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Which Peak Are We Climbing?

Around 2008, the big story was peak oil. The production of crude was going to peak, and that spelt a contracted future for energy for our civilization. since then, the world has gotten on to this business of fracking and as ugly as it may seem, it has changed the equation of our future consumption of oil as energy.

Heck, I admit: I was one of the people taken in by the Peak Oil argument – but only because the person who first introduced me to the notion had very good facts and figures. Of course, if you take a static snapshot of where we are and extrapolate, you ca imagine all kinds of scenarios. Neither he nor I imagined that fracking would come along, back in 2005-2006.

In that light I want to draw attention to a couple of articles worth getting your head around. The first is this one which discusses oil and gas in the context of a ‘commodities supercycle’.

After eight years, the Oil Drum is closing down, giving up the long struggle to alert us all to ‘‘peak oil’’ and the dangers of an energy crunch. The theme has gone out of fashion, eclipsed by shale and US fracking.

The demise of Britain’s leading website for oil dissidents has been seized on by critics as an admission that peak oil is a Malthusian myth. It comes amid a spate of reports from global banks announcing the death of the commodity supercycle, slain by creative technology.

Yet if you stand back, it is hardly evident that the world is again enjoying an abundant supply of cheap energy, metals, or food. Commodity prices have held up remarkably well, given that we are in a global trade depression of sorts.

The eurozone is in the longest unbroken recession since the 1930s, with industrial production 13 per cent below the pre-Lehman peak. Growth in the US has averaged 1.1 per cent over the last three quarters as it grapples with the most drastic fiscal tightening since the Korean War.

Russia and Brazil have ground to a near halt. China’s growth is near zero on a GDP deflator basis. Oil imports were down 1.4 per cent in June from a year earlier. Imports of iron ore were down 9.1 per cent.

It all adds up to a prostrate global economy, yet Brent crude oil is still trading at $US106. There is no comparison with the collapse to $US11 in 1998. The CRB commodities index remains three times higher than a decade ago.

You might conclude that the supercycle is in rude good health given what has been thrown at it. A new Eos report by the American Geophysical Union, Peak Oil and Energy Independence: Myth and Reality, argues that global crude output has been stuck on a plateau near 75 million barrels per day (bpd) since 2005 despite enticing returns.

The way the article couches it, it seems the immediacy of peak oil is temporarily delayed, thanks to the development of fracking, which will stave off peak production of fossil fuels in general for a generation. It’s pretty begrudging about the technological development aspect of what has led to the fracking business. The fact is, that a technological breakthrough came along and solved the problem of peak oil by changing the mode of our harvesting of fuel and energy. This is very much in line with Schumpeter’s observations about a creative destruction of value, as well as why to date, the Malthusian crunch has not come about.

The other article is this one in the Economist which covers the possibility that our demand for oil may be peaking, so future demand for crude oil may be nothing like the extrapolation of the Malthusian alarmists.

The other great change is in automotive technology. Rapid advances in engine and vehicle design also threaten oil’s dominance. Foremost is the efficiency of the internal-combustion engine itself. Petrol and diesel engines are becoming ever more frugal. The materials used to make cars are getting lighter and stronger. The growing popularity of electric and hybrid cars, as well as vehicles powered by natural gas or hydrogen fuel cells, will also have an effect on demand for oil. Analysts at Citi, a bank, calculate that if the fuel-efficiency of cars and trucks improves by an average of 2.5% a year it will be enough to constrain oil demand; they predict that a peak of less than 92m b/d will come in the next few years. Ricardo, a big automotive engineer, has come to a similar conclusion.

Not surprisingly, the oil “supermajors” and the IEA disagree. They point out that most of the emerging world has a long way to go before it owns as many cars, or drives as many miles per head, as America.

But it would be foolish to extrapolate from the rich world’s past to booming Asia’s future. The sort of environmental policies that are reducing the thirst for fuel in Europe and America by imposing ever-tougher fuel-efficiency standards on vehicles are also being adopted in the emerging economies. China recently introduced its own set of fuel-economy measures. If, as a result of its determination to reduce its dependence on imported oil, the regime imposes policies designed to “leapfrog” the country’s transport system to hybrids, oil demand will come under even more pressure.

Basically, our policies and technological advances are working to constrain our demand for oil. It seems there will be enough of these to match the decline in production of oil with a decline in demand. I imagine this sits really badly with my friends in the environmental movement who have been praying and hoping for peak oil to crash our technological civilisation once and for all. I chalk all this up to Schumpeter and his creative destruction of values as well as the Kurzweil vision of a Technological Singularity. Collectively, we seem to be accelerating to a point of development, not slowing down. Calling this cargo-ism seems to be just as ideologically motivated as the sort of people who wanted peak oil to cripple our civilisation.

Certainly, this is an interesting vision of the near future:

The biggest impact of declining demand could be geopolitical. Oil underpins Vladimir Putin’s kleptocracy. The Kremlin will find it more difficult to impose its will on the country if its main source of patronage is diminished. The Saudi princes have relied on a high oil price to balance their budgets while paying for lavish social programmes to placate the restless young generation that has taken to the streets elsewhere. Their huge financial reserves can plug the gap for a while; but if the oil flows into the kingdom’s coffers less readily, buying off the opposition will be harder and the chances of upheaval greater. And if America is heading towards shale-powered energy self-sufficiency, it is unlikely to be as indulgent in future towards the Arab allies it propped up in the past. In its rise, oil has fuelled many conflicts. It may continue to do so as it falls. For all that, most people will welcome the change.

If this indeed comes to pass, the world is going to be a very different place to the ‘Peak Oil’ scenario.

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