets be more detached from reality, from life on the ground (or in a free-fire-zone classroom) in this nation?

Doug Noland over at Prudent Bear.com is right: we’ve entered a euphoric phase of financial arbitrage capitalism with extreme Ponzi overtones, a pyramid scheme of revolving credit rackets and percentage spread plays completely abstracted from any reality of fruitful activity. The reason we don’t even call “money” by its former name anymore is precisely because we realize at some semi-conscious level that “liquidity” is not really money. Liquidity is a flow of hallucinated surplus wealth. As long as it flows in one direction, into financial markets, valve-keepers along the pipeline, like Goldman Sachs, Citibank, or the hedge funds, can siphon off billions of buckets of liquidity. The trouble will come when the flow stops - or reverses! That will be the point where we will rediscover that liquidity really is different from money, and if we are really unlucky we’ll discover that the U.S. dollar is actually different from real wealth.

Noland and others recognize the severe distortions in the finance sector, and they are surely correct to flag the implied dangers. But even these clear-eyed observers survey the disturbing finance scene without factoring the global energy situation. In a nutshell: world oil production seems to have peaked about 10 months ago. Being just past peak, there is still a huge amount of oil going into world economies. But being just past peak oil we are now seeing how complex systems proceed toward instability and breakdown when the underlying energy flow turns toward contraction.

The situation in finance is particularly sensitive and acute because an overall contraction in available energy means the end of industrial expansion (a.k.a. “growth”) at “normal” rates of three to seven percent annually. More to the point, it means that certificates, contracts, deals, plays, and rackets pegged to the expectation of growth will lose their legitimacy. Meaning, stocks, bonds, collateralized debt obligations, hedges - anything that represents the hope and expectation for more-of-anything - will no longer be understood to represent real value.

The current euphoric hysteria should therefore be viewed as a form of disorder in its own right. The players in the markets are making their moves based on misunderstood signals. They think the world is awash in energy and prosperity. They believe Cambridge Energy Research Associates (CERA) and Ben Bernanke, the Chairman of the United States Federal Reserve. They believe that the mortgage fiasco and the associated imploding housing bubble are just a couple of temporary zits on the handsome face that Wall Street presents to the world. In the background, though, feedback loops are aligning to rock the systems we depend on for daily life in the real world. Capital will become unavailable. Food will grow scarce. Trade will be interrupted. Mobility will be constrained. And an awful lot of pissed-off people will be poised to fight over the table scraps of industrial civilization.

I got a letter last week from a reader complaining bitterly that the stock market hasn’t crashed and blaming me for predicting that it would. He didn’t say, but I hope he hadn’t been out there on a shorting spree. In case any of you haven’t noticed, 2007 is not over yet.

The markets have been on an extraordinary run. The Dow finished 23 out of the last 26 days on the upside - some of them pretty way on the upside. This is the biggest U.S. stock market up-streak since a 19 for 21 streak in July of 1929, prior to the October crash. Bill Fleckenstein points out a similar run on the Tokyo exchange - 32 upside trading days out of 38 - just prior to its 1989 tanking.

While this kind of behavior seems ominous, I’m not claiming it necessarily has predictive value. One can say that the financial markets per se are running in an impressive state of structural distortion and imbalance and that systems way out of balance do not stay that way forever. But I risk more opprobrium by stating the obvious.

I think the persistence of this gross imbalance can be accounted for in large part by the current global energy situation. The world is at peak energy, peak oil especially, and the world runs on oil. Peak is peak. The most. There are about 84 million barrels of oil a day flowing around the industrial economies of the world. It is running a lot of activity.

Now, I happen to think that oil production probably peaked about a year ago, but we are still so close to it that the net available energy remains immense. Even if 2007 averages out to 83.5 million barrels a day instead of 84 million, it will still seem like a lot. Markets may be dumber than we think. All they see is a vast amount of cheap energy for manufacturing plastic salad shooters, for powering tourist jet charters to Cancun, for running Wal-Mart, Walt Disney World, and Taco Bell. All that energy is here right now.

Among the many tragic elements in the human condition is this tendency toward short-term thinking, the inability to imagine how our arrangements will work in a time that is not right now.

Interestingly, the main effect of post-peak oil on markets and economies is that it will produce shocking instabilities in complex systems dependent not just on the energy itself, but on the expectation for continuity of the energy. Financial markets are especially sensitive because they operate on sheer expectations. The Dow Jones doesn’t manufacture salad shooters, or haul tourists to the Mexican beaches, or build suburban houses. It just relays a dumb signal that says “we expect more” and investors respond. The trouble will start when the signal changes to “we don’t expect more.” That moment will be when the recognition of peak oil galvanizes the public’s attention. It will manifest as a simple societal binary switching mechanism. When that happens, the markets will exhibit the dumb herd behavior that they are famous for.

Of course, I have argued previously that the stupendous run-ups of market indexes themselves represent a kind of instability (those distortions and imbalances), as do also the supernatural flows of “liquidity” and I would stick to that observation. After all, if the world is “high” on oil - and I would argue that it is zonked out of its mind - then it would naturally spring way up off the diving board before swan-diving into the empty pool below.

Me, I’m keeping my eye on things like the production figures coming out of Mexico, the North Sea, and the Kingdom of Saudi Arabia. They’re all sliding down. Mexico is especially interesting because it is our Number 3 source of oil imports and its production is crashing so hard that a couple of years from now it may not be able to send us a single drop of oil. What do you think of that? Maybe the Walton family will buy Iowa so they can keep Wal-Mart running on ethanol.

Meanwhile, U.S. oil refineries are running above 90 percent production capacity to keep up with the gasoline demand for Happy Motoring. The stress on these complex operations is unprecedented. It gives them no slack time for routine repairs. The results are liable to be interesting, too, between the Fourth of July and Labor Day.

Regards,
James Howard Kunstler
for The Daily Reckoning Australia

http://www.dailyreckoning.com.au/post-peak-oil/2007/05/10/