ONE TOWN SQUARE: at the intersection of peak oil, climate change, and land use

Spiegel Online International reports A confidential German army study, warning of a looming oil crisis which could have dramatic political and economic consequences, has been leaked. The study – a product of the Future Analysis department of the Bundeswehr Transformation Center, a think tank tasked with fixing a direction for the German military – depicts the consequences of an irreversible depletion of raw materials.

According to Spiegel Online, the report concludes there is “some probability that peak oil will occur around the year 2010 and that the impact on security is expected to be felt 15 to 30 years later”. The study warns of:

[S]hifts in the global balance of power, of the formation of new relationships based on interdependency, of a decline in importance of the western industrial nations, of the “total collapse of the markets” and of serious political and economic crises.

The article provides the following summary of the report’s main points:

• Oil will determine power: The Bundeswehr Transformation Center writes that oil will become one decisive factor in determining the new landscape of international relations: “The relative importance of the oil producing nations in the international system is growing. These nations are using the advantages resulting from this to expand the scope of their domestic and foreign policies and establish themselves as a new or resurgent regional, or in some cases even global leading power.”
• Increasing importance of oil exporters: For importers of oil more competition for resources will mean an increase in the number of nations competing for favor with oil producing nations. For the latter this opens up a window of opportunity which can be used to implement political, economic or ideological aims. As this window of time will only be open for a limited period, “this could result in a more aggressive assertion of national interests on the part of the oil producing nations.”
• Politics in place of the market: The Bundeswehr Transformation Center expects that a supply crisis would roll back the liberalization of the energy market. “The proportion of oil traded on the global, freely accessible oil market will diminish as more oil is traded through bi-national contracts,” the study states. In the long run, the study goes on, the global oil market will only be able to follow the laws of the free market in a restricted way. “Bilateral, conditioned supply agreements and privileged partnerships, such as those seen prior to the oil crises of the seventies, will once again come to the fore.”
• Market failures: The authors paint a bleak picture of the consequences resulting from a shortage of petroleum. As the transportation of goods depends on crude oil, international trade could be subject to colossal tax hikes. “Shortages in the supply of vital goods could arise” as a result, for example in food supplies. Oil is used directly or indirectly in the production of 95% of all industrial goods. Price shocks could therefore be seen in almost any industry and throughout all stages of the industrial supply chain. “In the medium term the global economic system and every market-oriented national economy would collapse.”
• Relapse into planned economy: Since virtually all economic sectors rely heavily on oil, peak oil could lead to a “partial or complete failure of markets,” says the study. “A conceivable alternative would be government rationing and the allocation of important goods or the setting of production schedules and other short-term coercive measures to replace market-based mechanisms in times of crisis.”
• Global chain reaction: “A restructuring of oil supplies will not be equally possible in all regions before the onset of peak oil,” says the study. “It is likely that a large number of states will not be in a position to make the necessary investments in time,” or with “sufficient magnitude.” If there were economic crashes in some regions of the world, Germany could be affected. Germany would not escape the crises of other countries, because it’s so tightly integrated into the global economy.
• Crisis of political legitimacy: The Bundeswehr study also raises fears for the survival of democracy itself. Parts of the population could comprehend the upheaval triggered by peak oil “as a general systemic crisis.” This would create “room for ideological and extremist alternatives to existing forms of government.” Fragmentation of the affected population is likely and could “in extreme cases lead to open conflict.”

The study, Peak Oil: Sicherheitspolitische Implikationen knapper Ressourcen, is available here (unfortunately in German). Robert Rapier has posted a translation of the major points in the report at his R Squared Energy Blog.

The August 2010 edition of Oilwatch Monthly has just been released. It leads off with a discussion of Chinese demand for oil, which has been running at 8.8 million barrels per day (mbd) for the first half of 2010. Chines consumption has been growing at a rate of 7% per year since 2003. This compares to current U.S. consumption of 19 mbd.  U.S. consumption had been stable at 20.7 mbd prior to the economic crunch.

While Chinese consumption is rising, Chinese production is expected to peak in 2010 and then begin to decline at a rate of about 3% per year. Chinese production rose to just over 4 mbd in July, hitting 4.09 mbd. But 70% of Chinese production comes from nine giant fields, five of which are declining and another three of which have peaked or are expected to peak in 2010.

China, like the U.S., must import the difference between production and consumption. Dropping production and rising consumption can only mean one thing: greater demand for oil imports. This, at a time when it’s already looking like supplies are beginning to get tight.

Global crude production has been going down since 2005.

2008 – at least for the moment – saw the peak in all liquids production.

The main reason that all liquids production has been maintained above 2005 levels is the increase in natural gas liquids. Other nonconventional sources, such as biofuels, extra heavy oil, and tar sands,  have played a rather minor role.

Aa the world struggles to maintain the volume of liquids fuels production, the struggle to maintain  the energy content of liquid fuels production is proving even more of a challenge.

In production statistics all liquid fuels are aggregated as total “oil” production. However, different liquid fuels contain different amounts of energy per barrel produced. For example, a barrel of crude oil contains around 5.8 million British Thermal Units (BTUs) while a similar barrel of natural gas liquids contains 4.2 million BTUs. Conversion to BTUs shows that actual available energy worldwide in January 2010 was 3.3% lower than liquids statistics counted in barrels would suggest.

Oil consumption  in OPEC, China and India is growing at a good clip. Consumption in the U.S. and Europe has been dropping. Were that not the case, there already would not be enough to go around.

The global competition for energy from liquid fuels is soon going to get fierce.

The July 2010 edition of Oilwatch Monthly reports that both crude oil and liquid fuels production continue their slow decline from peak levels. The charts below taken from the report are posted at The Oil Drum.

Oil consumption in the twenty-seven countries of the European Union peaked in 2006 and has since been declining at a rate of 3% per year. Oil consumption in the transport sector in the EU began to decline in 2008, dropping 1.4% from 2007. Oil consumption in road transport fell, offsetting a continuing but slowing rise in air transport consumption.

Using less oil than the U.S. does not mean the EU is less prosperous than the U.S. EU nations consume only 60% of the oil as does the U.S., but the gross domestic product of the combined 27 EU nations exceeds that of the U.S. by 15%.

Here’s a sobering graph from The Oil Drum: Europe showing that oil exports – oil available for trade on international markets – have been declining since 2005 and that the decline is projected to not only continue, but accelerate.

This decline in oil exports is consistent with the Export Land Model. Consumption within oil producing countries continues to increase even as production lags or falls, leaving less available for export to oil consuming nations.

Luis de Souza writes this situation bodes ill for Europe.

It is hard to envision how Europe will fare in this race for the dwindling international oil market. One thing is for certain: Europe, with its heavy foreign dependence and its now very small internal production, is the Economic block with the most to lose.

But it’s hard to see how the U.S. will fare any better.  At least Europe has an infrastructure of cities and villages that mostly developed prior to the automobile age. Population centers have some semblance of a relationship to the surrounding countryside, a relationship that could conceivably be renewed and strengthened without too much disruption. And Europeans have long been used to high transportation fuel prices. High population densities and high fuel prices are two factors contributing to the survival of viable transportation alternatives in Europe. The U.S. has kept fuel prices low and subsidized sprawl since the end of WWII.  As a result, much of the built environment in the U.S. will prove to be  “stranded investment”, infrastructure whose fate is to be abandoned.

Souza warns that energy scarcities mean the end of  an economics we erroneously believe is the natural order of things.

An unsustainable economic paradigm is coming to an end. If economic recession is the only way for Europe and the OECD to reduce its reliance on fossil fuels, then economic recession is what it will be.

He’s writing of Europe, but what he says applies more generally to the post-WWII enshrinement of growth and free markets. After causing untold damage to human societies and to Earth itself, the wheels are finally coming off and that age is grinding to an end. Walt Whitman Rostow and The Stages of Economic Growth, RIP.

Nobody “official” – no country, no established economic research institute, no international organization (such as the IMF) – appears willing to entertain any notion or to publicly discuss scenarios that don’t plan for a return to stable economic (GDP) growth.

But then there’s the non-establishment Institute for Integrated Economic Research – which is unafraid to think the unthinkable.

The IIER suspects the odds of business-as-usual coming to an end are pretty high.

Nate Hagens at The Oil Drum: Campfire suggests it might be entertaining and perhaps even enlightening to begin asking our politicians, what will you do if growth is over?

This report from Zawya Dow Jones in Riyadh, Saudi Arabia, should give pause:

Saudi Arabia’s King Abdullah has ordered a halt to oil exploration operations to save the hydrocarbon wealth in the world’s top crude exporting nation for future generations, the official Saudi Press Agency, or SPA, reported late Saturday.

“I was heading a cabinet meeting and told them to pray to God the Almighty to give it a long life,” King Abdullah told Saudi scholars studying in Washington, according to SPA.

“I told them that I have ordered a halt to all oil explorations so part of this wealth is left for our sons and successors God willing,” he said.

A senior oil ministry official, who declined to be named, told Zawya Dow Jones the king’s order wasn’t an outright ban but rather meant future exploration activities should be carried out wisely.

Saudi officials have begun to worry about expanding domestic energy use. If current trends continue, Saudi Arabia’s demand will rise to 8.3 million barrels a day of oil equivalent in 2028 from 3.4 million barrels in 2009. Saudi officials are hoping that unspecified “efficiency measures” can cut the projected increase in demand in half.

Saudi Arabia’s cutting back on exploration, coupled with increased domestic demand, is surely bad news for oil exports – and for oil importing countries, including the U.S.

A meta-analysis published recently in the Journal of the American Planning Association finds the most important single factor in minimizing driving is to develop in existing areas of high destination accessibility – like city centers. Going back in time (or back to the future), that would be villages.

Other factors like mixed-use, street and intersection design, and block size prove to be less important than destination accessibility. Still, these factors are more important than mere density. Density is less important than land-use mix and having shops, schools, and workplaces near to where people live.

Not surprisingly, driving is found to have energy and climate implications:

The transportation outcomes . . .  vehicle miles traveled (VMT) and vehicle trips (VT), are critically linked to traffic safety, air quality, energy consumption, climate change, and other social costs of automobile use.

Figuring out a way to drive less – much, much less – is key to coming to grips with peak oil and to arresting global warming before we reach a tipping point beyond which Earth’s climate will spin out of control, resulting in an Eaarth we no longer recognize and which is no longer fit for human habitation.

The free-access analysis, Travel and the Built Environment, was authored by Reid Ewingab of the University of Utah’s Urban Land Institute; and Robert Cerverocde, University of California (Berkeley) Transportation Center, Institute of Urban and Regional Development.

Here’s the abstract:

Problem: Localities and states are turning to land planning and urban design for help in reducing automobile use and related social and environmental costs. The effects of such strategies on travel demand have not been generalized in recent years from the multitude of available studies.

Purpose: We conducted a meta-analysis of the built environment-travel literature existing at the end of 2009 in order to draw generalizable conclusions for practice. We aimed to quantify effect sizes, update earlier work, include additional outcome measures, and address the methodological issue of self-selection.

Methods: We computed elasticities for individual studies and pooled them to produce weighted averages.

Results and conclusions: Travel variables are generally inelastic with respect to change in measures of the built environment. Of the environmental variables considered here, none has a weighted average travel elasticity of absolute magnitude greater than 0.39, and most are much less. Still, the combined effect of several such variables on travel could be quite large. Consistent with prior work, we find that vehicle miles traveled (VMT) is most strongly related to measures of accessibility to destinations and secondarily to street network design variables. Walking is most strongly related to measures of land use diversity, intersection density, and the number of destinations within walking distance. Bus and train use are equally related to proximity to transit and street network design variables, with land use diversity a secondary factor. Surprisingly, we find population and job densities to be only weakly associated with travel behavior once these other variables are controlled.

Takeaway for practice: The elasticities we derived in this meta-analysis may be used to adjust outputs of travel or activity models that are otherwise insensitive to variation in the built environment, or be used in sketch planning applications ranging from climate action plans to health impact assessments. However, because sample sizes are small, and very few studies control for residential preferences and attitudes, we cannot say that planners should generalize broadly from our results. While these elasticities are as accurate as currently possible, they should be understood to contain unknown error and have unknown confidence intervals. They provide a base, and as more built-environment/travel studies appear in the planning literature, these elasticities should be updated and refined.

The Federal Highway Administration reports travel on all roads and streets was up 1.2% (3.1 billion vehicle miles) for April 2010 as compared with April 2009.

Cumulative travel for 2010 is down 0.2% (-1.6 billion vehicle miles). Calculated Risk has posted this chart.

Are we seeing a Hubbert’s Peak for VMT? Peak VMT logically would be a consequence of peak oil, as vehicle travel is almost totally dependent on oil.

Travel in the western states rose considerably less than the rest of the country – only 0.3%.

One implication of peak VMT is that we won’t be needing all of the road infrastructure that is currently being planned, based on the assumption that traffic will continue to increase into the future as it has in the past. Peak VMT means we’ll likely be stranded with excess capacity. Continuing to squander billions on new bridge and highway capacity will prove to be a tragic misallocation of precious land and scarce resources.

Shirin Wertime has a must-read article at Culture Change that poses the question: what will happen to our food system as fossil fuels become increasingly scarce and expensive? The following is my summary of some of the highlights.

Today’s agri-food systems are almost entirely dependent on fossil fuel energy for everything from food production to transportation to food preparation and storage. The structure of agriculture production, aided and abetted by government policies, has spurred the expansion of farm specialization and consolidation, monocultures, the delocalization of agricultural production, and the adoption of industrial farming practices. The increase in globalized food production, which has come at the expense of local production, is sustainable only as long as cheap energy supplies can subsidize the transportation of goods across long distances. It will take deep-rooted structural and institutional changes as well as lifestyle changes on the part of individuals, their governments, and societies to transition to a more sustainable, non-petroleum based food system which oil depletion and rising costs will inexorably force on us.

Farming itself has become the least profitable and least energy intensive segment of the entire economy of agriculture. Only one-fifth of the energy that goes into our mouths is actually used for growing food.  The rest goes to transport, processing, packaging, marketing, and food preparation and storage. Farmers end up with only 10% of the total food dollar, while 25% pays for farm inputs and 65% goes for transportation, processing and marketing. A century ago, farmers ended up with closer to 40% of the food dollar and most farm inputs were produced by the farmers themselves by using draft animal power, storing seeds, and using animal manure for fertilizer.

As oil declines, industrial agriculture in its current form will become impossible. It will prove increasingly difficult to feed the world with diminishing fertile land and water resources. The current structure of power relations and resource control in the United States prevents the widespread move away from fossil fuel based agriculture and transition to localized, sustainable agriculture. Without a change in the status quo, small local and sustainable producers cannot compete against fossil fuel subsidized agribusiness. But the reality is that the present agricultural system cannot be maintained for much longer. Decreasing oil production and rising oil prices will effectively bankrupt the American agri-food system. Without petroleum and all of its benefits, there will be little choice but to revert to a system of local, organic production and consumption.

Peak oil will turn our entire world upside down. There will be a return to localized, small-scale photosynthesis-based, appropriate-tech agricultural production and an end to the domination of economic and power structures that place profit above all else.

Now, I can buy all of this except the last part of the last sentence. I’ll believe in the end of avarice only when I see it.

The June 2010 edition of Oilwatch Monthly is now available at Peakoil Nederland.

Rembrandt at The Oil Drum: Europe has posted this chart from the report showing pretty clearly that crude oil production has peaked.

The only thing that is keeping global liquids production more or less on a plateau is growing production of unconventional oil – heavy and extra heavy oil, oil shale, oil sands, natural gas liquids, lease condensates, gas-to-liquids, coal-to-liquids, and biofuels.

The recently released BP Statistical Review of World Energy reports a sharp fall in demand for oil and natural gas worldwide in 2009 – not surprising, given the global economic crisis. World energy consumption fell by 1.1% in 2009, the first decline since 1982. This decline in consumption was led by OECD countries, which saw a 5% decline in consumption in 2009. Emerging countries led by China and India grew energy consumption by 2.7%, but this was not enough to overcome the drop in the OECD.

Supply and demand are but two sides of the same coin – as one rises or falls, so must the other.

You know peak oil has gone mainstream when insurance companies are saying the environmental and economic costs of fossil fuels are simply too high to justify on-going investments. But that’s a consequence of the disaster in the Gulf.

Jeff Rubin has recently pointed out the real legacy of Three Mile Island wasn’t the event itself, which happened back in 1979, but rather what happened (or more precisely didn’t happen) over the course of the next 40 years in the United States. Literally overnight, the near-meltdown of the reactor core changed public acceptance of nuclear power plants. No company in the U.S. has built a new one since.

BP’s Deepwater Horizon event may prove to have similar consequences. A major new report from insurance giant Lloyd’s and UK think tank Chatham House argues that a rapid shift towards low carbon energy sources represents the only way of tackling the energy industry’s soaring risk profile.

Commenting on the report, titled Sustainable Energy Security: Strategic Risks and Opportunities for Business, Lloyd’s chief executive Richard Ward, said that the environmental and economic costs of fossil fuels are simply too high to justify on-going investments.

The current generation of business leaders need to rethink their approach to energy risks or be left behind as energy becomes less reliable and more expensive. We need a long-term plan to reduce consumption and diversify our energy sources.

“Peakers” have toiled towards for decades now toiled to raise awareness of the precariousness of our predicament, working towards the moment when the rest of the world would finally realize that you can’t extract an infinite amount of oil from a finite planet. The moment will inevitably lead to another, when the implications of that realization begin to sink in.  As seers such as John Michael Greer and James Kunstler have been saying repeatedly, the implications are that the technological, economic, and social arrangements predicated on endless supplies of cheap oil might be “a good deal less clever than they seemed”.

It beginning to look like the first moment has finally arrived. The second moment can’t be far behind.

Oxford researcher Jörg Friedrichs in a new article asks, what is likely to happen if peak oil occurs?

While a global peak of oil production would be a planetary event, reactions would differ in different parts of the world. Globalization has been fueled by cheap and abundant energy, traded as a commodity on a free market. Increasing conflict over scarce energy would undermine the very foundations of the world’s social, economic, and political systems that have developed over the past few centuries.

To answer his question, Friedrichs focuses on oil importing countries, which constitute the vast majority of states. He looked at three historical examples, which suggest three possible “peak oil trajectories” – paths that different countries might take in responding to peak oil:

• Japan and predatory militarism. The specter of future resource shortages had played an important role in shaping Japan’s imperialist strategy ever since the end of World War I. When an American oil embargo became imminent in 1941, Japan preemptively attacked the US Naval Base at Pearl Harbor and radicalized its war of conquest in order to gain access to the rich oil supplies of the East Indies.
• Korea and totalitarian retrenchment. In North Korea after the end of the Cold War, subsidized deliveries of oil and other vital resources from the Soviet Union came to a halt. The “Hermit Kingdom” reacted in a shockingly reckless way. Elite privileges were preserved while hundreds of thousands of North Koreans died from hunger.
• Cuba and socioeconomic adaptation. Cuba, like North Korea, suffered an abrupt end to subsidized deliveries from the Soviet Union. While this plunged Cuba into a deep crisis, there was no mass starvation comparable to North Korea. Instead, Cubans relied on social networks and non-industrial modes of production to cope with energy scarcity and the concomitant shortage of food – and were actively encouraged to do so by the regime in Havana.

Friedrichs dismisses “techno-optimists” who believe the world can transition to other energy sources, citing the example of the American South (which he calls “Dixieland”) after the Civil War. Southerners only had to look to the North of their own country for investment and innovative technologies – yet it took well over a century to make the transition. Moreover, a similar energy ‘‘upgrade’’ does not seem to be available in the event of peak oil.

Freidrichs expects that peak oil will not lead either to immediate collapse or a smooth transition, but rather to painful adaptation processes that may last for a century or more, as people do not give up habits easily.

Friedrichs thinks that countries prone to military solutions may follow a Japanese-style strategy of predatory militarism. Countries with a strong authoritarian tradition may follow a North Korean path of totalitarian retrenchment. Countries with a strong community ethos may embark on a Cuban-style mobilization of local resilience, relying on their people to mitigate the effects of peak oil.

What’s his prognosis for the U.S.? Most likely, predatory militarism. The U.S. is by far the most militaristic country on the planet. How much the U.S. spends on its military adventurism, and the percentage of global spending U.S. spending represents, depends on what you count. For the 2010 fiscal year, the base budget of the Department of Defense was $533.8 billion. Adding spending on “overseas contingency operations” brings the sum to $663.8 billion. Defense-related expenditures outside of the Department of Defense constitute between $216 billion and $361 billion in additional spending, bringing the total for defense spending to between $880 billion and $1.03 trillion in fiscal year 2010. No matter how you add it up, U.S. “defense” spending far exceeds that of the largest spender, China, whose official budget is a paltry 77 billion (but others estimate China’s spending on the military is in reality much higher, perhaps in the range of $121 billion). Once-mighty Russia’s military spending has most likely dropped to a pitiful $20 billion or so (although DoD swears it’s more like $70 billion). The Stockholm International Peace Research Institute (SIPRI)’s 2009 Year Book on Armaments, Disarmament and International Security pegs global military expenditures for 2008 at $1.464 trillion. SIPRI calculates that U.S. military spending is 41.5% of the world total. Other calculations put the U.S. share as high as 48%.

Does anyone seriously expect that, when faced with soaring energy prices that threaten to cripple its economy, the U.S. would not abandon its free-market rhetoric and use the military that it is paying for? After several generations of individualism and affluence, America will not easily dismantle its military machine and accept the need to rely on communities and revert to a sustainable lifestyle.

Friedrichs ends on a note that he describes as “not cozy”. Even if a mix of substitute fuels were to be found, and if alternate technologies were to be developed in time, this might mitigate the impact of peak oil and postpone the decline of overall world energy consumption – for a while. But there would inevitably be another time, as infinite growth on a finite planet is impossible. At some point, industrial society will start crumbling and free trade will begin to disintegrate.

Friedrichs article, “Global energy crunch: how different parts of the world would react to a peak oil scenario“, is published in the journal Energy Policy 38 (8): 4562-4569  (2010).

Steven Kopits at Econbrowser says the EIA’s International Energy Outlook (IEO) for 2010 contains an admission that

That peak oil is all but on us. And that’s new.

He explains his conclusion this way:

As recently as 2007, the EIA saw a rosy future of oil supplies increasing with demand. It predicted oil consumption would rise by 15 mbpd to 2020, an ample amount to cover most eventualities. By 2030, the oil supply would reach nearly 118 mbpd, or 23 mbpd more than in 2006. But over time, this optimism has faded, with each succeeding year forecast lower than the year before. For 2030, the oil supply forecast has declined by 14 mbpd in only the last three years. This drop is as much as the combined output of Saudi Arabia and China.

But that’s not the interesting part. The more salient development is the reduction in the forecast to 2020. Forecasts beyond ten years are highly uncertain and more subject to massaging and interpretation. Shorter term forecasts are more definite, and the forecasters are more accountable. As a consequence, the outlook for the short to medium term warrants greater attention. In the case of the EIA, the forecast changes most dramatically here. For the remainder of the decade, even though China would be expected to hit its stride for increased oil demand, the EIA sees no year in which liquids production will increase by even 1%. Petroleum liquids supply increases by an average of 0.6% per year from 2011 to 2020. In other words, the EIA is expecting the oil supply to be essentially flat for the rest of the decade. The supply will creep up from 86 mbpd today to approximately 92 mbpd to 2020, but that is not much growth, and indeed, is about the same as current global liquids production capacity. Moreover, it represents a reduction of nearly 4 mbpd from last year’s forecast for 2020. On paper, the output of China has disappeared over the course of the last year.

But his interpretation is hard to square with the chart he posts showing the last four EIA projections, compared to actual:

What I see in this chart is continued EIA blindness to reality, despite the repeated failure of its forecasting.  Its forecasts are consistently rosy, while actual production has slowed and is now falling.  While it’s certainly true that the EIA has trimmed its outlook so as to not be as outrageous as before, the EIA is still wildly optimistic – as this blog observed earlier here.

While it may be the case that the economic consequences of  EIA’s projection that production will increase to only 92 mbd by 2020 could be grim – especially due to Export Land Model effects – that’s a far cry from being “hard core peak oil.” Hard core would be to see liquids production as falling already, and that fall accelerating significantly by 2020.

John Hofmeister, recently retired president of Shell Oil Company, told an audience at the Offshore Technology Conference that we face an “energy abyss”:

[D]espite the high oil price “wake up” call delivered to the US during the period 2005-2008, policymakers have been unable or unwilling to address the nation’s energy security, economic competitiveness that comes from affordable energy, and the potential jobs creation initiatives that a sound energy policy would and should deliver. Given the current trajectory of an aging infrastructure, decades of restrictions on drilling, failure to tackle the obstacles that prevent both more nuclear plant and clean coal plant projects, frittering at the edges of renewable energy, and avoidance of other energy “hard choices,” within the decade the nation faces an unprecedented energy abyss.

By 2020, there will be inadequate supplies of liquid fuels and electricity taking the nation toward inevitable gas lines, brown-outs, black-outs and extraordinary high prices.

The energy abyss will stick around for up to a full decade with all of the national insecurity, economic decline, joblessness and social malaise that accompanies energy shortages in third world countries.

The energy industry, despite its technological, geological, chemical, physical, molecular, logistical, scientific and engineering expertise and capacity to deliver affordable energy in endless supply, given all of the natural sources of energy in this country, and the world, will be unable to supply the demand because of public policy constraints. Yet, it will bear the brunt of the blame for energy shortages. Today’s energy professionals will bear the reputational burden of our national decline and failure because who else is blameable? Are you prepared to accept that blame, or are there viable alternatives, things you can do, to change the nation’s current trajectory?

Understanding the scope and depth of the energy system’s problems requires careful understanding of just how entrenched the obstacles are to sound enabling public policy. What do we do about “political time” dominance in the political process, up against “energy time” requirements to get projects launched and completed? How do you respond to the dysfunctional structures that our three independent branches of government have created over the course of time? Is it really necessary to have 13 executive branch agencies govern energy and the environment? Do we need 26 congressional committees and subcommittees writing legislation on energy? Should every federal district court have authority to delay and ultimately prevent citizens from having the energy they need because of the power of the judicial bench? How long can you tolerate the paralysis of partisanship where right and left wing interest groups, demagogues and authority figures, elected as well as appointed, prohibit mainstream, centrist Americans, most likely the majority of citizens, from achieving needed policy objectives? Are you willing to accept zigzag efforts to move energy policy forward forever?

The nation has to come to grips with its energy future sooner, not later. The time is now not then. We can’t wait for a ninth president and 19th congress to promise us whatever it takes to get elected and then lead us down another failed path. We should have learned by now but we haven’t.

One could object that Hofmeister blames the upcoming “energy abyss” on “public policy constraints” rather than geophysical or ecosystem constraints. But the very fact that an energy industry insider sees an energy abyss as inevitable should make folks sit up and take notice.

Of course other industry insiders, such as Matt Simmons, have been saying the same thing for years, for example in this presentation at the AON Annual Energy Insurance Symposium, January 14, 2010.

Even as the disastrous consequences of our dependence on fossil fuels unfold in the Gulf, we will continue to go about our business as usual.

Even as the disastrous consequences of our dependence on fossil fuels unfold in the Gulf, we will continue to go about our business as usual.

At least until the next energy crisis, when it will be too late. Gail the Actuary at The Oil Drum states what should be obvious:

No one is really willing to look at what our energy future is really likely to look like, and plan and make regulations on that basis. In my view, we really should be planning for what industry and transportation will need to look like, with no (or very little) fossil fuels. We need to look at what kind of roads we can maintain, and what, if any, kinds of vehicles will be able to run on them. If we don’t look to see where we are really headed, it is hard to see that we can take steps that will get us in the right direction.

The April 2010 edition of Oilwatch Monthly reports March 2010 conventional crude production was around 73.7 million b/d, and suggests there is a high chance that the standing record for monthly crude oil production – 74.73 million b/d, reached in July 2008 – may be broken within the next six months.

There’s also a chance that the yearly record for highest conventional crude production – 73.72 million b/d in 2005 – may be broken in 2010.

Conventional crude oil – the cheapest and easiest to process of liquid fuels – has been on a production plateau of between roughly 72 and 74 million barrels per day since late 2004. Production dropped to a low of 71.47 million b/d in May 2009 as demand fell several million barrels per day due to the economic crisis.

In March 2010 world production of all liquid fuels fell to 86.59 million b/d, down by 220,000 barrels per day from February, according to the International Energy Agency (IEA). Liquids production for February 2010 was revised upwards in the IEA Oil Market Report of April from 86.59 to 86.8 million b/d. Average global liquid fuels production in 2009 was 84.94 versus 86.6 and 85.32 million b/d in 2008 and 2007.

Governments have, for the moment, returned the global economy to a fragile growth track by bailing out the global financial system and assuming huge chunks of bank and corporate debt. But the debt problem hasn’t gone away – the IMF in its latest report warns of growing sovereign debt risk to the global financial system and of pressing need to continue repairing the financial sector in advanced and the hardest-hit emerging economies.

A recent paper by Bassam Fattouh of the Oxford Institute for Energy Studies titled Oil Market Dynamics through the Lens of the 2002-2009 Price Cycle argues that oil prices over the past year (2009) have been driven by a loss in faith that rising prices will result in increased supplies – in other words, by the looming reality of peak oil. Oil supplies stubbornly are refusing to increase in response to rising prices.

During the 1980s and the 1990s, expectations about short-term oil price behaviour rested on the assumption that changes in oil prices would induce supply, demand or policy feedbacks – or a combination of them – which would prevent prices from rising above a certain ceiling or from falling below a certain floor. These perceptions of strong feedbacks stabilised long-term expectations about oil prices. However, as oil prices rose sharply during the boom years, uncertainty about the existence of and the timing of feedbacks from prices to oil supply and demand markedly increased. The perception of strong feedbacks in the oil market was replaced by the perception of limited feedbacks.* * *

It is possible to dissect the 2008-2009 price cycle into three distinct phases:

• Phase 1: In the first half of 2008, doubts about the existence and timing of feedbacks from prices to oil supply and demand became pervasive. This destabilised short-term expectations and created a wide band within which the oil price could oscillate. . . .
• Phase 2: The sharp reversal in oil prices from July 2008 to February 2009 came in two distinct phases. The first was a cooling off in prices from their peaks, brought on primarily by the combination of a supply side response from the key marginal producers, following the Jeddah meeting in June, and by mounting evidence in the rear-view mirror that OECD demand had weakened far more than initial expectations and provisional data flows had suggested. The second phase was more directly associated with the intensification of the global financial crisis, and the consequent rapid fall in consensus expectations for global economic growth. Until expectations about the global economy began to stabilise, there was, and probably could not have been, any recovery in oil prices.
• Phase 3: In the second quarter of 2009, the powerful shocks that affected global oil demand were counteracted by perceptions of global recovery and the perception of tight future market fundamentals — fuelled by increasing concern that the credit crunch and the low price environment would limit investment flows in the oil sector and in alternative energy.

Fattouh notes that some economists think there is an “inverse relationship between oil price changes and economic growth” – in other words, that increasingly strained supplies could bring an end to economic growth.  But being a two-handed economist, he also notes there’s an opposing school, which believes that oil price shocks are not special and can be offset by appropriate policy responses – although he cautions that this view “undermines a key element in the conventional wisdom on the relationship between GDP growth and oil prices”.

Fattouh’s observation above is a startling one: to believe that economic growth can continue in an environment of increasing constraints on oil supplies and consequent rising prices is inconsistent with economics as we have come to know it.

A short article by Zawyi Dow Jones, Dubai, lends additional credence to Jeffry Brown’s Export Land Model:

Saudi Arabia’s domestic demand for energy is set to rise by 250% to 8.3 million barrels a day of oil equivalent by 2028, according to the chief executive of the country’s state oil company.

In a speech given in Riyadh on April 19 Khalid Al Falih said that the kingdom will have to improve energy efficiency in the future in order to sustain its leading export capacity while achieving ambitious economic development goals.

“We estimate that through improved efficiency, while maintaining the same economic growth, the increase in energy demand can be cut into half,” Al Falih said in the speech on the Saudi Arabian Oil Co., or Saudi Aramco Web site.

“If no efficiency improvements are achieved, and the business is as usual, the oil availability for exports is likely to decline to less than 7 million barrels per day by 2028, a fall of 3 million barrels per day while the global demand for our oil will continue to rise,” he said.

Jeffrey Brown’s Export Land Model is proving prescient. From an article in The National (Abu Dubai):

Saudi Arabia has emerged as the second-biggest source of global oil demand growth after China.

Higher oil consumption in the Arab world’s biggest economy is forecast to account for 11.7 per cent of global expansion this year, the International Energy Agency (IEA) said.

While that is still well behind China’s projected 26 per cent share of worldwide growth in oil consumption this year, the rising demand for crude and oil products in Saudi Arabia is outstripping increases in the major developing economies of Russia, Brazil and India. . . .

Demand for petrol in Saudi Arabia which, like most Middle East countries, subsidises the cost of fuel for consumers, rose by 22.4 per cent in January compared with a year earlier, after expanding by 9 per cent last year, the IEA said.

The preliminary data “suggest that growth this year may well reach double-digit figures”, the agency added.