2009 - Trying to Rebuild the House of Cards

What a year 2008 was. So much greed got bitch-slapped in the wallet. Fat-cat fights broke out on Wall Street as they all scrambled for the new Federal Reserve kitty litter. Bubbles were bursting everywhere like over-inflated bubble-wrap turf at the Super Bowl.

The big question is how far is this unravelling going to go? And what will happen when Wiley Coyote finally succumbs to gravity and hits bottom, wherever bottom is? The other important thing, for me, controversial as it may be, is to put 2008 in a peak oil perspective. I tend to do that. Based on the statistics, it appears that we hit peak oil in the spring of 2005. That, of course, is hotly debated. Those in power and those honest and unbiased mouthpieces for the energy industry and oil companies still claim that peak oil is decades away. And proponents of the abiotic oil theory claim that oil is self-regenerating and infinite (queue Bobby McFarren singing Don't worry, be happy!).

I don't like to engage in the statistical debate. There is a general lack of reliability in all of those statistics. There is always a major political component behind what gets reported. OPEC nations, for example, who doubled their reported reserves when they formed OPEC and established reserve-dependent production quotas, have never changed the numbers they report despite decades of drawdown on those reserves. Oil statistics, as with most statistics, are as meaningless as a sumo wrestlers new year's resolution to lose weight and can be interpreted many ways to support a variety of agenda.

There is little question that energy costs (the cost of all forms of energy rose in tandem with the price of oil) were a significant contributor to the economic collapse that began in 2008. Whether they were a cause or a coincidence is unclear. One of the debates that will probably persist through 2009 is whether peak oil or commodity speculators drove the price of oil up to $147.67. The statistics suggesting that we hit peak in the spring of 2005 do exist. But it is a question of interpretation.

From the time that M. King Hubbert first correctly forecast, in the early 1950s, that the U. S. lower-48 oil production would peak in 1970 (he further forecast that global production would peak in or about 2000, a date that was delayed by the oil crises of the 1970s and '80s) the basis of the peak oil argument has been a simple one. It was and still is based on production of conventional crude. The reason is simple. When global conventional crude passes the peak and goes into decline the combination of other sources will not be able to offset the declines in conventional crude. What has changed over the years, rather, in an attempt to disguise that inevitability, is the official definition of oil that is included in government and industry statistics.

Oil reserve reporting, for example, has been loosened from its original proven to provable. Those within the oil industry would like it loosened further still, perhaps all the way to ultimately recoverable. Such distinctions may be lost on all but industry insiders but it makes a tremendous difference in defining something like peak oil.

More importantly, the industrial and political definition of oil itself has changed significantly over the past few decades, as well as the definition of the liquid fuels such as gasoline, diesel, jet fuel and marine fuel normally derived from oil. The definition of oil has expanded far beyond conventional crude as well. It now encompasses synthetic crude produced from tar sands and oil shale, synthetic biofuels, extra heavy oil, vegetable and plant inputs to biofuels, deep water oil. It has also expanded to encompass, as barrels of oil equivalents (BOE), substances like natural gas, methane, and coal used as raw material for producing liquid fuels through processes like GTL (Gas to Liquid) and CTL (Coal to Liquid). Essentially anything that can be converted into liquid fuels, such as recycled motor oils and used cooking oil, either is or eventually will be included in the definition of oil. Whether or not this is an intentional misdirection to disguise the rapid decline in oil reserves, the effect on public awareness is the same.

However, even incorporating deepwater crude and extra heavy oil (which the majority of the world's refineries are not designed to process), global oil discoveries peaked way back in the 1960s and have been declining ever since. We are now producing or extracting every year over four barrels of oil for every new barrel of oil discovered, and have been consuming more oil per year than that discovered for nearly three decades. Taken on a field by field basis, peak generally follows discovery by about thirty years, but this can vary significantly from one field to another. Some will peak and go into decline in as short a time as ten years. Some large fields like Gawhar, Cantarell and Burgan may not reach peak production for forty or fifty years.

There is an ever-accelerating effort to find or identify alternatives from which liquid fuels can be produced. For a variety of reasons that effort is meeting ever-growing opposition. The push for bio-fuels resulting in rapidly rising food grain prices is largely seen as a major contributor to increasing world hunger. There is rapidly accelerated destruction of old growth rainforests to bring more land into bio-fuel production. Financing has been diverted into bio-fuel subsidies from research and development funding for other viable energy alternatives like solar and wind. There has been increased land consolidation for efficient fuel crop production pushing more indigenous, self-sufficient farmers off their land in poor third world countries.

Massive investments continue in tar-sands and oil-shale operations, possibly the most environmentally destructive energy projects on the planet. Coal production (coal is the dirtiest, least energy-dense of the fossil fuels) is again on the rise, using ever-poorer grades of coal for the production of liquid fuels. Massive volumes of natural gas are being diverted to liquid fuels or used as the energy source for tar-sands and oil-shale processing. And all of these efforts are running into increased public opposition as the damage they do becomes clearer.

So how will all of this play out in 2009? In 2008 oil prices rocketed up to over $147.00 per barrel only to collapse, right along with the stock markets and the global economy, to under $40.00 per barrel by year end. There was a serious amount of demand destruction, in rich and poor nations alike, in the second half of the year. Repeated production cuts by OPEC have not succeeded in halting the plummeting price of oil. Where oil, according to the experts, was way above what the fundamentals would support at $147.00, it is now as far below the fundamentals at $40.00 and lower.

No one seems to be quite sure what the fundamentally supportable price of oil should be anymore. It is likely that this confusion and uncertainty of oil prices will continue through 2009. Prices may, if there are signs of some measurable economic recovery, be driven by speculators back above the $100.00 per barrel mark, perhaps even surpassing the $147.00 level of mid 2008. If there are no signs of economic recovery, however, the downward momentum will likely see the global economy contract even further. Moving from recession to depression is clearly a possibility. The fundamentals will not again form the basis of oil prices until the economic turmoil settles. Just as there was a fear (of war) premium built into the price on the way up, there is a fear (of recession/depression) penalty built into it on the way down.

There is one unavoidable truth underlying all of this, however. Whatever the price of oil, somewhere around 30-billion barrels of it will be consumed globally in 2009. When we are talking about total, remaining, recoverable oil of less than a trillion barrels that is still a lot of drawdown. It appears that we are on a global production plateau with minor new discoveries and alternatives thus far effectively offsetting (hiding?) the production decline in existing fields. This will likely delay the recognition and admission of peak oil in official circles until we fall off the plateau and have clearly and unarguably begun our slide down the depletion slope. The demand destruction during the current global economic uncertainty will lengthen the plateau slightly and delay a little longer that recognition and admission. On the other hand, major developed nations may decide to take advantage of the temporarilly low oil prices to top up their Strategic Petroleum Reserves, which China has already begun to do.

The other reality is, however, that more and more effective voices are beginning to talk about peak oil in government, in the mainstream media and in books. A momentum is beginning to build, a momentum that has been a long time coming. The Exxons and CERAs and EIAs can no longer cavalierly dismiss peak oil and sweep it under their tired old threadbare carpet. The experts are beginning to have to justify the credibility they have been granted and increasingly it is clear the emperor has no clothes. Their reassurances and promises are increasingly being recognized for what they are: sleights of hand, parlour tricks, smoke and mirrors. The house of cards is built on shifting sand.

Increasingly the deniers and naysayers are now resorting to claiming that peak oil is a manufactured hoax meant to drive up the price of oil. Up until now they had comfortably clung to the accusation that peak oilers are a wacko fringe using fudged statistics. As more and more of those peak oilers are previous respected members of their own profession and industry (people like Fatih Birol, Matt Simmons, Ali Samsan Baktiari and Colin Campbell) armed with the same statistics as the so-called experts, that old accusation has finally lost the credibility it should never have had. Once those brave people leave the oil industry they no longer have a professional obligation to push the industry or corporate agenda. They are free to tell the truth and deal with the harsh reality of peak oil.

I believe that in 2009, partly because of the global financial crisis and partly in spite of it, peak oil will move its way toward the top of the agenda for the governments of developed and developing nations throughout the world. With the tremendous amount of debt incurred with the global financial crisis, the large amount of wealth lost, the major devaluation and revaluation of currencies through the printing of trillions of dollars of new money to bail out the economy, the on-going captivity of the world's governments by the perpetual growth economic paradigm, those governments will try to direct a great deal of energy into the recovery of their national economies. As they do so the reality of declining global energy reserves is going to smack them in the face. The hole we have dug with this collapse of the virtual economy is deep enough that there are not enough of those reserves left to push energy production to the levels that such a major recovery can be achieved.

By the end of 2009, I believe, we will either invent and implement a new economic paradigm that is not based on perpetual growth, or we will, in trying to recover, turn the current global recession into a global depression, not the second Great Depression but the Last Great Depression. We may finally come to the full realization that it is not money that makes the world go round. It is energy. You can always print more money but it has no value, like the Emperor's new clothes, if there is no energy. Money has no value unless it is working and it can't work without energy.

Oh, and one last truth or reality for 2009...... These are certainly interesting times in which to live. Buckle up and enjoy the ride.