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Peak oil and collapse scenarios. Part 2

Oil debate | Peak oil and collapse scenarios. Part 2 Anthony Harrington

In Part One we did a sort of fast fly-by of the Peak Oil debate, taking its temperature, as it were, rather than “explaining” it. There are already more than enough “explanations” and “refutations”, as any search engine will demonstrate, and the reader is invited to explore them at his/her leisure. Here we pick up on Dmitry Orlov and John Michael Greer’s vision of the Hubbert cliff, (see my earlier blog 'Collapse scenarios – satire or vision of the future? Part 1') which summarises as: crises may be long in the making, but when they happen, they happen fast. As an instance of a non-Peak Oil example, take the US sub prime catastrophe. It was years in the making but when it broke, it broke like a runaway train, leaving the wreckage of the world’s financial systems strewn all over the place.

Orlov makes the point that you get to the “cliff” approach by realizing that the symmetry of the original Hubbert curve is shaped on the upside by the world being energized to discover and exploit more oil, hence its steepness, and, on the downside, by the balance between exploitation, new discoveries and depletion (we use as much as we can, so it depletes fast, somewhat ahead of new discoveries, creating the symmetry between the up and down slopes). He argues that the logic that produces this symmetry between the curve’s up and down slopes is badly flawed.

It imagines that the downward slope is constrained only by the geology of depleting oil reserves. In reality, he argues, there are very powerful factors that “steepen” the curve, until it becomes vertical and modern civilization topples over its edge to crash and burn. (I did mention in Part One that the Peak Oil debate has some relevance for investment decision making, right?)

Looking after Number 1

One of the most obvious of the constraints on the downside is that as the reserves of oil-exporting countries diminish to a level where the end is in sight, the country concerned becomes less interested in earning foreign currency through exporting oil, and much more interested in conserving the oil for its own future use to prevent it having to import increasingly expensive supplies from elsewhere. The debate then is no longer about producing technologies and how much can be extracted, and the remaining resource simply vanishes as a global commodity. Once enough oil producers start thinking like this, it catches on, except where the country concerned has vast reserves, and vast reserves are fast vanishing.

The decision to conserve rather than to export can come at any moment, whenever an oil-producing country decides it has reached the tipping point. As one oil expert said recently when asked if Canadian tar sands would “save the world”, “Nope,” he answered, “but they may save Canada…”.

Orlov makes a further point about disruptions to the production supply and maintenance chain that comes when industry starts to find oil hard to get. I find this point a little too “Mad Max” and end-of-the-worldish for my taste, but I cite it anyway. The point kicks off from the tight correlation between the consumption of oil and GDP. Constrain oil and economic activity falls off.

“… less oil implies a smaller economy. At what point does the economy shrink so much that it can no longer meet its own maintenance requirements? In order to continue functioning, all sorts of infrastructure, plant and equipment must be maintained and replaced in a timely manner, or it all stops functioning. Once that point is reached economic activity becomes constrained not just by the availability of transportation fuels, but also by the availability of serviceable equipment.”

Orlov adds a second, rather separate point to this, namely that as a country’s economic base and GDP shrink, its creditworthiness also shrinks, so importing increasingly expensive oil on credit becomes more difficult, again, steepening the downslope.

Half full

Against all this one has to point out that getting goods from A to B is what logistic supply chains do and they are very resourceful and resilient about finding ways of doing this. That is how markets function and it is what makes them efficient. Saying “but it all runs on oil” does not lead naturally to the conclusion “therefore it’s all bust” - not if you have any belief in human ingenuity. Businesses might fail but enterprise per se does not fold up like a house of cards, not usually, anyway… (again, I am leaving a little wriggle room there – this is, after all, a scary subject).

Then there is a completely different debate, usually central to the Peak Oil furore, which turns on arguments about how much oil is actually “out there” in the Earth’s crust waiting to be got at. We’ll pick that up in Part Three (published tomorrow).

QFINANCE is still running a competition with New Society Publishers to win both the books featured in Anthony Harrington's 'Collapse Scenarios' series... because everybody loves free books. Enter now for your chance to win.

Further reading on commodities, prices and asian economies:

Tags: commodities , Dmitry Orlov , fossil fuels , Hubbert cliff , Hubbert curve , John Michael Greer , logistic supply chains , Mad Max , oil and gas , oil crisis , Peak Oil , transportation
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  1. omvco says:
    Tue Sep 13 16:21:35 BST 2011

    Interesting follow up article. AMackenzie

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